NIKE, Inc. — Q3 FY2012 Form 10-Q
Reporting period: Unaudited quarter and nine months ended February 29, 2012; comparisons are with the corresponding 2011 periods. Amounts are U.S. dollars unless noted.
Financial performance
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Revenue | $5.846B (+15%) | $5.079B | $17.658B (+17%) | $15.096B |
| Gross profit | $2.561B (+10%) | $2.327B | $7.704B (+11%) | $6.954B |
| Gross margin | 43.8% | 45.8% | 43.6% | 46.1% |
| Selling and administrative expense | $1.802B (+10%); 30.8% of revenue | $1.637B; 32.2% | $5.445B (+11%); 30.8% | $4.921B; 32.6% |
| Income before income taxes | $770M (+9%) | $707M | $2.240B (+8%) | $2.071B |
| Net income | $560M (+7%) | $523M | $1.674B (+9%) | $1.539B |
| Diluted EPS | $1.20 (+11%) | $1.08 | $3.56 (+13%) | $3.16 |
Q3 revenue increased 16% excluding currency effects; nine-month revenue increased 14% on that basis. Footwear, apparel and equipment all grew. NIKE Brand revenue rose 15% in Q3 and 18% year to date as reported. Q3 growth was broad-based by geography except Japan on a currency-neutral basis; North America and Greater China were key contributors. Direct to Consumer revenue grew 23% currency-neutral in Q3 and represented about 18% of NIKE Brand revenue.
Gross margin fell 200 basis points in Q3 and 250 basis points year to date. Higher product input costs, especially materials and labor, were the main pressure; price increases, Direct to Consumer growth and cost-reduction actions partly offset the decline. The effective tax rate was 27.3% in Q3 versus 26.0% a year earlier, but 25.3% year to date versus 25.7%.
Cash flow, balance sheet and liquidity
- Operating cash flow: $925M for nine months, versus $970M a year earlier. Working capital used $1.157B, with inventory growth a major driver.
- Investing cash flow: provided $998M, versus $602M used in the prior-year period, mainly reflecting net sales and maturities of short-term investments.
- Financing cash flow: used $1.870B, chiefly for $1.585B of share repurchases, $454M of dividends and debt reduction. Cash and equivalents increased $66M to $2.021B.
- Liquidity: cash, equivalents and short-term investments totaled $3.2B at February 29, 2012; $2.2B was held by foreign subsidiaries. Current assets were $10.932B and current liabilities $3.410B.
- Debt and facilities: balance-sheet debt included $49M current and $229M long-term debt, plus $91M notes payable. No borrowings were outstanding under the new approximately $1B revolving facility or the $1B commercial-paper program. The company reported compliance with credit-facility covenants.
- Inventory: $3.356B, up from $2.715B at May 31, 2011; management reported inventory value up 32% year over year. Higher input costs and product mix contributed, alongside higher wholesale unit inventories and improved factory deliveries.
Material changes and management commentary
- Revenue growth and lower selling and administrative expense as a share of revenue supported earnings, but rising product costs compressed gross margin. Management said these cost pressures, together with planned inventory-management actions in certain markets, were expected to outweigh some pricing, Direct to Consumer and cost-reduction benefits for the remainder of FY2012.
- Futures orders for NIKE Brand footwear and apparel scheduled for March–July 2012 were up 15% reported and 18% currency-neutral, reflecting 10% unit growth and 8% higher average selling price. Management cautioned that futures orders do not necessarily predict revenue because shipment timing, order mix, cancellations, discounts and sales outside the futures channel vary.
- For Q4 FY2012, management expected selling and administrative expense to grow faster than revenue, citing planned demand-creation spending around the European Football Championship, London Summer Olympics and NFL launch. The filing provides no specific full-year revenue or earnings guidance.
- Segment performance was uneven: North America and Greater China revenue and EBIT advanced; Emerging Markets delivered strong growth. Western Europe revenue rose, but EBIT declined 9% in Q3 and 21% year to date, largely on margin pressure. Japan EBIT declined 23% in Q3. Other Businesses revenue grew, led by Converse, while year-to-date EBIT declined 9%.
- Share repurchases totaled $1.585B in cash flow for the nine-month period; the company said 17.7M shares were purchased for $1.560B under its four-year $5B program. About $1.1B remained authorized at quarter end. Q3 declared dividends were $0.36 per share, up 16% year over year.
Risks, contingencies and unusual items
- Foreign exchange exposure is managed with derivatives; outstanding derivative notional was approximately $8B. The company reported that currency-related changes in other income/expense affected year-to-date results, while translation effects also influenced reported revenue and earnings.
- Gross unrecognized tax benefits were $257M, excluding interest and penalties; $136M would affect the effective tax rate if recognized. Accrued interest and penalties were $105M. Management said unrecognized tax benefits could decrease by up to $63M within 12 months as examinations are resolved or statutes expire. The IRS was examining fiscal 2010 and 2011 U.S. federal tax years.
- Letters of credit outstanding totaled $126M, primarily for inventory purchases and guarantees. The filing reported no significant changes to previously disclosed commitments or legal proceedings, and no material changes to risk factors.
- Management cited risks including economic and consumer-demand shifts, competition, input and freight costs, inventory management, supply and information-system execution, currency movements, international operations, and access or cost of capital. Results are interim and are not necessarily indicative of the full year.
Important facts for investors to verify
- Whether inventory growth converts to sales without increased discounting or further margin deterioration.
- Whether product input-cost pressures and planned market inventory actions continue to outweigh pricing and cost-reduction benefits.
- How futures-order growth translates into shipments and revenue, given management’s stated limitations on the indicator.
- Whether Western Europe, Japan and Other Businesses improve profitability, and whether Greater China and Emerging Markets sustain growth.
- Progress on tax examinations and the timing and outcome of uncertain-tax-position resolutions.
- Cash deployment, including remaining buyback authorization, dividends, and the extent to which foreign-held cash is available for U.S. needs.