NIKE, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2018. The filing is an FY2018 annual report, not a report for 2017 Q4; it also presents unaudited quarterly data, including Q4 FY2018.
Business context
NIKE designs, markets and sells athletic footwear, apparel, equipment and accessories worldwide through wholesale accounts and NIKE Direct stores and digital platforms. Its portfolio includes NIKE, Jordan, Hurley and Converse. Most footwear and apparel are produced by independent contractors outside the United States. In FY2018, NIKE reorganized its NIKE Brand reporting into North America, EMEA, Greater China and APLA segments.
Key financial metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $36.397 billion | $34.350 billion | +6% reported; +4% currency-neutral |
| Gross profit | $15.956 billion | $15.312 billion | +4% |
| Gross margin | 43.8% | 44.6% | Down 80 basis points |
| Income before taxes | $4.325 billion | $4.886 billion | Down 11% |
| Net income | $1.933 billion | $4.240 billion | Down 54% |
| Diluted EPS | $1.17 | $2.51 | Down 53% |
| Cash from operations | $4.955 billion | $3.846 billion | Up $1.109 billion |
- Revenue mix and growth: NIKE Brand revenue was $34.485 billion, up 7% reported and 5% currency-neutral. Footwear revenue rose 6% reported; apparel rose 11%; equipment fell 2%. NIKE Direct revenue grew 15% reported and 12% currency-neutral, with digital commerce sales of $2.8 billion, up from $2.2 billion.
- Expenses and margins: Selling and administrative expense rose 9% to $11.511 billion, or 31.6% of revenue versus 30.8%. Management cited investments in digital, consumer experiences, product and marketing, as well as one-time wage-related realignment costs. Currency headwinds were the main stated cause of gross-margin contraction.
- Cash, liquidity and debt: At year-end, cash and equivalents were $4.249 billion and short-term investments $996 million. Working capital was $9.094 billion; current ratio was 2.5. Long-term debt was $3.468 billion, with $336 million of notes payable. Cash used in financing was $4.835 billion, including $4.254 billion of share repurchases and $1.243 billion of dividends. The company reported $325 million outstanding under its commercial paper program and no borrowings under its $2 billion committed credit facility.
- Investment and capital returns: Capital expenditures were $1.028 billion. NIKE repurchased 69.7 million shares for approximately $4.267 billion in FY2018. In June 2018, the Board approved a new four-year, $15 billion repurchase program, expected to begin after completion of the existing program.
Material changes versus FY2017
- Revenue grew, but pretax income and net income declined. Net income was materially affected by the Tax Act, including a provisional $1.875 billion transition-tax expense and $158 million of deferred-tax remeasurement expense. The effective tax rate rose to 55.3% from 13.2%.
- Foreign exchange effects were mixed: currency translation benefited reported revenue by approximately $832 million, while management cited currency headwinds to gross margin and an unfavorable $110 million impact on pretax income from translation and currency-related gains and losses.
- Greater China revenue rose 21% reported (18% currency-neutral); EMEA rose 16% (9% currency-neutral); APLA rose 9% (10% currency-neutral). North America revenue declined 2%, while Converse revenue declined 8% reported and 11% currency-neutral.
- Operating cash flow increased, helped by working-capital movements, including accrual of the transition tax payable over eight years. Inventory increased to $5.261 billion from $5.055 billion.
Outlook, commentary, risks and unusual items
- Management’s long-term goals through FY2023, on average annually, are high-single-digit revenue growth, gross-margin expansion of up to 50 basis points, slight selling and administrative expense leverage, mid-teens EPS growth and a low-thirties return on invested capital.
- For FY2019, NIKE expected infrastructure investment—including corporate facilities, digital capabilities and NIKE Direct stores—to average 3%–4% of revenue. The filing does not provide specific FY2019 revenue or EPS guidance.
- Management described the Consumer Direct Offense and “Triple Double” strategy as focused on innovation, faster time to market and closer consumer connections. It noted North American retail disruption and store closures, while saying it saw stabilization and improving momentum.
- Principal risks include intense competition and changing consumer preferences; demand and inventory forecasting; foreign currency, tariffs and trade-policy changes; dependence on concentrated overseas contract manufacturing; freight and input-cost volatility; retailer financial health; digital and information-technology disruption; data security and privacy; brand and endorsement risks; and tax and regulatory uncertainty.
- Other notable items: the Tax Act amounts were provisional and could be adjusted; Argentina was expected to become a hyperinflationary market for accounting purposes in FY2019, with no material impact anticipated at then-current rates. Management reported no material pending legal proceedings beyond routine litigation. PwC issued an unqualified opinion on the financial statements and internal control, which management also concluded was effective.
Most important facts for investors to verify
- How much of the FY2018 earnings decline reflects the one-time Tax Act charge, and what tax rate and cash-tax profile are expected going forward.
- Whether NIKE can restore gross-margin expansion while managing currency exposure, discounting and product costs.
- Whether North America and Converse stabilize, and whether Greater China and other international growth rates are sustainable.
- Whether NIKE Direct and digital growth translate into durable profitability after the associated investments and store commitments.
- The effect of tariffs and other trade-policy changes on sourcing costs, supply continuity and margins, given manufacturing concentration in Vietnam, China and Indonesia.
- Cash use and balance-sheet effects of the existing and newly authorized share repurchase programs, dividends and debt funding.