Footwear and apparel giant NIKE (NKE Free NIKE Stock Report) has reported fiscal second-quarter (ended November 30th) share earnings of $0.59, in line with our estimate and up $0.02, or 3.5%, year over year. A top-line gain of 8% was a bit lighter than we were expecting, but that was largely the result of unfavorable currency exchange rates. The gross margin increased a solid 140 basis points, driven by a mix shift toward more-profitable products and channels (owned direct-to-consumer businesses), higher average selling prices, and easing raw materials inflation. However, that improvement was more than offset by a 170-basis-point increase in the expense ratio. The reduction in the operating ratio was expected and should not raise concerns. Marketing costs were elevated to support key product launches and in preparation of the upcoming World Cup and Winter Olympic sporting events, which should boost future sales. Too, below the operating line, other expenses were $13 million, versus $17 million in income in the year-earlier period, due to an adverse legal judgment and currency exchange losses this year. This was partially offset by a lower effective tax rate.

The bottom line also benefited from a decline in average shares outstanding. During the November quarter, NIKE repurchased 5.5 million shares for $406 million. At the end of the period, there was $6.1 billion remaining on the September, 2012 $8-billion authorization.

Inventories were up 11%, year to year, at the end of the quarter but, on a unit basis, ahead only 7%, 100 basis points less than the sales increase. The balance of the increase was due to higher product costs and currency exchange rates. In addition, future orders scheduled for delivery through April were up 12%. Encouragingly, orders in Western Europe jumped 26%. Orders in Japan declined 10%. However, on a constant-currency basis, orders in Japan increased 1%. Japan is also NIKE's smallest geographic segment.

We are lowering our full-year earnings estimate by a nickel, to $3.00 a share, on guidance for a continuation of higher investment spending. The revised estimate represents a 12% increase over fiscal 2013. All told, NKE stock fell slightly on the report, but remain fairly near its 52-week high.

About The Company:Nike, Inc. designs, develops, and markets footwear, apparel, equipment, accessories, and services. It sells products to retail accounts, through NIKE-owned retail stores and the Internet, and through a mix of independent distributors and licensees in approximately 190 countries. It operates over 300 domestic and roughly 450 locations (including factory stores). It has about 48,000 employees.

At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.