NIKE, Inc. Form 10-Q Summary
Business context and reporting period. This unaudited quarterly report covers the quarter and six months ended November 30, 2022 (NIKE fiscal 2023 Q2). NIKE sells footwear, apparel, equipment and accessories through wholesale customers and NIKE Direct, including stores and digital platforms. Dollar amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial results
| Metric | Quarter ended Nov. 30, 2022 | Year-over-year change | Six months ended Nov. 30, 2022 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $13.315 billion | +17% reported; +27% currency-neutral | $26.002 billion | +10% reported; +18% currency-neutral |
| Gross profit / margin | $5.711 billion / 42.9% | Profit +10%; margin down 300 bps | $11.326 billion / 43.6% | Profit +4%; margin down 260 bps |
| Net income | $1.331 billion | Down 0.4% | $2.799 billion | Down 13% |
| Diluted EPS | $0.85 | Up 2% | $1.77 | Down 11% |
| EBIT margin (non-GAAP) | 12.5% | 13.7% prior year | 13.5% | 15.8% prior year |
| Operating cash flow | Not separately reported for quarter | — | $1.358 billion | Compared with $3.868 billion |
Margins and expenses. Selling and administrative expense rose 10% in both the quarter and six-month period, to $4.124 billion and $8.044 billion, respectively. Higher promotional activity to reduce excess inventory, unfavorable currency movements, freight and logistics expense, and higher product input costs weighed on gross margin. Strategic pricing increases partly offset these pressures. The six-month effective tax rate increased to 19.5% from 11.0%, primarily reflecting smaller stock-based compensation tax benefits and a shift in earnings mix.
Revenue mix and regions. NIKE Brand revenue rose 18% in the quarter and 10% for six months; Converse revenue increased 5% and 4%, respectively. NIKE Direct represented approximately 43% of NIKE Brand revenue in the quarter and 42% for six months. Greater China remained a weak spot: reported revenue fell 3% in the quarter and 10% for six months; currency-neutral revenue rose 6% in the quarter but fell 4% for six months. North America, EMEA and APLA reported growth.
Financial position and cash flows
- At November 30, 2022, cash and equivalents were $6.490 billion and short-term investments were $4.131 billion, totaling $10.621 billion.
- Total debt, including current maturities, was $9.424 billion: $500 million current and $8.924 billion long-term. NIKE reported no borrowings under its committed credit facilities or $3 billion commercial-paper program at quarter-end.
- Inventories were $9.326 billion, up from $8.420 billion at May 31, 2022. Management said inventory declined 3% from the first quarter as demand and promotional activity helped normalize stock levels.
- Six-month operating cash flow was $1.358 billion, versus $3.868 billion a year earlier. Working-capital changes reduced cash flow by $2.009 billion, driven principally by increases in receivables and inventory.
- Six-month investing cash outflow was $23 million; financing cash outflow was $3.321 billion, including $2.550 billion of share repurchases and $960 million of dividends. Cash and equivalents declined by $2.084 billion from May 31.
Material changes, outlook and risks
- Inventory and demand: Earlier-than-planned product arrivals contributed to elevated inventory. Management reported progress in reducing inventory, but the marketplace remained promotional. NIKE adjusted remaining fiscal 2023 purchases to prioritize reducing excess inventory.
- Outlook: NIKE expects unfavorable foreign-exchange movements, including hedges, to materially pressure reported revenue, gross margin and pretax income for the remainder of fiscal 2023. Elevated freight and logistics costs, product input costs and promotional activity are also expected to weigh on gross margin, partly offset by strategic pricing. No numeric full-year guidance is provided in the supplied filing text.
- China and macro conditions: COVID-related store closures and lower traffic affected Greater China. Restrictions were lifted in December 2022, but management expected continued volatility. Inflation, weaker consumer demand, excess inventory, customer order reductions or cancellations, and renewed COVID disruptions could adversely affect results.
- Argentina and Uruguay divestiture: NIKE completed sales of its entities in Argentina and Uruguay during the quarter. The combined loss on sale was approximately $550 million, of which $389 million had been recognized in prior periods; the remaining loss was recognized upon completion, largely in other income/expense. The shift to distributors is expected to reduce consolidated and APLA revenue growth because of different commercial terms, with potential longer-term benefits to profitability and foreign-exchange exposure.
- Legal and tax matters: NIKE disputes Belgian customs claims for alleged underpaid duties dating from fiscal 2018; it cannot estimate the loss range, and an adverse outcome could materially affect results, financial position or cash flows. The filing also describes a European Commission investigation concerning Netherlands tax rulings; NIKE considers it without merit. The U.S. IRS was auditing fiscal years 2017–2019.
- Capital returns and funding: NIKE began executing a new four-year, $18 billion repurchase authorization after terminating its prior program. It reported $19.0 million shares repurchased for approximately $1.9 billion under the new plan by November 30. Management believes available liquidity and operating cash generation, together with external funding access, will meet foreseeable capital needs.
Most important facts for investors to verify
- Whether inventory levels and promotional activity continue to decline without materially weakening full-price demand or gross margin.
- How foreign-exchange effects, freight and product costs affect reported results over the remainder of fiscal 2023.
- Greater China sales and operating performance as COVID-related disruptions ease.
- The cash-flow and earnings implications of working-capital needs, ongoing repurchases and dividends.
- Developments and potential financial exposure in the Belgian customs claim and Netherlands tax investigation.