NIKE, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended November 30, 2010 (fiscal 2011). The interim financial statements are unaudited.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $4.842 billion; up 10% year over year | $10.017 billion; up 9% |
| Gross margin | $2.193 billion; 45.3%, up 80 basis points | $4.627 billion; 46.2%, up 80 basis points |
| Selling and administrative expense | $1.611 billion; up 9%; 33.3% of revenue versus 33.6% | $3.284 billion; up 9%; 32.8% of revenue versus 32.9% |
| Income before tax | $609 million; up 24% | $1.364 billion; up 16% |
| Net income | $457 million; up 22% | $1.016 billion; up 14% |
| Diluted EPS | $0.94 versus $0.76; up 24% | $2.08 versus $1.80; up 16% |
| Operating cash flow | $647 million for the six months, down from $1.377 billion |
At November 30, cash and equivalents were $1.768 billion and short-term investments were $3.021 billion. Total debt, including notes payable, was approximately $598 million; the company had no borrowings under its $1 billion revolving credit facility or commercial paper program. Total assets were $14.464 billion and shareholders’ equity was $9.949 billion.
Material changes and business drivers
- Quarterly growth reflected stronger NIKE Brand footwear and apparel demand across most regions, with particular strength in North America and Emerging Markets, and higher revenue from Other Businesses.
- Gross-margin expansion reflected more full-price sales, fewer close-out discounts, product-cost initiatives, and growth in Direct-to-Consumer. These benefits more than offset higher freight costs.
- Direct-to-Consumer revenue grew 13% on a currency-neutral basis in the quarter; comparable store sales grew 9%. Footwear and apparel were up 12% and 9%, respectively, on a currency-neutral basis; equipment declined 5%.
- Regional results were mixed: quarterly revenue rose 20% in Greater China, 24% in Emerging Markets, and 14% in North America, but fell 14% in Japan. Western Europe revenue declined 7% in reported dollars but increased 2% excluding currency changes. Western Europe and Japan EBIT declined 19% and 20%, respectively.
- Operating cash flow fell substantially year over year as working capital shifted to a $591 million cash outflow, including higher inventory and receivables. Inventory was $2.348 billion, up 15% from May 31, 2010; management noted inventory was up 8% year over year at quarter-end, alongside 11% futures-order growth.
- Financing cash use increased, primarily reflecting $785 million of share repurchases. During the first half, NIKE repurchased 10.8 million shares for $797 million and paid $260 million in dividends. Quarterly declared dividends were $0.31 per share, versus $0.27.
Outlook, risks, and unusual items
- Futures and advance orders for NIKE Brand footwear and apparel scheduled for December 2010 through April 2011 were up 11% at prior-year exchange rates. Management cautioned that futures orders are not necessarily indicative of actual revenue because of shipment timing, order mix, cancellations, discounts, and sales not covered by futures orders. Regional futures orders included 16% growth in North America, 14% in Greater China, and a 5% decline in Japan.
- Management expected gross margins to face increasing pressure for the remainder of fiscal 2011 from rising product input costs, currency movements, and higher freight costs.
- The six-month effective tax rate rose to 25.5% from 24.2%, mainly because a greater share of pretax income came from U.S. operations. Gross unrecognized tax benefits were $278 million; accrued interest and penalties on uncertain tax positions were $95 million. The IRS was auditing 2009 and 2010 tax years, and the company was appealing issues from 2007 and 2008 audits.
- Endorsement commitments totaled $4.274 billion, including $389 million due during the remainder of fiscal 2011; other commitments totaled $441 million. Letters of credit outstanding were $86 million. The filing reported no other significant subsequent developments relating to previously disclosed commitments and contingencies.
- Currency exposure remains material: outstanding derivatives had a notional amount of $6 billion. Management cited risks including economic conditions, changing consumer demand, competition, input and freight costs, foreign exchange, and the accuracy of demand and inventory planning. The company said it had not experienced difficulty accessing credit markets to date and believed available liquidity and funding sources would meet foreseeable needs.
- Management reported effective disclosure controls as of November 30, 2010, with no material change in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors or material developments in previously reported legal proceedings.
Important facts for investors to verify
- Whether inventory growth and working-capital use remain consistent with demand and futures-order trends.
- Whether higher input and freight costs, currency movements, or discounting erode gross-margin gains.
- Whether futures-order growth converts into delivered sales, particularly given the weakness in Japan and reported-dollar softness in Western Europe.
- Developments in U.S. tax audits and any effect on unrecognized tax benefits, tax expense, or cash payments.
- The pace of share repurchases, dividend payments, and cash generation relative to capital needs and long-term endorsement commitments.