NIKE, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended August 31, 2010 (NIKE fiscal 2011 first quarter), compared with the three months ended August 31, 2009. NIKE sells athletic footwear, apparel and equipment through its NIKE Brand, other businesses and direct-to-consumer channels. Dollar amounts are in millions except per-share data.
Key financial results
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Revenue | $5,175 | $4,799 | +8%; +10% excluding currency changes |
| Gross profit / gross margin | $2,434 / 47.0% | $2,216 / 46.2% | Profit +10%; margin +80 basis points |
| Selling and administrative expense | $1,673 | $1,546 | +8%; 32.3% of revenue versus 32.2% |
| Income before tax | $755 | $681 | +11% |
| Net income | $559 | $513 | +9% |
| Diluted EPS | $1.14 | $1.04 | +10% |
| Effective tax rate | 26.0% | 24.7% | +130 basis points |
- Management attributed revenue growth to demand for NIKE Brand footwear and apparel, particularly in North America and Emerging Markets, and growth across its other businesses. Worldwide NIKE Brand footwear and apparel revenue each rose 9% at reported exchange rates; equipment declined 3%.
- Gross-margin improvement reflected a larger direct-to-consumer contribution, fewer discounted close-out sales and better in-line product margins. Higher freight costs and unfavorable currency effects partly offset these benefits.
- Demand-creation expense increased 23% to $679, reflecting greater marketing investment, including spending around the 2010 World Cup and World Basketball Festival. Operating overhead was $994, broadly flat year over year.
Cash flow, balance sheet and liquidity
- Operating cash flow was $212, down from $709. Management cited a $430 working-capital cash outflow, compared with a $42 inflow in the prior-year quarter, including higher receivables and inventory and lower accounts payable and accrued liabilities.
- Investing cash outflow was $684, including net purchases of short-term investments of $614 and capital expenditures of $89. Financing cash outflow was $600, including $488 of share repurchases and $131 of dividends paid.
- Cash and equivalents were $2,010 at August 31, 2010, versus $3,079 at May 31, 2010; short-term investments were $2,678 versus $2,067. Combined cash and short-term investments were $4,688. Total assets were $14,051.
- Inventory was $2,210, up from $2,041 at May 31, 2010; accounts receivable was $2,791, up from $2,650. Current liabilities totaled $3,142.
- Debt at quarter-end comprised $132 current and $342 long-term debt, plus $109 of notes payable. No amounts were outstanding under the $1 billion revolving credit facility or the $1 billion commercial-paper program. NIKE said available cash, investments, operating cash generation and access to funding should meet foreseeable operating and capital needs.
- Quarterly dividends declared were $0.27 per share, versus $0.25 a year earlier. NIKE repurchased 7.3 million shares during the quarter under its $5 billion program; $4.029 billion remained available at quarter-end.
Material changes and business trends
- Regional revenue growth excluding currency was strongest in Emerging Markets (+24%), Greater China (+10%), North America (+8%) and Western Europe (+6%). Japan declined 18%. Other Businesses revenue increased 16% excluding currency.
- Consolidated EBIT was $754 versus $682. NIKE Brand EBIT fell to $853 from $886, as stronger results in North America, Greater China and Emerging Markets were offset by declines in Western Europe, Central and Eastern Europe and Japan, and a wider Global Brand Divisions loss. Other Businesses EBIT increased to $109 from $87; Corporate loss narrowed to $208 from $291.
- Futures and advance orders for NIKE Brand footwear and apparel for September 2010 through January 2011 were 13% higher at prior-year exchange rates and 10% higher at forecast exchange rates. Management cautioned that orders are not necessarily indicative of revenue because of shipment timing, order mix, cancellations, discounts and sales not included in futures orders.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided. Management expected gross margins to face increasing pressure for the remainder of fiscal 2011 from currency movements, rising product input costs and higher freight costs. It expected Japan’s market conditions to remain challenging.
- Management said currency translation and the year-over-year change in currency-related gains reduced first-quarter income before tax growth by approximately $33. It also cited a $71 year-over-year reduction in stock-option expense, largely related to a change in accelerated vesting provisions and lower estimated fair value of grants.
- Gross unrecognized tax benefits were $271, excluding interest and penalties; $129 would affect the effective tax rate if recognized. IRS audits covered 2009 and 2010, and certain 2007–2008 issues were under appeal. NIKE said the timing and amount of possible cash payments on uncertain tax positions could not be reasonably estimated.
- NIKE reported $100 of letters of credit, primarily for inventory purchases, and no significant changes to previously reported contractual obligations or legal proceedings. It reported no material changes to previously disclosed risk factors or market-risk disclosures. Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material quarterly change in internal control over financial reporting.
- Key risks include consumer demand and forecasting, competition, inventory and supply planning, freight and input costs, foreign exchange, international operations, information systems, and access to capital markets. NIKE stated it did not use derivatives for trading purposes; outstanding derivatives had a notional amount of $5 billion.
Most important facts for investors to verify
- Whether higher futures orders convert into sales and earnings, given management’s stated limitations on their predictive value.
- Whether freight, product input costs and currency pressure erode the quarter’s 47.0% gross margin.
- Whether working-capital investment and the sharp decline in operating cash flow reverse as demand and inventory levels evolve.
- Developments in Japan and performance across NIKE Brand segments, especially the weaker EBIT trends in several European markets and the larger Global Brand Divisions loss.
- The outcome and potential cash or tax-rate effects of IRS audits and other uncertain tax positions.
- The share-repurchase program’s pace and funding; the narrative reports $517 million of first-quarter purchases, while the cash-flow statement reports $488 million of repurchases.