NKE

NIKE, Inc. 10-K Summary: Fiscal Year Ended May 31, 2002

Business Context and Reporting Period

This filing covers the fiscal year ended May 31, 2002. NIKE, Inc. is the world's largest seller of athletic footwear and apparel, operating through a mix of independent distributors, licensees, and subsidiaries in approximately 140 countries. The company designs, develops, and markets footwear, apparel, equipment, and accessories. Key brands include NIKE, Cole Haan, Bauer, and Hurley (acquired in April 2002). Manufacturing is primarily outsourced to independent contractors, with virtually all footwear produced outside the United States.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues reached a record high, driven by growth in all geographic regions. International revenues grew 6.6% (12.4% in constant dollars), while U.S. revenues grew 2.0%.
• Product Mix: U.S. footwear revenues declined 0.7% due to a strategic reduction in close-out sales to improve profitability, despite increased in-line sales. Conversely, U.S. apparel and equipment sales grew 3.6% and 21.7%, respectively.
• Profitability: Gross margin percentage improved to 39.3% due to higher in-line pricing in EMEA, lower product and transportation costs in the U.S., and a favorable sales mix.
• Expenses: Selling and administrative expenses increased to 28.5% of revenues (from 28.3%) due to investments in supply chain initiatives, retail expansion, and compensation programs. Demand creation expenses remained consistent as a percentage of revenues.
• Customer Concentration: Foot Locker, Inc. accounted for 10.9% of global net sales. Foot Locker's shift toward moderately-priced offerings led to a significant decrease in their futures orders for the U.S. holiday season.

Guidance, Outlook, and Risks

• Accounting Changes: The company adopted SFAS No. 133 (Derivatives) in the prior year, resulting in a one-time cumulative effect charge of $5.0 million. The company expects to adopt SFAS No. 142 (Goodwill) on June 1, 2002, which will cease goodwill amortization (saving ~$13 million annually) but requires an estimated transitional impairment charge of approximately $270 million related to Bauer NIKE Hockey and Cole Haan subsidiaries in the first quarter of fiscal 2003.
• Outlook: Management expects revenue growth in the first quarter of fiscal 2003 to lag futures order growth due to lower close-out sales and retail sales impacts from the post-September 11 economic environment. Demand creation expenses are expected to grow slightly faster than revenues due to the World Cup 2002 campaign and a new Manchester United endorsement.
• Risks:
  • Trade Legislation: Exposure to EU quotas and anti-dumping duties, though currently mitigated by product exclusions and sourcing shifts.
  • Supply Chain: Reliance on independent contractors and potential disruptions from trade restrictions or political instability.
  • Legal Proceedings: Pending securities class actions and the Kasky v. NIKE case regarding labor practices (remanded to lower courts after California Supreme Court ruling).
  • Customer Concentration: Dependence on Foot Locker and other large retailers.

Investor Verification Checklist

• Impairment Charge: Verify the magnitude and timing of the expected $270 million goodwill impairment charge related to SFAS 142 adoption in Q1 2003.
• Foot Locker Orders: Monitor the impact of Foot Locker's reduced futures orders on U.S. footwear revenue in the upcoming holiday season.
• Supply Chain Investment: Assess the return on investment for the ongoing supply chain initiative, which increased operating overhead but aims to reduce inventories and close-outs.
• Legal Exposure: Track the status of the Kasky v. NIKE litigation and securities class actions for potential financial impact.
• Debt Levels: Review the increase in long-term debt and the utilization of the $1.1 billion committed credit facility.