NIKE, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended February 29, 2016, compared with the periods ended February 28, 2015. The request metadata says “2015 Q3,” but the filing is for fiscal 2016 Q3.
Business context and results
NIKE designs, markets and sells athletic footwear, apparel and equipment; the filing reports the NIKE Brand, Converse and corporate results. Amounts below are in U.S. dollars unless noted.
| Metric | Q3 FY2016 | First nine months FY2016 |
|---|---|---|
| Revenue | $8.032 billion; up 8% reported and 14% excluding currency effects | $24.132 billion; up 6% reported and 14% excluding currency effects |
| Gross profit / margin | $3.689 billion; 45.9%, flat year over year | $11.185 billion; 46.3%, up 40 basis points |
| Income before tax | $1.135 billion; up 9% | $3.550 billion; up 13% |
| Net income | $950 million; up 20% | $2.914 billion; up 21% |
| Diluted EPS | $0.55; up 22% | $1.67; up 23% |
| Effective tax rate | 16.3%, versus 24.4% | 17.9%, versus 23.6% |
Cash flow, balance sheet and capital
- Operating cash flow for the first nine months was $1.912 billion, down from $3.338 billion. Management attributed the decline principally to working-capital outflows, including a $630 million reduction in cash collateral received from derivative counterparties versus an increase in the prior-year period, and payment timing.
- Investing activities used $544 million, including $901 million of property, plant and equipment additions. Financing activities used $2.045 billion.
- At February 29, cash and equivalents were $3.044 billion and short-term investments were $2.062 billion. Total debt was $2.055 billion; the company had no borrowings under its $2 billion committed credit facility or commercial-paper program. Cash and short-term investments included $4.0 billion held by foreign subsidiaries.
- Inventory was $4.590 billion, up from $4.337 billion at May 31, 2015. North American inventory remained somewhat elevated amid distribution and supply-chain challenges, though management said product flow was normalizing.
- NIKE repurchased $2.698 billion of stock and paid $752 million in dividends during the nine-month period. It completed its prior $8 billion repurchase program and began a new four-year, $12 billion program.
Changes and operating trends
- NIKE Brand revenue rose 9% reported and 15% currency-neutral in Q3. Footwear grew 11% reported; apparel rose 8%; equipment declined 8%.
- Direct-to-consumer revenue grew 22% reported and 29% currency-neutral in Q3, reaching approximately 27% of NIKE Brand revenue. Online sales through NIKE-owned websites grew 56%.
- Greater China revenue rose 23% reported and 27% currency-neutral in Q3; North America rose 13% and 14%, respectively. Emerging Markets revenue fell 8% reported but grew 11% currency-neutral.
- Converse revenue declined 9% reported and 5% currency-neutral in Q3; EBIT fell 22%. Management cited a difficult comparison with prior-year sales ahead of a systems launch, lower unit sales and margin pressure.
- Q3 selling and administrative expense increased 8%, in line with reported revenue growth. Gross margin was held flat by currency headwinds, higher warehousing and other costs, and Converse mix, offset by higher selling prices and DTC growth.
Outlook, risks and unusual items
- Management expected a full-year FY2016 effective tax rate of approximately 19%. No full-year revenue or earnings forecast is provided in the filing text.
- NIKE Brand futures orders for delivery March through July 2016 totaled $12.6 billion, up 12% reported and 17% excluding currency effects. Management cautioned that futures orders are not necessarily indicative of subsequent revenue because of shipment timing, order mix, cancellations, discounts and returns.
- Foreign exchange remained a material headwind: currency translation reduced Q3 revenue by approximately $493 million and pretax income by approximately $104 million; for the first nine months, the respective detriments were approximately $1.780 billion and $407 million. NIKE uses derivatives to manage exposures and does not use them for trading or speculation.
- Other income, net, was $82 million for the nine months, including foreign-currency effects and a favorable settlement of a Western European bankruptcy-related legal judgment. The Q3 amount was $17 million of other income, net.
- Gross unrecognized tax benefits were $505 million, of which $285 million would affect the effective tax rate if recognized. NIKE was contesting a $31 million IRS deficiency notice related to foreign tax credits; management did not expect a material financial-statement impact. The company estimated unrecognized tax benefits could decrease by up to $97 million within 12 months.
- Endorsement-contract cash commitments totaled approximately $7.403 billion, including potential amounts dependent on performance, royalties and other contract terms. Letters of credit were $150 million; maximum exposure under remaining Cole Haan lease guarantees was $19 million. The filing reported no material legal-proceeding developments and no material changes to previously disclosed risk factors.
- Management cited risks including currency volatility, consumer demand and forecasting, competition, inventory and supply-chain execution, information systems and data security, and macroeconomic conditions. The filing said disclosure controls were effective as of February 29, 2016.
Important facts for investors to verify
- Whether strong currency-neutral growth and futures orders translate into reported sales and earnings amid significant foreign-exchange pressure.
- Whether elevated inventory and North American distribution constraints continue to improve, and whether related discounting or obsolescence costs affect margins.
- Whether DTC and digital growth can sustain performance while supporting higher operating and marketing investment.
- Whether the lower tax rate persists and how tax audits, uncertain tax positions and foreign tax-credit matters are resolved.
- How the new $12 billion repurchase program, debt issuance and large endorsement commitments affect cash, leverage and capital flexibility.