NIKE, Inc. — Fiscal 2015 Second-Quarter Form 10-Q
Business context and period. The filing covers the quarter and six months ended November 30, 2014. NIKE sells athletic footwear, apparel and equipment; the NIKE Brand accounts for more than 90% of company revenue, and Converse is a separately reported segment. Figures are unaudited and in U.S. dollars.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $7.380 billion; +15% reported, +18% excluding currency effects | $15.362 billion; +15% reported, +16% excluding currency effects |
| Gross profit / margin | $3.327 billion / 45.1%, up 120 basis points | $7.048 billion / 45.9%, up 140 basis points |
| Net income | $655 million; +23% | $1.617 billion; +23% |
| Diluted EPS | $0.74; +25% | $1.83; +27% |
| Operating cash flow | Not presented separately for the quarter | $1.235 billion, versus $948 million |
| Capital expenditures | Not presented separately for the quarter | $487 million |
Selling and administrative expense rose 17% in the quarter and 19% year to date; it equaled 33.0% and 32.0% of revenue, respectively. The filing attributes gross-margin expansion mainly to higher average selling prices and a richer product mix, DTC growth and favorable currency effects, partly offset by higher product costs, including labor inflation. Operating cash flow less capital expenditures was approximately $748 million for the six months (derived from filing amounts).
At November 30, cash and equivalents were $2.273 billion and short-term investments were $2.440 billion. Total current assets were $14.033 billion and current liabilities $4.937 billion. Long-term debt, including its current portion, was $1.194 billion; notes payable were $93 million. NIKE reported $4.7 billion in cash, cash equivalents and short-term investments, including $3.0 billion held by foreign subsidiaries, and no borrowings under its committed credit facility or commercial paper program.
Material changes and business trends
- Growth was broad across the NIKE Brand: quarterly revenue increased 16% in North America, 22% in Western Europe, 21% in Greater China and 17% in Central & Eastern Europe. Japan declined 5% reported but grew 3% excluding currency effects. Emerging Markets grew 4% reported and 13% excluding currency effects.
- NIKE Brand DTC revenue grew 28% in the quarter and represented 21% of NIKE Brand revenue, versus 19% a year earlier. Online sales through NIKE-owned websites rose 66% excluding currency effects.
- Converse revenue increased 21% reported and 24% excluding currency effects in the quarter, while Converse EBIT fell 12%, reflecting higher selling and administrative costs and lower gross margin.
- Share repurchases reduced weighted-average diluted shares 3% year over year. NIKE repurchased 15.7 million shares for $1.243 billion during the six months; cumulative purchases under the $8 billion program were 67.6 million shares for approximately $4.7 billion.
Outlook, commentary and risks
- Futures orders for NIKE Brand footwear and apparel scheduled for December 2014 through April 2015 were $11.1 billion, up 7% reported and 11% excluding currency effects. Management cautions that futures orders are not necessarily indicative of revenue because of shipment timing, order mix, cancellations, discounts and other sales channels.
- Management continued to expect a fiscal-year effective tax rate of approximately 24.5%. No revenue or earnings guidance is stated in the supplied filing text.
- Management said existing cash, investments, operating cash flow and access to external funding should cover foreseeable domestic and international capital needs. Share repurchases are expected to be funded from operating cash flow, excess cash or debt, with timing dependent on capital needs and market conditions.
- Foreign currency translation reduced reported revenue by approximately $173 million in the quarter and $185 million year to date; the estimated combined effect of translation and currency-related gains and losses reduced pretax income by approximately $39 million and $7 million, respectively. NIKE had $14.8 billion of derivative notional exposure, primarily currency hedges, and stated it does not use derivatives for speculation.
- Gross unrecognized tax benefits were $444 million, of which $240 million would affect the effective tax rate if recognized. The IRS was auditing tax years 2012–2014; NIKE said unrecognized tax benefits could decrease by up to $39 million within 12 months.
- Commitments included $129 million of letters of credit and a maximum $28 million exposure under guarantees of former Cole Haan lease payments. The filing reported no material change in previously disclosed risk factors or legal proceedings; it lists currency movements, consumer demand, competition, product costs, supply-chain and technology disruptions, and international operations among risks.
- Prior-year comparative results were revised for immaterial accounting errors, including expensing internally developed patent and trademark costs as incurred. The revisions reduced prior-year net income by $3 million for the quarter and $4 million for the six-month period.
Important facts for investors to verify
- Whether strong reported and constant-currency sales growth, particularly in DTC and Greater China, continues, and whether futures-order growth converts into realized sales.
- Whether price and product-mix benefits can continue to offset labor and other product-cost inflation, and rising operating and marketing expenses.
- How currency movements affect revenue, margins, earnings and the substantial hedge portfolio.
- Whether the expected 24.5% fiscal-year tax rate and potential tax-audit outcomes remain consistent with management’s estimates.
- Whether cash generation supports capital spending, dividends and repurchases while maintaining the reported liquidity position.