NIKE, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers NIKE’s fiscal third quarter and first nine months of fiscal 2017, ended February 28, 2017, compared with the corresponding periods of fiscal 2016. NIKE Brand accounted for over 90% of company revenue; Converse was also reported as a segment. The financial statements are unaudited.
Key financial results
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $8.432 billion, up 5% reported and 7% currency-neutral | $25.673 billion, up 6% reported and 8% currency-neutral |
| Gross margin | 44.5%, down 1.4 percentage points | 44.8%, down 1.5 percentage points |
| Net income | $1.141 billion, up 20% | $3.232 billion, up 11% |
| Diluted EPS | $0.68, up 24% | $1.91, up 14% |
| Operating cash flow | Not provided for the quarter | $2.751 billion, versus $1.912 billion |
Quarterly selling and administrative expense fell 3% to $2.496 billion and was 29.6% of revenue, down from 31.9%. For the nine months, it rose 3% to $7.898 billion. Lower gross margin reflected higher product costs, unfavorable currency effects and lower DTC margins; higher full-price selling prices partly offset these pressures. Other income was $88 million in the quarter and $168 million for the nine months, mainly reflecting foreign-currency and other non-operating gains.
At February 28, cash and equivalents were $4.021 billion and short-term investments were $2.139 billion. Current assets were $16.205 billion versus current liabilities of $5.271 billion. Long-term debt was $3.472 billion, with $6 million current; notes payable were $23 million. Debt increased after the October 2016 issuance of $1.5 billion in senior notes. The company reported $6.2 billion of cash, equivalents and short-term investments, including $5.2 billion held by foreign subsidiaries.
Nine-month capital spending was $776 million. Financing cash outflows included $2.429 billion of share repurchases and $834 million of dividends; NIKE issued $1.482 billion net proceeds from long-term debt issuance. Under its four-year, $12 billion repurchase program, it had repurchased 64.9 million shares for about $3.617 billion through February 28.
Material changes and segment trends
- Currency-neutral NIKE Brand revenue rose 7% in the quarter, with growth across all geographies. Greater China revenue increased 15% currency-neutral; Western Europe grew 10%, while North America grew 3%.
- NIKE Brand direct-to-consumer revenue increased 13% currency-neutral in the quarter and represented about 29% of NIKE Brand revenue, compared with 27% a year earlier. Digital commerce sales rose 18%.
- Quarterly reported EBIT rose 9% in North America and 6% in Greater China, but fell 13% in Western Europe, 17% in Central & Eastern Europe and 14% at Converse. For the nine months, total NIKE Brand EBIT declined 6%, while total company EBIT increased 5%.
- NIKE Brand footwear and apparel futures orders for delivery March–July 2017 totaled $12.3 billion, down 4% reported and 1% excluding currency changes. Management cautioned that futures orders are not necessarily indicative of revenue growth.
Outlook, commentary, risks and unusual items
- Management expected a fourth-quarter fiscal 2017 effective tax rate of approximately 22%; no broader revenue or earnings guidance is stated in the provided filing text.
- The nine-month effective tax rate was 13.1%, versus 17.9%, primarily reflecting a one-time benefit from resolution of a foreign tax credit matter with the IRS and reduced foreign tax reserves. The quarter’s rate was 13.8%, versus 16.3%.
- NIKE resolved the IRS foreign tax credit matter for fiscal 2011–2012 with no additional federal income tax deficiency. The IRS was auditing fiscal 2013–2016. Gross unrecognized tax benefits were $421 million; the company said they could decrease by up to $168 million within 12 months.
- Management cited foreign-exchange volatility, higher labor and product costs, promotional activity and lower DTC margins as pressures. It also highlighted shifting retail traffic, consolidation and a more promotional North American retail environment. Other disclosed risks include demand and inventory forecasting, competition, consumer preferences, supply-chain and technology disruption, and international market exposure.
- NIKE said existing cash, operating cash generation and access to external funding should meet foreseeable capital needs. It had no borrowings under its $2 billion committed credit facility or commercial-paper program at period end and reported compliance with credit-facility covenants.
- No material change in risk factors or material legal-proceeding developments was reported. Letters of credit outstanding totaled $152 million. The company reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether gross-margin pressure from product costs, foreign exchange and promotional/DTC mix persists or eases.
- Whether futures-order weakness translates into subsequent revenue trends; orders are not a reliable standalone revenue forecast.
- How DTC and digital growth affect profitability, including the costs of continued investment and increased off-price sales.
- The sustainability of the unusually low year-to-date tax rate and the stated approximately 22% fourth-quarter tax-rate expectation.
- Foreign-exchange exposure, tax-audit outcomes, debt and repurchase funding, and the concentration of cash held by foreign subsidiaries.