NIKE, Inc. Form 10-Q Summary
Business context and period: Fiscal 2014 second quarter and first six months ended November 30, 2013; comparisons are with the corresponding 2012 periods. Amounts are in U.S. dollars. Results are unaudited and primarily reflect continuing operations. NIKE had sold Cole Haan and Umbro during fiscal 2013 and presents them as discontinued operations.
Key financial metrics
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $6.431 billion, up 8% reported and 9% excluding currency | $13.402 billion, up 8% reported and 8% excluding currency |
| Gross profit / margin | $2.826 billion / 43.9%, up 140 basis points | $5.958 billion / 44.5%, up 140 basis points |
| Net income from continuing operations | $537 million, up 3% | $1.317 billion, up 19% |
| Diluted EPS from continuing operations | $0.59, up 4% | $1.45, up 21% |
| Net income, including discontinued operations | $537 million versus $384 million | $1.317 billion versus $951 million |
| Selling and administrative expense | $2.088 billion, up 14%; 32.5% of revenue versus 30.8% | $4.144 billion, up 6%; 30.9% of revenue versus 31.3% |
| Operating cash flow | Not reported separately for the quarter | $929 million versus $1.245 billion |
Quarterly pretax income was $717 million, up 1%; the six-month figure was $1.757 billion, up 16%. Effective tax rates were 25.1% for the quarter and 25.0% for the six months, below prior-year rates of 26.8% and 26.9%, respectively.
At November 30, cash and equivalents were $2.086 billion and short-term investments were $3.101 billion, totaling $5.187 billion. Current assets were $13.607 billion and current liabilities $3.851 billion. Long-term debt was $1.201 billion, with a further $7 million current portion and $180 million of notes payable. Shareholders’ equity was $11.344 billion.
Six-month investing cash outflow was $1.177 billion, including $428 million of capital expenditures; financing cash outflow was $990 million, including $928 million of share repurchases and $375 million of dividends. Cash declined $1.251 billion from the fiscal-year opening balance. Working-capital changes used $799 million of cash, versus $113 million in the prior-year period.
Material changes and operating drivers
- NIKE Brand revenue rose 7% reported and 9% excluding currency in the quarter; Converse revenue increased 14% reported and 11% excluding currency. Direct-to-consumer revenue grew 19% excluding currency and represented about 19% of NIKE Brand revenue, versus 17% a year earlier.
- Gross-margin expansion reflected higher average selling prices, product mix, lower product costs, improved off-price margins, and DTC growth, partly offset by unfavorable currency movements. Higher marketing and overhead costs lifted quarterly SG&A as a share of revenue.
- Reported regional revenue growth was strongest in Western Europe and Central & Eastern Europe. Emerging Markets EBIT fell 18% in the quarter, with lower margins and higher expenses; Mexico distribution-center transition issues contributed to shipping delays and costs. China’s wholesale revenue declined 1% in the quarter on a constant-currency basis, while DTC grew 38%.
- Other expense shifted from $17 million of income to $13 million of expense in the quarter, mainly due to an adverse legal judgment involving a former Western European customer and unfavorable currency conversion results.
- Prior-year net income included discontinued-operation losses of $137 million for the quarter and $155 million for the six months. Accordingly, reported total net-income growth substantially exceeds growth in continuing-operations income.
Outlook, risks and unusual items
- NIKE Brand futures orders for footwear and apparel scheduled for December 2013 through April 2014 were $10.4 billion, up 12% reported and 13% excluding currency. The company cautioned that futures orders are not necessarily indicative of revenue because of shipment timing, order mix, cancellations, discounts and returns.
- For Greater China, management expected full-year revenue roughly in line with the prior year, with single-digit growth in the third quarter and flat to slightly lower revenue in the fourth quarter. Changes in cancellations, returns and discounts were expected to create volatility.
- Management said existing cash, investments, operating cash generation and financing access should meet foreseeable capital needs. The company had no borrowings under its $1 billion revolving credit facility or commercial-paper program at period-end and was in compliance with facility covenants.
- Key exposures include foreign-exchange movements, consumer demand and forecasting uncertainty, inventory management, product and labor costs, competition, and technology and distribution execution. NIKE reported approximately $10 billion of derivative notional, principally currency hedges, and stated derivatives were not held for speculation.
- Gross unrecognized tax benefits were $513 million, excluding interest and penalties; $337 million would affect the effective tax rate if recognized. The IRS was auditing tax years 2011–2013, including foreign tax credits and transfer pricing. Management said unrecognized tax benefits could decrease by up to $21 million within 12 months.
- Letters of credit totaled $129 million. Cole Haan lease guarantees had a maximum exposure of $38 million; their fair value was described as not material. The filing reported no material changes to previously disclosed legal proceedings or risk factors and no off-balance-sheet arrangements with a reasonably likely material effect.
Important facts for investors to verify
- Whether revenue growth, gross-margin gains and DTC expansion continue, and whether elevated quarterly SG&A moderates.
- Whether China’s stated outlook is achieved, given weak wholesale sales and expected volatility in cancellations, returns and discounts.
- Whether Mexico distribution issues, inventory growth and working-capital cash use improve.
- How currency movements and the adverse legal judgment affect subsequent earnings and hedge-related results.
- Developments in the IRS audit and uncertain-tax-position liability, and any changes to the Cole Haan lease guarantees.