NIKE, Inc. — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2014; the filing also reports fourth-quarter results. The request metadata says “2013 Q4,” but the supplied filing is for FY2014. Unless noted, amounts are U.S. dollars.
Business context and financial performance
NIKE designs, markets and sells athletic footwear, apparel, equipment and accessories through wholesale partners and Direct to Consumer (DTC) stores and websites. Nearly all footwear and apparel is made by independent contractors outside the United States.
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $27.799 billion | $25.313 billion | +10% reported; +11% currency-neutral |
| Gross profit / margin | $12.446 billion / 44.8% | $11.034 billion / 43.6% | Gross profit +13%; margin +120 bps |
| Net income from continuing operations | $2.693 billion | $2.451 billion | +10% |
| Diluted EPS from continuing operations | $2.97 | $2.68 | +11% |
| Operating cash flow | $3.003 billion | $2.968 billion | +$35 million |
| Cash and short-term investments at year-end | $5.142 billion | $5.965 billion | Down $823 million |
| Long-term debt at year-end | $1.199 billion | $1.210 billion | Down $11 million |
FY2014 revenue growth was broad-based, led by NIKE Brand footwear (+11%), Converse (+16%) and DTC (+22% currency-neutral). DTC represented about 20% of NIKE Brand revenue, up from 18%. Basketball, football (soccer), running and sportswear were key growth categories. Consolidated quarterly revenue was $7.425 billion in Q4, up from $6.697 billion; Q4 gross margin was 45.6% versus 43.9%, and continuing-operations net income was $698 million versus $690 million.
Margins, cash, debt and liquidity
- Gross-margin improvement reflected higher average selling prices, a richer product mix, DTC growth and cleaner closeout inventory. Offsets included higher product costs—especially labor inflation—and foreign-exchange headwinds.
- Selling and administrative expense rose 12% to $8.766 billion, or 31.5% of revenue versus 30.8%. Demand creation expense increased 10%; operating overhead increased 14%, including investment in DTC, digital capabilities and infrastructure.
- Working capital was $8.669 billion, down from $9.686 billion; current ratio was 2.7 versus 3.5. Inventory increased 13% to $3.947 billion, partly to support higher futures orders.
- Cash from operations was $3.003 billion; investing activities used $1.207 billion, including $880 million of capital expenditures; financing activities used $2.914 billion, including $2.628 billion of share repurchases and $799 million of dividends.
- Cash, cash equivalents and short-term investments totaled $5.1 billion, including $2.5 billion held by foreign subsidiaries. No borrowings were outstanding under the $1 billion committed credit facility or commercial-paper program. The company reported investment-grade long-term ratings of AA- and A1.
- Share repurchases totaled 36.6 million shares for $2.628 billion during FY2014. The company had repurchased $3.417 billion under its current four-year, $8 billion program by year-end.
Changes versus the prior comparable period
- Revenue grew 10% reported, despite a $288 million foreign-currency translation detriment to revenue. Management estimated currency translation and related year-over-year foreign-exchange gains and losses reduced pretax income by $139 million.
- North America revenue rose 10%; Western Europe 19%; Central & Eastern Europe 13%; Greater China 5%; Emerging Markets 3%; Converse 16%. Japan revenue fell 12% reported, but increased 5% currency-neutral.
- Greater China returned to modest currency-neutral growth (+3%), driven by DTC, while wholesale revenue declined 4% currency-neutral. Japan’s reported decline reflected yen weakness. Emerging Markets revenue increased 13% currency-neutral, but EBIT fell 3% reported amid currency, product-cost and logistics pressures.
- FY2013 included the divestitures of Umbro and Cole Haan; FY2014 had no discontinued-operations income. FY2013 discontinued operations included a $107 million after-tax Umbro sale loss and a $231 million after-tax Cole Haan sale gain.
Outlook, commentary, risks and unusual items
- Management’s stated long-term goals were high-single-digit revenue growth, mid-teens EPS growth, consistent return on invested capital with accelerated cash flows, and steady results across its portfolio. It did not provide a specific FY2015 revenue or earnings forecast in the supplied text.
- Worldwide NIKE Brand futures orders for delivery June–November 2014 were $13.3 billion, up 11% reported and 12% currency-neutral. Management cautioned that futures orders are not necessarily indicative of future revenue because of order mix, cancellations, shipment timing, discounts, returns and currency movements.
- Key risks include changing consumer preferences and intense competition; reliance on concentrated independent footwear manufacturers; foreign-exchange, trade and sourcing exposure; inventory and retailer credit risk; supply-chain, distribution and IT disruptions; data security; and potential damage to brand reputation.
- Other expense was $103 million, versus $15 million of other income in FY2013, mainly reflecting an adverse $90 million year-over-year change in currency conversion gains and losses and an adverse legal judgment involving a former Western European customer.
- The filing reports no material pending litigation, but identifies $506 million of uncertain tax positions (excluding interest and penalties); cash timing is uncertain. Approximately $6.6 billion of foreign earnings were indefinitely reinvested; estimated potential net deferred tax liability on repatriation was $2.1 billion, assuming full use of foreign tax credits.
- NIKE revised prior-period statements for immaterial errors, including expensing internally developed patent and trademark costs as incurred. FY2013 and FY2012 continuing-operations net income were reduced by $13 million and $12 million, respectively. The company and auditor reported effective internal control over financial reporting as of May 31, 2014.
Important facts for investors to verify
- Whether FY2015 demand and margins support management’s long-term growth goals, particularly given the limits of futures-order visibility.
- Whether inventory growth, working-capital outflows and slower inventory turns remain manageable and do not require increased discounting.
- How foreign-exchange movements, product labor inflation and other input costs affect gross margin and reported earnings.
- Whether DTC and digital investments generate returns sufficient to offset rising overhead and capital spending.
- Developments in Greater China wholesale demand, Japan, and Emerging Markets operating profitability.
- Potential cash, tax or earnings effects from uncertain tax positions and any future repatriation of foreign earnings.
- Execution and financial implications of the $8 billion repurchase program, dividends and planned investment needs.