Business Context and Reporting Period
This Form 10-Q covers NIKE, Inc. for the quarter and nine months ended February 28, 1995. The company reported record revenues exceeding $1 billion for the third consecutive quarter. A significant corporate event during the period was the acquisition of Canstar Sports Inc. for approximately $407 million in cash.
Key Financial Metrics
| Metric | Q3 1995 | Q3 1994 | 9 Months 1995 | 9 Months 1994 |
|---|---|---|---|---|
| Revenues | $1,124.7M | $871.8M | $3,348.8M | $2,785.5M |
| Net Income | $95.3M | $63.2M | $286.3M | $229.6M |
| Diluted EPS | $1.29 | $0.85 | $3.88 | $3.03 |
| Gross Margin | 39.7% | 38.4% | 39.7% (implied) | 38.9% (implied) |
| Cash & Equivalents | $242.7M | $386.0M | $242.7M | $386.0M |
| Working Capital Ratio | 2.1:1 | 3.2:1 | 2.1:1 | 3.2:1 |
| Debt to Equity | 0.5:1 | 0.4:1 | 0.5:1 | 0.4:1 |
Liquidity: Cash and equivalents decreased by $276 million primarily due to the Canstar acquisition and stock repurchases. The company maintains $300 million in committed unused lines of credit.
Material Changes vs. Prior Period
- Revenue Growth: Q3 revenues increased 29% year-over-year, driven by a 27% increase in U.S. footwear, 39% in U.S. apparel, and 33% in international revenues.
- Profitability: Net income rose 51% to $95.3 million. Gross margins improved to 39.7% due to high volume and fewer closeout sales compared to the prior year.
- Acquisition Impact: The purchase of Canstar Sports Inc. added $72 million to inventory and significantly impacted cash flow and working capital.
- Balance Sheet: Accounts receivable reached an all-time high, increasing $227 million (32%) due to a 42% sales increase in January and February. Total inventories increased $158 million, largely due to international expansion and the Canstar acquisition.
Outlook, Risks, and Management Commentary
- Orders: Worldwide orders for athletic footwear and apparel for delivery between March and July 1995 were approximately $2.4 billion, a 37% increase over the prior year. Management notes this is a record amount but warns that order mix and exchange rates may cause revenue variances.
- Expenses: Selling and administrative expenses decreased as a percentage of revenue to 24.7% from 26.5%. Management expects this ratio to approximate prior year results for the full fiscal year due to planned marketing investments.
- Tax Rate: The effective tax rate for the quarter was 39.0%. Management anticipates the fiscal 1995 rate will approximate the 39.1% rate of fiscal 1994.
- Risks: High order volumes may impact product availability for "at once" shipments. International operations are shifting toward futures orders, which may alter revenue recognition timing.
Investor Verification Checklist
- Verify the integration progress and financial contribution of the Canstar Sports Inc. acquisition in subsequent quarters.
- Monitor the conversion of the record $2.4 billion in orders into actual revenue, considering potential shifts in order mix and exchange rate fluctuations.
- Track the trend of accounts receivable and inventory levels to ensure they align with sales velocity and do not indicate channel stuffing or obsolescence risks.
- Confirm the stability of the gross margin as the company increases marketing spend to support sell-through of high order volumes.