NIKE, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended November 30, 2009 (second quarter of NIKE fiscal 2010); year-to-date figures cover the six months ended that date. Comparisons are with the same periods in 2008. NIKE designs, markets and sells athletic footwear, apparel and equipment through geographic segments and other businesses. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $4,405.6, down 4% | $9,204.1, down 8% |
| Gross margin | $1,960.7; 44.5% of revenue, down 20 bps | $4,176.2; 45.4%, down 60 bps |
| Selling and administrative expense | $1,478.6, down 4%; 33.6% of revenue | $3,024.7, down 11%; 32.9% of revenue |
| Income before taxes | $491.0, down 6% | $1,172.2, down 5% |
| Net income | $375.4, down 4% | $888.4, down 1% |
| Diluted EPS | $0.76, down 5% | $1.80, down 2% |
| Operating cash flow | Not provided separately | $1,377.1, versus $638.3 |
Cash and equivalents were $2,035.2 and short-term investments $1,974.8 at November 30, 2009. Total current assets were $9,765.6 and current liabilities $2,798.3. Debt comprised $459.6 of long-term debt, $7.6 current debt and $103.1 of notes payable. Shareholders’ equity was $9,224.1.
Six-month investing cash outflow was $1,064.8, including net purchases of investments; financing cash outflow was $505.7. Cash declined $255.9 to $2,035.2. Capital expenditures were $172.6. NIKE repurchased 3.3 million shares for $208.9 in the six-month period and paid $243.1 in dividends. Quarterly dividend declared per share was $0.27, versus $0.25.
Material changes versus prior comparable periods
- Management attributed lower revenue chiefly to weaker consumer spending across most major markets. NIKE Brand revenue declined 4% in the quarter and 9% as reported for the six months; excluding currency, the six-month decline was 6%.
- Emerging Markets was the only geography with revenue growth in the quarter, up 8% reported and 14% excluding currency. Central and Eastern Europe fell 24% reported; Western Europe fell 6%. In the six-month period, Emerging Markets grew 1% reported, while Central and Eastern Europe declined 29%.
- Worldwide NIKE Brand footwear revenue fell 1% in the quarter; apparel fell 10% and equipment 8%. Over six months, footwear fell 6% and apparel and equipment each fell 13%.
- Gross margin pressure reflected increased discounting and less favorable foreign exchange impacts. Lower product costs and a greater share of NIKE-owned retail sales partly offset those factors.
- Selling and administrative costs declined, primarily following fiscal 2009 restructuring and lower demand-creation spending. The effective tax rate also fell to 23.5% for the quarter and 24.2% for six months, supporting earnings.
- Operating cash flow improved substantially year over year, helped by working capital providing $180.2 of cash versus a $502.3 outflow in the prior-year six-month period. Receivables and inventory declined, partly reflecting lower revenue and tighter inventory buys.
Outlook, commentary, risks and unusual items
- Management estimated a fiscal 2010 effective tax rate of approximately 25%.
- Worldwide footwear and apparel futures and advance orders for delivery December 2009 through April 2010 were up 4% reported. Currency contributed about 5 percentage points; excluding currency, orders declined. NIKE cautioned that orders are not necessarily indicative of revenue because of shipment timing, order mix, cancellations, discounts and sales not captured by futures orders.
- The company cited a challenging retail and economic environment, discounting to manage inventories, and foreign exchange exposure. Forward-looking risks also include competition, changing consumer preferences, forecasting and inventory management, international operations, supply and logistics disruption, and dependence on customers and suppliers.
- Fiscal 2009 restructuring reduced the global workforce by about 5% and generated gross charges of $195. The company reported $25.2 remaining in the restructuring accrual at November 30 and expected no additional charges from those actions.
- Gross unrecognized tax benefits were $263.4, plus $75.6 of accrued interest and penalties. IRS audits covered tax years 2007–2009; management did not anticipate a significant change in gross unrecognized benefits from possible settlements in the next 12 months.
- Derivative notional exposure was $6.4 billion, primarily foreign-currency hedges. The company said it did not use derivatives for trading and reported no material changes in market-risk disclosures. It noted that future capital-market volatility could raise borrowing costs or affect access to financing.
- No material developments in previously reported legal proceedings or material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether demand and revenue trends improve, particularly in Europe and other weaker geographies, and whether discounting continues to weigh on gross margin.
- How much of futures-order growth translates into shipments and revenue, given the reported currency contribution and management’s stated limitations of the measure.
- Whether operating cash flow remains strong as working-capital movements normalize, and how investment purchases, buybacks and dividends affect cash balances.
- Developments in IRS audits and unrecognized tax benefits, including any resulting cash payments or effective-tax-rate effects.
- Foreign-exchange exposure and hedge effects, including the reported losses in accumulated other comprehensive income and the sensitivity of results to currency movements.