NKE

NIKE, Inc. 10-K Summary: Fiscal Year Ended May 31, 2004

Business Context and Reporting Period

This report covers the fiscal year ended May 31, 2004. NIKE, Inc. is the world's largest seller of athletic footwear and apparel, operating in over 120 countries. The company designs, develops, and markets footwear, apparel, equipment, and accessories. Key brands include NIKE, Converse (acquired September 2003), Cole Haan, Bauer NIKE Hockey, and Hurley. Virtually all products are manufactured by independent contractors, primarily in Asia.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 15% to $12.25 billion. Seven percentage points of this growth were attributed to favorable foreign currency exchange rates (primarily the euro). The acquisition of Converse contributed 2 percentage points.
• Profitability: Net income nearly doubled (99% increase) to $945.6 million. This was driven by a 190 basis point improvement in gross margin percentage (to 42.9%) and strong operating performance across all regions.
• Margin Drivers: Gross margin improvements were driven by favorable hedge rates (70 bps), higher in-line pricing margins due to manufacturing efficiencies (70 bps), and improved profitability on wholesale closeout sales (10 bps).
• Segment Performance: The "Other" segment (including Converse, Cole Haan, Hurley) saw revenues surge 51% due to the Converse acquisition. The EMEA region grew 18%, and Asia Pacific grew 20%.
• Share Repurchases: The company completed a $1.0 billion share repurchase program in fiscal 2004 and authorized a new $1.5 billion program in June 2004.

Guidance, Outlook, and Risks

• Outlook: Management expects a positive impact on fiscal 2005 gross margins due to improved year-over-year hedge rates, primarily for the euro. The company aims for high single-digit revenue growth and mid-teens earnings per share growth long-term.
• Orders: Worldwide futures orders for footwear and apparel scheduled for delivery from June through November 2004 were up 11.3% compared to the prior year. Management notes that futures orders are not necessarily indicative of future sales trends due to order mix shifts and cancellations.
• Trade Risks: The expiration of the Multi-Fiber Arrangement on January 1, 2005, eliminates textile quotas but introduces risks of safeguard measures or anti-dumping duties, particularly regarding Chinese imports. The company is monitoring potential trade protectionism in the EU and US.
• Supply Chain: The company is implementing new supply chain systems globally to improve revenue response, margins, and cash flow. Approximately 80% of businesses had completed implementation as of year-end.
• Customer Concentration: No single customer accounted for more than 10% of consolidated revenues in fiscal 2004. However, the three largest US customers accounted for 23% of total US sales.

Investor Verification Checklist

• Converse Integration: Verify the financial performance and integration progress of the Converse acquisition, which significantly boosted the "Other" segment.
• Currency Hedging: Assess the sustainability of the gross margin benefits derived from favorable hedge rates, particularly regarding the Euro, as these may not persist in future periods.
• Trade Policy Exposure: Monitor developments regarding the expiration of the Multi-Fiber Arrangement and potential new trade restrictions on Chinese imports affecting footwear and apparel costs.
• Supply Chain Implementation: Track the completion of the global supply chain system upgrade and its impact on inventory turns and working capital efficiency.
• Customer Concentration: Review the stability of relationships with top retail accounts, particularly following the bankruptcy of Footstar and distribution shifts with Foot Locker.