Nike Reduces Annual Earnings Forecast as China Sales Fall

Nike Inc., the world’s largest sporting-goods company, reduced its annual forecast for sales and earnings and said revenue in China would decline in the next two quarters.

Revenue in the year ending in May will rise at a high single-digit percentage rate while earnings per share gain by a low double-digit percentage, Chief Financial Officer Don Blair said yesterday on a call with analysts. In March, Nike forecast sales would gain as much as low double digits and that profit would increase by a mid-teens percentage.

Nike’s sales in China, where it got 9.7 of its revenue in its most recent fiscal year, have been deteriorating as the economy’s growth slows and it discounts apparel that didn’t have the proper fit and sophistication for the nation’s shoppers. In May, Nike replaced its top executive in the country, and the company also is working on improving the presentation of its products at retailers there, Blair said.

Nike’s business in China is “still a work in progress,” Chris Svezia, an analyst for Susquehanna Financial Group in New York, said in an interview. “There was some hope that they were turning the corner.”

Nike, based in Beaverton, Oregon, declined 2.8 percent to $60.59 at 10:10 a.m. in New York. The shares had advanced 21 percent this year through yesterday, compared with a 13 percent gain for the Standard & Poor’s 500 Index.

In China, sales excluding the effect of currency exchange-rate fluctuations fell 1 percent in Nike’s fiscal fourth quarter ended May 31 for the third consecutive drop, Nike said yesterday in a statement. Revenue will decline in the first half of this fiscal year before stabilizing in the final two quarters, Blair said.

Profit Gains

Meanwhile, Nike profit in the quarter topped analysts’ estimates as running shoes boosted U.S. sales and margins expanded for the second time in almost three years.

Net income rose 22 percent to $668 million, or 73 cents a share, from $549 million, or 59 cents, a year earlier. Excluding businesses the company has since sold, profit was 76 cents a share, beating the 74-cent average projection compiled by Bloomberg.

Nike has been benefiting from increasing demand for running and basketball gear in North America as revenue in its largest market surged 12 percent. That helped worldwide sales gain 7.4 percent to $6.7 billion, topping estimates.

“It’s a good quarter, but not a blowout,” said Svezia, who rates the stock neutral.

Orders for the Nike brand from June to November, excluding the effects of currency exchange-rate changes, advanced 8 percent. Analysts projected a gain of 8.8 percent, the average of five estimates compiled by Bloomberg. Orders on that basis advanced 12 percent a year earlier.

Higher Costs

Nike has been trying to improve profitability amid higher costs for materials and labor, mostly in China. To combat that, the company increased prices last year and has been cutting waste out of its supply chain. It also sold off the underperforming Cole Haan and Umbro brands last year.

As a result, gross margin, or the percentage of sales left after subtracting the cost of goods sold, widened to 43.9 percent from 42.8 percent a year earlier. That marked the second straight gain after nine consecutive declines. The company forecast an expansion of 0.5 percentage points.

Last week, Nike announced management changes that included repositioning several current executives and the retirement of Charlie Denson, its second-in-command. Denson, president of the Nike brand, is leaving July 1 after 34 years. Gary DeStefano, president of global operations and a 31-year veteran, is also retiring next month.

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