NIKE, Inc. — Fiscal 2011 Form 10-K
Period clarification: The filing is an annual report for the fiscal year ended May 31, 2011, not a standalone 2010 Q4 filing. It includes unaudited fourth-quarter comparisons.
Business context
NIKE designs, markets and sells footwear, apparel, equipment and accessories worldwide through wholesale customers, its Direct to Consumer business and distributors and licensees. Most products are made by independent contractors outside the United States.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $20.862 billion | $19.014 billion |
| Gross margin | $9.508 billion; 45.6% | $8.800 billion; 46.3% |
| Income before income taxes | $2.844 billion | $2.517 billion |
| Net income | $2.133 billion | $1.907 billion |
| Diluted EPS | $4.39 | $3.86 |
| Cash from operations | $1.812 billion | $3.164 billion |
- Annual revenue grew 10%, net income 12% and diluted EPS 14%. Gross margin declined 70 basis points, principally from higher product input and transportation costs and a lower licensee-revenue mix. Selling and administrative expense rose 6%, but fell to 32.1% of revenue from 33.3%.
- Fourth-quarter revenue was $5.766 billion versus $5.077 billion; net income was $594 million versus $522 million. Gross margin was 44.3%, down from 47.4%.
- At May 31, 2011, cash and equivalents were $1.955 billion and short-term investments $2.583 billion. Working capital was $7.339 billion and the current ratio 2.9. Total debt was $476 million, including $200 million current and $276 million long-term; notes payable were a further $187 million.
- Inventory increased 33% to $2.715 billion and accounts receivable rose to $3.138 billion. Operating cash flow fell substantially, with working capital use increasing to $708 million.
- Capital returned to shareholders included $1.859 billion of share repurchases and $555 million of dividends paid. Dividends declared were $1.20 per share, up from $1.06.
Material changes and outlook
- NIKE Brand revenue rose 10% on a constant-currency basis. North America, Emerging Markets and Greater China were key growth drivers; Japan declined. Footwear revenue grew 11%, apparel 9%, and equipment fell 2%.
- Direct to Consumer represented about 16% of NIKE Brand revenue, versus 15% the prior year; constant-currency revenue grew 16% and comparable store sales rose 11%.
- Worldwide futures and advance orders for June–November 2011 deliveries were $10.3 billion, 15% higher reported and 12% higher excluding currency effects. Management cautioned that orders are not necessarily indicative of revenue.
- Management’s long-term financial goals remained high-single-digit revenue growth, mid-teens EPS growth, improved return on invested capital and accelerated cash flows. These are goals, not a specific fiscal 2012 forecast.
- Management expected gross-margin pressure to continue in fiscal 2012, particularly from rising input and transportation costs, which could outweigh planned price increases and cost-efficiency efforts. The Japan earthquake and tsunami negatively affected fourth-quarter results, with further adverse impact expected in fiscal 2012.
Risks, contingencies and unusual items
- Key risks include changing consumer preferences and intense competition; inventory forecasting and retailer credit; reliance on overseas contract manufacturers and global shipping; foreign-exchange and commodity-cost volatility; and information-system, supply-chain and distribution disruptions.
- Trade measures and import restrictions remained potential risks. The filing noted the termination of EU anti-dumping measures on certain leather footwear effective April 1, 2011, while duties and investigations in other markets could affect costs or imports.
- Unrecognized tax benefits were $212 million, excluding interest and penalties; the timing of possible cash payments was not reasonably estimable. Approximately $4.4 billion of foreign earnings were designated indefinitely reinvested offshore.
- Contractual commitments totaled $10.364 billion, including $4.444 billion for endorsement contracts and $3.175 billion for product purchases. The company reported no material pending legal proceedings and said routine indemnification exposure was not material.
- Fiscal 2009 included $195 million in restructuring charges and $401 million in Umbro goodwill, intangible and other asset impairments; neither charge recurred in fiscal 2011. The independent auditor reported effective internal control over financial reporting as of May 31, 2011.
Important facts for investors to verify
- Whether inventory and receivables growth converts into sales and cash, given the 33% inventory increase and lower operating cash flow.
- Whether margin pressure from input and freight costs is offset by pricing, product-cost reductions and Direct to Consumer growth.
- How futures-order growth translates into realized revenue after cancellations, discounts, shipment timing and currency movements.
- The duration and financial impact of Japan-related disruption, and trends in Japan and other weaker regions.
- Potential outcomes of tax examinations and trade investigations, and the implications of offshore earnings and significant contractual commitments.