NIKE, Inc. Form 10-Q Summary
Period: Fiscal third quarter ended February 29, 2020, with nine-month results through that date. The filing is for fiscal 2020 Q3, notwithstanding the request metadata’s “2019 Q3” label. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
NIKE designs, markets and sells athletic footwear, apparel, equipment and related products worldwide through wholesale partners and NIKE Direct stores and digital channels. Its reportable operations include North America, EMEA, Greater China, APLA and Converse. The interim statements are unaudited; management cautions that interim results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Three months ended Feb. 29, 2020 | Three months ended Feb. 28, 2019 | Nine months ended Feb. 29, 2020 | Nine months ended Feb. 28, 2019 |
|---|---|---|---|---|
| Revenue | $10.104 billion | $9.611 billion | $31.090 billion | $28.933 billion |
| Gross profit / gross margin | $4.473 billion / 44.3% | $4.339 billion / 45.1% | $13.888 billion / 44.7% | $12.841 billion / 44.4% |
| Income before income taxes | $881 million | $1.291 billion | $3.691 billion | $3.558 billion |
| Net income | $847 million | $1.101 billion | $3.329 billion | $3.040 billion |
| Diluted EPS | $0.53 | $0.68 | $2.09 | $1.87 |
| Effective tax rate | 3.9% | 14.7% | 9.8% | 14.6% |
- Revenue and channels: Q3 revenue rose 5% reported and 7% currency-neutral. NIKE Brand revenue increased 5% reported; Converse revenue increased 9%. NIKE Direct revenue rose 11% reported, and digital commerce sales grew 36% currency-neutral. For nine months, revenue increased 7% reported and 10% currency-neutral; digital commerce sales were $3.8 billion versus $2.8 billion.
- Profitability: Q3 gross margin declined 80 basis points, reflecting COVID-19-related Greater China impacts, rebates and factory cancellation costs, as well as foreign exchange and other costs. Nine-month gross margin increased 30 basis points. Q3 operating expenses increased 6%, with operating overhead up 8%.
- Cash flow: Nine-month operating cash flow was $2.486 billion, down from $3.893 billion. Investing cash outflow was $758 million; financing cash outflow was $3.310 billion, including $2.865 billion of share repurchases and $1.071 billion of dividends. Cash and equivalents ended the period at $2.863 billion.
- Liquidity and debt: Cash, equivalents and short-term investments totaled $3.182 billion at quarter-end, versus $4.663 billion at May 31, 2019. Long-term debt was $3.463 billion, with $4 million current, and notes payable were $9 million. NIKE had no commercial paper outstanding at quarter-end and no borrowings under its committed credit facility.
- Balance sheet: Total assets were $26.220 billion; current assets $15.744 billion and current liabilities $8.280 billion. Inventory was $5.807 billion, up from $5.622 billion at May 31, 2019. Lease adoption added operating lease right-of-use assets and liabilities; at quarter-end these were $2.907 billion and $3.180 billion, respectively.
Material changes versus the prior comparable period
- Q3 net income fell 23% and diluted EPS fell 22%; nine-month net income rose 10% and diluted EPS rose 12%.
- Q3 Greater China revenue declined 5% reported (4% currency-neutral) and segment EBIT fell 13%, as store closures and reduced hours related to COVID-19 impaired sales. In contrast, nine-month Greater China revenue increased 12% reported and EBIT rose 13%.
- Q3 other expense was $297 million, versus $55 million of other income a year earlier. The principal driver was a $400 million impairment charge associated with planned transitions to distributor operations in Brazil, Argentina, Chile and Uruguay.
- Operating cash flow declined substantially, primarily reflecting working-capital and other asset/liability changes, including accounts payable timing, inventory growth, variable compensation payments and lower cash collateral received from derivative counterparties.
- NIKE adopted lease accounting Topic 842 in fiscal 2020. Adoption increased assets and liabilities by $2.7 billion at June 1, 2019; prior-year comparative balance sheets were not adjusted.
Outlook, management commentary, risks and unusual items
- COVID-19: During Q3, approximately 75% of NIKE-owned and partner stores in Greater China were temporarily closed or operating reduced hours. After quarter-end, nearly all NIKE-owned stores outside Greater China and Korea were closed. Management said it could not reasonably estimate the future financial impact, but expected a material adverse effect on revenue growth and profitability, potentially including higher inventory, sales reserves, factory cancellation costs and changing wholesale payment terms. By early April, approximately 95% of NIKE-owned and partner stores in Greater China had reopened, with digital demand strong; management cautioned that recovery remained uncertain.
- Distributor transitions: The Brazil, Argentina, Chile and Uruguay transactions were expected to close in the first half of fiscal 2021, subject to applicable approvals. Management expected the change to reduce consolidated and APLA revenue growth due to different commercial terms, while potentially improving profitability through lower selling and administrative costs and reduced currency exposure. The $400 million impairment primarily reflected anticipated release of non-cash currency translation losses and could fluctuate with exchange rates before closing.
- Subsequent liquidity actions: After quarter-end, NIKE issued $6 billion of senior unsecured notes on March 27, 2020. As of April 7, it had $1 billion outstanding under its commercial paper program and had entered into an additional $2 billion, 364-day credit facility. NIKE also temporarily suspended share repurchases in response to COVID-19.
- Other risks and contingencies: Foreign exchange movements, tariffs, supply-chain and manufacturing disruption, changing consumer demand, and retail-partner financial stress were identified risks. The IRS was auditing fiscal 2017–2019; gross unrecognized tax benefits were $802 million, of which $555 million would affect the effective tax rate if recognized. The European Commission was investigating certain Netherlands tax rulings; NIKE stated it believed the investigation was without merit. No material legal-proceeding developments were reported, and the filing disclosed no material off-balance-sheet arrangements.
- No quantified full-year guidance: The filing does not provide a clear numerical forecast for fiscal 2020. Management described long-term growth and profitability objectives but emphasized the uncertainty of COVID-19’s effects.
Important facts for investors to verify
- How store closures, digital demand, wholesale shipments and reopening progress translate into revenue, margins, inventory and cash flow.
- The drivers and potential final amount of the $400 million impairment, and the timing and economics of the four distributor transactions.
- Liquidity and debt developments after quarter-end, including the $6 billion notes, commercial paper borrowing and new credit facility.
- Whether gross-margin pressure, foreign exchange exposure, tariffs and higher inventory persist, and the resolution of significant tax uncertainties.