NKE

NIKE, Inc. 10-Q Summary: Quarter Ended August 31, 2003

Business Context and Reporting Period

This filing covers the first quarter of fiscal 2004, ended August 31, 2003. NIKE, Inc. operates globally in the design, production, marketing, and selling of sports and fitness footwear, apparel, and equipment. The company reported strong operational performance driven by international growth and improved gross margins, culminating in the completion of the Converse Inc. acquisition shortly after the period end.

Key Financial Metrics

Note: Q1 2003 Net Income and EPS figures include a one-time cumulative effect of accounting change charge of $266.1 million related to FAS 142 goodwill impairment.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 8% year-over-year. International regions drove the majority of this growth, with a 15% increase in revenue from outside the U.S.
• Margin Expansion: Gross margin percentage improved by 160 basis points to 43.0%, the highest quarterly gross margin in the company's public history. This was driven by lower product costs, reduced air freight, higher pricing margins on in-line products, and favorable currency exchange rates (primarily the Euro).
• Profitability: Income before taxes increased 20% to $400.6 million. Net income turned from a loss of $48.9 million in the prior year to a profit of $261.2 million, largely due to the absence of the prior year's $266.1 million accounting charge.
• Regional Performance:
  • EMEA: Revenue up 17% and pre-tax income up 26%.
  • Asia Pacific: Revenue up 13% and pre-tax income up 51%.
  • USA: Revenue declined 2% due to reduced footwear sales to key customers, though pre-tax income increased due to margin improvements.
• Cash Flow: Cash provided by operations more than doubled to $350.7 million, aided by a decrease in net investment in working capital compared to an increase in the prior year.

Outlook, Risks, and Unusual Items

• Acquisition: On September 4, 2003, NIKE completed the acquisition of Converse Inc. for $305 million in cash. The company accumulated cash reserves during the quarter to fund this transaction.
• Order Trends: Worldwide futures and advance orders for footwear and apparel for the period September 2003 to January 2004 were 10.5% higher than the comparable prior year period. Management notes that order growth is not necessarily indicative of future revenue due to mix shifts and cancellations.
• Currency Impact: Changes in currency exchange rates contributed approximately 6.5 percentage points to consolidated revenue growth. While foreign currency hedge losses were incurred, they were more than offset by favorable translation of foreign profits.
• Legal Settlement: The company settled the Kasky v. NIKE lawsuit on September 12, 2003, agreeing to contribute $1.5 million to the Fair Labor Association and maintain funding for worker education programs.
• Risks: Key risks include exchange rate fluctuations, intense competition, consumer preference changes, and the complexity of global supply chain management.

Investor Verification Checklist

• Converse Integration: Verify the financial impact and integration progress of the Converse Inc. acquisition in subsequent filings.
• USA Footwear Distribution: Monitor the recovery of U.S. footwear revenues following the distribution changes and reduced sales to Foot Locker.
• Currency Hedging: Track the net impact of foreign currency hedge losses versus translation gains, particularly regarding the Euro, as exchange rates fluctuate.
• Inventory Levels: Review inventory turnover and reserve levels, especially given the reduction in closeout sales and the shift in product mix.
• Share Repurchases: Confirm the status of the $1 billion share repurchase program, noting $89.5 million spent in this quarter.