NIKE, Inc. quarterly report, Q1 FY2017

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NIKE, Inc. — Form 10-Q Summary

Business context and reporting period

Quarter ended August 31, 2016, NIKE’s first quarter of fiscal 2017; comparisons are with the quarter ended August 31, 2015. NIKE sells athletic footwear, apparel and equipment, with the NIKE Brand representing more than 90% of company revenue. Figures are unaudited and in U.S. dollars.

Financial performance

  • Revenue: $9.061 billion, up 8% reported and 10% excluding currency effects. NIKE Brand revenue rose 7% reported (10% currency-neutral); Converse revenue rose 3% (4% currency-neutral).
  • Profit and margins: Gross profit was $4.123 billion, up 3%, while gross margin fell 200 basis points to 45.5%. Selling and administrative expense rose 12% to $2.897 billion, or 32.0% of revenue versus 30.6%. Pretax income declined 11% to $1.281 billion; net income increased 6% to $1.249 billion. Diluted EPS was $0.73, up 9%.
  • Cash flow: Operating cash flow was $721 million, compared with $491 million. Investing activities used $76 million; financing activities used $1.135 billion, including $1.054 billion of share repurchases and $269 million of dividends. Cash and equivalents ended the quarter at $2.659 billion.
  • Liquidity and debt: Cash, cash equivalents and short-term investments totaled $4.8 billion. Current assets were $14.589 billion and current liabilities $5.363 billion. Total debt was approximately $2.037 billion, including $44 million current and $1.993 billion long-term. No borrowings were outstanding under the $2 billion committed credit facility at quarter-end.
  • Other balance-sheet measures: Accounts receivable was $3.526 billion and inventory was $4.896 billion, substantially all finished goods. Inventory increased $58 million from May 31, 2016.

Material changes and business drivers

  • Revenue growth was broad-based on a currency-neutral basis. Greater China rose 21%, Japan 18%, Central and Eastern Europe 16%, North America 6%, Western Europe 10%, and Emerging Markets 11%.
  • NIKE Brand Direct to Consumer revenue increased 19% reported and 22% currency-neutral; it represented approximately 27% of NIKE Brand revenue versus 24% a year earlier. Digital commerce sales grew 49%.
  • Gross margin pressure reflected higher product and other costs, unfavorable currency effects, increased off-price sales and lower DTC margins. Higher full-price average selling prices provided a partial offset. Management cited sourcing and manufacturing, warehousing and logistics investments and costs associated with exiting the Golf equipment business among other costs.
  • Demand creation expense rose 25%, primarily reflecting marketing for the Rio Olympics and European Football Championship and higher sports marketing costs. Operating overhead increased 6%, including investment in DTC, infrastructure and digital capabilities.
  • NIKE Brand EBIT declined 20% to $1.298 billion. Greater China and Japan EBIT increased, while North America, Western Europe, Central and Eastern Europe, and Emerging Markets EBIT declined. Converse EBIT rose 4% to $153 million.

Outlook, commentary and risks

  • Management expected a full-year fiscal 2017 effective tax rate of approximately 17%; the quarter’s 2.5% rate benefited from one-time tax items and should not be treated as a recurring rate.
  • NIKE Brand futures orders for delivery September 2016 through January 2017 totaled $12.3 billion, up 5% reported and 7% excluding currency effects. Management cautioned that futures orders are not necessarily indicative of revenue because of shipment timing, order mix, cancellations, discounts and returns.
  • The quarter’s tax rate benefited chiefly from resolution of a U.S. foreign tax credit matter with the IRS, as well as a one-time deferred-tax-asset adjustment. NIKE said U.S. federal income tax matters through fiscal 2012 were resolved. Gross unrecognized tax benefits were $387 million at quarter-end.
  • Foreign exchange remains a material exposure affecting revenue translation, product costs and reported margins. The company used derivatives to manage exposures and reported $11.3 billion notional of designated foreign-currency cash-flow hedges and $7.7 billion of undesignated derivatives outstanding.
  • Management said available liquidity, operating cash generation and external funding access were expected to meet foreseeable capital needs. NIKE had repurchased 39.0 million shares for approximately $2.243 billion under its four-year, $12 billion authorization as of August 31, 2016.
  • The filing reported no material changes to previously disclosed risk factors, legal proceedings or contractual obligations, and no off-balance-sheet arrangements expected to materially affect the company. Letters of credit outstanding totaled $153 million.

Important facts for investors to verify

  • Whether revenue growth and strong DTC and digital sales can continue without further discounting or margin erosion.
  • Whether gross-margin pressures—especially foreign exchange, product costs, off-price mix and logistics—ease in subsequent quarters.
  • How much reported earnings growth depended on the nonrecurring tax benefits, and whether the full-year tax-rate outlook remains approximately 17%.
  • Whether futures-order growth converts into sales as scheduled; the company explicitly cautions that orders are not a direct revenue forecast.
  • Whether share repurchases remain supportable alongside dividends, investment needs and working-capital requirements, particularly given the quarter’s financing cash outflow.