NIKE, Inc. Form 10-Q Summary
Business context and reporting period. NIKE designs, markets and sells athletic footwear, apparel, equipment and accessories worldwide through wholesale customers and NIKE Direct. This filing covers the fiscal quarter and six months ended November 30, 2019; comparisons are with the corresponding prior-year periods. Amounts are in U.S. dollars.
Key financial metrics
| Metric | Quarter ended Nov. 30, 2019 | Prior-year quarter | Six months ended Nov. 30, 2019 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $10.326 billion | $9.374 billion | $20.986 billion | $19.322 billion |
| Gross profit | $4.544 billion | $4.105 billion | $9.415 billion | $8.502 billion |
| Gross margin | 44.0% | 43.8% | 44.9% | 44.0% |
| Operating income, before interest and taxes | $1.261 billion | $1.011 billion | $2.837 billion | $2.292 billion |
| Net income | $1.115 billion | $847 million | $2.482 billion | $1.939 billion |
| Diluted EPS | $0.70 | $0.52 | $1.56 | $1.19 |
- Revenue growth: Reported revenue rose 10% in the quarter and 9% for the six months; currency-neutral growth was 13% and 11%, respectively. Quarterly NIKE Brand revenue increased 10% reported, led by Greater China (+20% reported; +23% currency-neutral). Converse revenue rose 13% reported.
- Channels and products: Quarterly NIKE Direct revenue grew 15% reported, and digital commerce sales were $1.3 billion versus $977 million. Currency-neutral digital growth was 38% for the quarter. Footwear accounted for $6.622 billion of quarterly revenue; apparel accounted for $3.317 billion.
- Expenses and taxes: Quarterly selling and administrative expense rose 6%, slower than revenue growth, and declined to 32.2% of revenue from 33.5%. Quarterly effective tax rate fell to 10.7% from 15.0%, primarily due to a more favorable stock-based-compensation impact.
- Cash flow: Six-month operating cash flow was $1.306 billion, down from $2.825 billion. The filing attributes the decline mainly to a $1.600 billion working-capital and other-assets/liabilities cash outflow, including higher receivables and inventory and lower cash collateral received from derivative counterparties. Investing cash outflow was $788 million; financing cash outflow was $1.868 billion.
- Liquidity and debt: At November 30, cash and equivalents were $3.070 billion and short-term investments were $432 million, totaling $3.502 billion. Long-term debt was $3.462 billion, with $6 million current; commercial paper borrowings were $300 million. NIKE reported a $2 billion committed credit facility with no borrowings outstanding and stated available liquidity and operating cash flows should meet foreseeable needs.
- Capital returns: NIKE repurchased 22.0 million shares for $1.917 billion in the six-month period and paid $689 million in cash dividends. The company had repurchased 33.6 million shares for approximately $2.9 billion under its $15 billion, four-year authorization as of quarter-end.
Material changes versus the prior period
- Quarterly net income rose 32% and diluted EPS rose 35%; six-month net income rose 28% and diluted EPS rose 31%. Management cited revenue growth, gross-margin expansion and selling and administrative expense leverage; lower tax rates and fewer diluted shares also contributed to EPS growth.
- Gross margin improved 20 basis points in the quarter and 90 basis points for the six months. Higher full-price average selling prices and NIKE Direct growth helped; incremental U.S. tariffs on China-imported products, other costs and unfavorable foreign exchange partly offset the gains.
- Inventory increased to $6.199 billion from $5.622 billion at May 31, 2019; accounts receivable increased to $4.792 billion from $4.272 billion.
- Adoption of lease accounting standard Topic 842 added approximately $2.7 billion to assets and liabilities at June 1, 2019. At November 30, operating lease right-of-use assets were $2.882 billion and operating lease liabilities totaled $3.154 billion. The adoption had no material income-statement or cash-flow impact.
Outlook, commentary, risks and unusual items
- Management described opportunities for future growth and profitability and reaffirmed a long-term focus on innovation, digital consumer connections and NIKE Direct. The filing provides no specific financial guidance or numerical forecast.
- Management highlighted volatile foreign-exchange markets and a stronger U.S. dollar. Translation of foreign operations and year-over-year foreign-currency-related gains and losses had an estimated unfavorable income-before-tax impact of $77 million for the quarter and $92 million for the six months.
- Risks discussed include changing consumer demand and competition, inventory forecasting, tariffs and other trade-policy changes, foreign exchange and inflation, technology and data-security issues, supply and distribution disruptions, and litigation or regulatory matters. NIKE reported no material change in previously disclosed risk factors.
- On December 6, 2019, after quarter-end, NIKE completed the sale of Hurley, following its October agreement; the company said the divestiture’s impact was not material.
- The European Commission opened an investigation into whether Dutch tax rulings breached State Aid rules. NIKE said it believes the investigation is without merit; an adverse resolution could result in additional assessments and higher future Netherlands taxes. NIKE also said it was assessing a subsequent change in foreign tax law that could affect withholding taxes and future tax expense; the impact was not yet estimable.
- NIKE reported $804 million of gross unrecognized tax benefits at quarter-end, of which $545 million would affect the effective tax rate if recognized. The company estimated these benefits could decrease by up to $50 million in the next 12 months.
Important facts for investors to verify
- Whether NIKE Direct and digital growth, particularly in Greater China, can continue while the company manages distribution-channel changes and store optimization.
- Whether inventory and receivables growth converts to cash; six-month operating cash flow declined substantially year over year.
- Whether higher selling prices and direct-channel mix can continue to offset tariffs, product costs, freight and warehousing costs, and foreign-exchange pressures.
- Potential outcomes and financial effects of the Dutch tax investigation and the subsequent foreign tax-law change.
- Share-repurchase pace and capital allocation relative to operating cash generation, debt and lease obligations.