NIKE, Inc. 10-Q Summary: Quarter Ended August 31, 1998
Business Context and Reporting Period
This Form 10-Q covers the first quarter of fiscal year 1999, ended August 31, 1998. NIKE, Inc. reported a significant decline in profitability and revenue, primarily driven by the economic crisis in the Asia Pacific region, a strengthening U.S. dollar, and strategic inventory liquidation efforts. The company also executed a major restructuring plan initiated in the prior fiscal year to align costs with expected revenue growth.
Key Financial Metrics
| Metric | Q1 FY1999 | Q1 FY1998 | Change |
|---|---|---|---|
| Revenues | $2,504.8 million | $2,766.1 million | -9.4% |
| Net Income | $163.8 million | $253.1 million | -35.3% |
| Gross Margin % | 37.6% | 39.8% | -220 bps |
| Operating Cash Flow | $368.9 million | $137.4 million | +168.5% |
| Cash & Equivalents | $167.8 million | $403.1 million | -58.4% |
| Inventory | $1,160.1 million | $1,396.6 million | -16.9% |
| Long-Term Debt | $375.7 million | $379.4 million | -1.0% |
| Current Ratio | 2.22:1 | 2.07:1 | Improved |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues fell 9% ($261.3 million). The U.S. region declined 10% (footwear -13%, apparel -5%). The Asia Pacific region saw a severe 46% drop, attributed to the regional economic crisis and currency fluctuations. Europe was the only major region to grow, up 12%.
- Margin Compression: Gross margin percentage dropped 220 basis points to 37.6%. This was caused by the liquidation of closeout inventories (particularly in Asia and U.S. apparel) and the impact of the strong dollar on European pricing.
- Restructuring Impact: While the $129.9 million restructuring charge was recorded in the prior fiscal year's fourth quarter, the current quarter saw significant cash outflows ($55.6 million) to settle severance, lease commitments, and contract cancellations. A total of 1,208 employees were terminated as part of this initiative.
- Cash Flow Improvement: Despite lower net income, cash provided by operations surged to $368.9 million (up from $137.4 million) due to a $150.2 million positive change in working capital, driven largely by inventory reduction.
Guidance, Outlook, and Risks
- Forward Orders: Worldwide futures and advance orders for the period September 1998 through January 1999 totaled $3.2 billion, a 15% decrease from the prior year. Management cautions that this is not necessarily indicative of future revenue due to order mix shifts and cancellation rates.
- Cost Cutting: Management plans to eliminate an additional 300 positions in the Asia Pacific region during fiscal 1999 to align costs with revenue levels.
- Year 2000 (Y2K) Risk: The company estimates total Y2K remediation costs between $45 million and $50 million. While internal systems are being addressed, the company cites significant risk regarding the compliance of suppliers and customers, which could materially disrupt operations.
- Accounting Changes: The company adopted SFAS 130 (Comprehensive Income) and SFAS 128 (Earnings Per Share). Future adoption of SFAS 133 (Derivatives) is expected in fiscal year 2001, with impact currently undetermined.
- Share Repurchases: The company repurchased 1.3 million shares for $52.0 million in the quarter. Since the program's inception in December 1997, 2.5 million shares have been purchased for $105.9 million.
Investor Verification Checklist
- Inventory Quality: Verify the extent of "closeout" inventory liquidation and its impact on future gross margins.
- Asia Pacific Recovery: Monitor the trajectory of revenue recovery in the Asia Pacific region given the 46% decline and ongoing economic instability.
- Y2K Contingency: Assess the status of supplier and customer Y2K compliance surveys and the adequacy of contingency plans for supply chain disruptions.
- Order Book vs. Revenue: Track the conversion rate of the 15% lower advance orders into actual revenue for the upcoming quarters.
- Restructuring Completion: Confirm the final cash outlays for the $129.9 million restructuring charge and the timeline for lease commitment settlements extending to July 2001.