NKE

Business Context and Reporting Period

Company: NIKE, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 30, 1996 (Second Quarter of Fiscal Year 1997)
Reporting Basis: Unaudited condensed consolidated financial statements. Prior year comparative data (1995) has been adjusted to eliminate a one-month reporting lag in certain international operations to ensure comparability.

Key Financial Metrics

Note: All figures in thousands except per share data and percentages.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 55% for the quarter and 44% year-to-date. This marks the ninth consecutive quarter of double-digit revenue growth.
• Profitability: Net income surged 81% for the quarter and 44% year-to-date. Year-to-date net income ($402.9 million) exceeded the total net income for the entire 1995 fiscal year.
• Segment Performance:
  • U.S. Operations: Revenues up 63% for the quarter. U.S. Apparel grew 93%; U.S. Footwear grew 52% (driven by a 48% increase in pairs sold).
  • International: Revenues up 60% for the quarter. Japan was the largest non-U.S. market, up 171% for the quarter. Asia Pacific grew 96%.
  • Other Brands: Slight decline of 1% for the quarter.
• Expense Management: Selling and administrative expenses decreased as a percentage of revenue for the quarter (25.2% vs. 26.1% prior year) despite a $177 million dollar increase, due to revenue outstripping costs.
• Cash Flow: Cash provided by operations was $125 million for the six months, compared to $93 million in the prior year. However, cash used in investing activities increased significantly to $203 million (vs. $95 million prior year) due to capital expenditures.

Guidance, Outlook, and Risks

• Order Backlog: Worldwide orders for delivery from December 1996 through April 1997 were approximately $4.1 billion, a 54% increase over the prior year. Management notes this is not necessarily indicative of future revenue growth due to a shift toward "futures" orders.
• Margin Outlook: Management expects full-year gross margin percentage to be up only slightly from the prior fiscal year. Increases in pricing and demand are expected to be offset by higher air freight costs.
• Expense Outlook: Selling and administrative expenses as a percentage of revenue are expected to approximate the prior year's level for the full fiscal year.
• Tax Rate: The effective tax rate is anticipated to remain at approximately 38.75% for fiscal 1997.
• Dividends: The quarterly cash dividend was increased by 33% to $0.10 per share.
• Subsequent Event: In December 1996, the company issued $200 million in seven-year notes at 6.375% interest to refinance short-term debt and for general corporate purposes.
• Risks: Exchange rates negatively impacted revenue by $38 million for the quarter and $93 million year-to-date. Forward-looking statements are subject to risks detailed in SEC filings.

Investor Verification Checklist

• Inventory Levels: Verify the sustainability of the $50 million increase in inventory ($981 million total) and the reported inventory turn improvement to 5.56.
• Order Mix: Assess the impact of the shift from "at once" to "futures" orders on future revenue recognition timing.
• Freight Costs: Monitor the impact of increased air freight costs on the projected slight improvement in gross margins.
• International Exposure: Evaluate the sensitivity of future earnings to foreign exchange rate fluctuations, given the significant international revenue growth.
• Capital Expenditures: Review the $188 million in capital additions for the six-month period to ensure alignment with long-term growth strategy.