NIKE, Inc. 10-K Summary: Fiscal Year Ended May 31, 1995
Business Context and Reporting Period
This Annual Report (Form 10-K) covers the fiscal year ended May 31, 1995. NIKE, Inc. is the world's largest supplier of athletic footwear, designing, developing, and marketing high-quality footwear, apparel, and accessories. The Company sells to approximately 14,000 retail accounts in the U.S. and operates in approximately 110 countries globally. A significant strategic development in this period was the February 1995 acquisition of Canstar Sports Inc., the world's largest hockey equipment manufacturer, for approximately $409 million.
Key Financial Metrics
| Metric | Fiscal 1995 | Fiscal 1994 | Change |
|---|---|---|---|
| Revenues | $4,760.8 million | $3,789.7 million | +25.6% |
| Gross Margin | $1,895.6 million (39.8%) | $1,488.2 million (39.3%) | +0.5 pts |
| Net Income | $399.7 million | $298.8 million | +33.8% |
| Earnings Per Share | $5.44 | $3.96 | +37.4% |
| Cash Flow from Operations | $254.9 million | $576.5 million | -55.8% |
| Cash and Equivalents (End of Period) | $216.1 million | $518.8 million | -58.3% |
| Long-Term Debt | $10.6 million | $12.4 million | -14.5% |
| Working Capital | $938.4 million | $1,208.4 million | -22.3% |
Liquidity: The current ratio decreased to 1.8 from 3.2 in the prior year, primarily due to the Canstar acquisition and increased operational cash needs. The Company maintains a commercial paper program rated A1/P1 with $118.6 million outstanding at year-end.
Material Changes vs. Prior Period
- Revenue Growth: Revenues exceeded $4 billion for the first time, driven by a 24% increase in U.S. footwear sales and a 27% increase in international revenues. All four quarters exceeded $1 billion in revenue.
- Profitability: Net income reached a record $399.7 million. Gross margins improved to 39.8% due to strong consumer demand, lower closeout levels, and effective inventory management.
- Acquisition Impact: The acquisition of Canstar Sports Inc. significantly impacted the balance sheet, increasing inventory by $160 million and accounts receivable by $350 million. It also contributed to a $303 million decrease in cash and equivalents.
- Expense Management: Selling and administrative expenses as a percentage of revenue decreased to 25.4% from 25.7%, despite absolute dollar increases due to marketing and international infrastructure investments.
- Orders: Worldwide orders for the next six months totaled $2.5 billion, a 35% increase over the prior year.
Guidance, Outlook, and Risks
Outlook: Management anticipates the effective tax rate for fiscal 1996 will approximate the 1995 rate of 38.5%. Capital expenditures for fiscal 1996 are projected at approximately $177 million, focused on consolidating European warehouses and expanding NIKE TOWN retail locations. The Company plans to continue its stock repurchase program (authorized up to $450 million) and maintain a dividend policy targeting 15% to 25% of trailing twelve-month earnings.
Risks and Contingencies:
- Trade Legislation: The Company faces risks regarding "Most Favored Nation" (MFN) status for China and Vietnam, which could increase tariffs. Additionally, the European Union has initiated anti-dumping investigations on footwear from China, Indonesia, and Thailand, though the Company believes most of its products are excluded.
- Foreign Exchange: The Company is exposed to currency fluctuations, though it utilizes forward contracts and options to hedge risks. A weaker U.S. dollar in 1995 favorably affected results.
- Competition: The industry is highly competitive with rapid changes in consumer preferences and technology.
- Supply Chain: Virtually all footwear is manufactured outside the U.S. Disruption in a specific country could temporarily impact operations, though the Company believes it can mitigate this within 12 months.
Investor Verification Checklist
- Canstar Integration: Verify the long-term profitability and integration success of the Canstar Sports Inc. acquisition, which added significant goodwill ($338.6 million) and inventory.
- Order Fulfillment: Monitor the conversion of the record $2.5 billion in futures orders into actual revenue, noting that orders are cancelable and subject to mix changes.
- Trade Policy Exposure: Assess the potential financial impact of any changes in U.S. MFN status for China or the outcome of EU anti-dumping investigations on footwear sourcing costs.
- Cash Flow Trends: Review the significant decline in operating cash flow ($576M to $255M) to ensure it is driven by working capital buildup for growth rather than operational inefficiency.
- Stock Repurchase Execution: Track the execution of the $450 million share repurchase program and its impact on earnings per share.