NIKE, Inc. Form 10-Q Summary
Business context and reporting period
NIKE reported its first quarter of fiscal 2014, the three months ended August 31, 2013, compared with the three months ended August 31, 2012. The filing reports continuing operations unless otherwise noted. Cole Haan and Umbro were sold in fiscal 2013 and are presented as discontinued operations. NIKE also changed its segment structure in fiscal 2014, adding NIKE Golf and Hurley to geographic segments; prior-period segment data was restated.
Key financial metrics
| Metric | Quarter ended Aug. 31, 2013 | Prior-year quarter |
|---|---|---|
| Revenue | $6.971 billion | $6.474 billion |
| Gross profit / margin | $3.132 billion / 44.9% | $2.828 billion / 43.7% |
| SG&A | $2.056 billion | $2.059 billion |
| Income from continuing operations | $780 million | $585 million |
| Net income | $780 million | $567 million |
| Diluted EPS from continuing operations | $0.86 | $0.63 |
| Cash provided by operations | $597 million | $535 million |
Revenue rose 8%; continuing-operations income rose 33%, and diluted continuing-operations EPS rose 37%. Gross margin expanded 120 basis points. The effective tax rate fell to 25.0% from 26.9%. Demand-creation expense declined 16% to $731 million, while operating overhead rose 12% to $1.325 billion. Consolidated EBIT was $1.048 billion, up 31%.
Operating cash flow was partly offset by working-capital outflows; the company reported a $402 million working-capital cash outflow. Investing activities used $392 million, including $215 million of property and equipment additions. Financing activities used $598 million, including $526 million of share repurchases and $188 million of dividends paid. Cash and equivalents declined $401 million during the quarter to $2.936 billion.
At August 31, cash, cash equivalents, and short-term investments totaled $5.578 billion, including $3.2 billion held by foreign subsidiaries. Debt comprised $1.264 billion of long-term debt, including its current portion, and $111 million of notes payable. No borrowings were outstanding under the committed credit facility or commercial-paper program. Current assets were $13.618 billion and current liabilities $3.863 billion.
Material changes versus prior comparable period
- NIKE Brand revenue increased 7% to $6.468 billion; Converse revenue increased 18% to $494 million (16% excluding currency effects).
- North America revenue grew 9%; Western Europe 11%; Central & Eastern Europe 12%. Greater China declined 1% reported and 3% excluding currency effects. Japan declined 20% reported but grew 1% excluding currency effects.
- Direct-to-consumer NIKE Brand revenue grew 17% reported and 18% excluding currency effects, reaching about 20% of NIKE Brand revenue versus 18% a year earlier.
- Gross-margin gains reflected lower product costs, higher average selling prices, DTC growth, and Converse mix, partly offset by about 60 basis points of unfavorable currency movements.
- Other expense shifted from $28 million of income to $28 million of expense, primarily due to a $46 million adverse change in foreign-currency conversion results. Share repurchases were lower than the prior-year quarter; diluted weighted-average shares declined about 1%.
Outlook, commentary, risks and contingencies
- Futures orders for NIKE Brand footwear and apparel scheduled for September 2013–January 2014 totaled $9.6 billion, up 8% reported and 10% excluding currency changes. Management cautioned that futures orders do not necessarily predict revenue because of shipment timing, order mix, cancellations, discounts, and returns.
- Management expected Greater China revenue in fiscal 2014’s second quarter to exceed the prior-year quarter, with full-year revenue roughly in line with the prior year. It noted volatility from retailer cancellations, returns, and discounts.
- Management said cash, investments, operating cash generation, and access to external funding should meet foreseeable capital needs. The company continued its four-year, $8 billion repurchase program; $6.685 billion remained authorized at quarter-end.
- Key disclosed risks include competitive and consumer-demand changes, inventory and forecasting challenges, foreign exchange exposure, supply and logistics interruptions, input-cost increases, information-system and data-security risks, and potential changes in borrowing costs. NIKE reported no material change in its previously disclosed risk factors.
- Gross unrecognized tax benefits were $491 million, including $315 million that would affect the effective tax rate if recognized. The IRS was auditing tax years 2011–2013, including intercompany transfer-pricing matters; management said unrecognized benefits could decrease by up to $25 million within 12 months. Accrued interest and penalties on uncertain tax positions were $122 million.
- Preexisting guarantees of certain Cole Haan lease payments remained, with maximum exposure of $41 million; their fair value was described as not material. Letters of credit totaled $144 million. The filing reported no significant new developments in other commitments or contingencies and no off-balance-sheet arrangements with a material or reasonably likely effect.
Important facts for investors to verify
- Whether futures-order growth converts into revenue, particularly given the qualification that orders are not a direct forecast.
- Greater China’s inventory-clearance progress, returns, and management’s stated full-year revenue expectation.
- Whether gross-margin expansion persists as currency effects, product costs, pricing, and product mix change.
- Cash conversion and working-capital trends, alongside capital spending and the pace of share repurchases.
- Developments in the IRS audit and transfer-pricing discussions, and any change in tax exposures or Cole Haan guarantee exposure.