NIKE, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers NIKE’s third quarter and first nine months of fiscal 2010, ended February 28, 2010. Although the request labels the period “2009 Q3,” the filing itself reports fiscal 2010 Q3. Results are unaudited; amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Three months ended February 28, 2010 | Nine months ended February 28, 2010 |
|---|---|---|
| Revenue | $4,733; up 7% year over year | $13,937; down 4% |
| Gross margin | $2,218; 46.9% of revenue, up 3.0 percentage points | $6,394; 45.9%, up 0.5 percentage points |
| Net income | $496; up 104% | $1,385; up 21% |
| Diluted EPS | $1.01; up 102% | $2.81; up 21% |
| Cash from operations | Not presented for the quarter | $1,889, versus $662 a year earlier |
Quarterly reported earnings comparisons were boosted by the prior-year $240.7 after-tax noncash Umbro impairment. Excluding that charge, Q3 net income and diluted EPS each rose 2%; nine-month net income and diluted EPS were approximately flat year over year on the company’s adjusted comparison.
At February 28, cash and equivalents were $2,225 and short-term investments were $1,814, totaling $4,039. Debt included $452 long-term debt, $8 current debt and $109 notes payable. The company reported no borrowings under its $1 billion revolving credit facility or $1 billion commercial paper program. Operating cash flow improved with higher net income and working-capital inflows; inventory and receivables declined. Investing activities used $964, primarily reflecting net purchases of short-term investments, and financing activities used $909, including share repurchases and dividends.
Material changes and operating trends
- Q3 revenue growth was 2% excluding currency effects. Emerging Markets and Greater China led NIKE Brand growth; Central and Eastern Europe, Western Europe and Japan were weaker. Nine-month revenue declined 3% excluding currency.
- Q3 gross margin improvement reflected better in-line product margins, favorable product mix, lower raw-material and freight costs, fewer closeout discounts, and greater owned-retail contribution. Currency effects partly offset these gains.
- Q3 selling and administrative expense rose 16% to $1,564, or 33.0% of revenue, as demand-creation spending, performance-based compensation and owned-retail investment increased. Nine-month expense declined 4%.
- For the nine months, NIKE Brand revenue fell 4%; Other Businesses revenue rose 3%. The prior-year Other Businesses results included the Umbro impairment, making reported EBIT comparisons unusually favorable in 2010.
- Inventory was $2,150 at February 28, down from $2,357 at May 31, 2009. Shareholders’ equity increased to $9,429 from $8,693.
Outlook, commentary and risks
- Futures and advance footwear and apparel orders for March–July 2010 were 9% higher year over year, including an estimated 3 percentage points from currency. Management cautioned that orders are not necessarily indicative of revenue because of shipment timing, order mix, cancellations, discounts and sales not captured in futures orders.
- Management anticipated a low-single-digit increase in fiscal 2010 selling and administrative expense, with higher Q4 demand creation around the 2010 World Cup and other initiatives, and higher performance-based compensation.
- Management said cash, short-term investments, operating cash generation and access to external funding should cover operating and capital needs in the foreseeable future. It noted that capital-market volatility could raise borrowing costs or affect access.
- Key disclosed exposures include foreign-exchange movements, difficult economic and retail conditions, competitive and changing consumer demand, inventory and forecasting challenges, and potential disruption to systems or supply chains. No material change in previously reported risk factors or legal proceedings was disclosed.
- Unrecognized tax benefits were $252, excluding interest and penalties; IRS audits for 2007–2009 could be completed within 12 months, but management could not estimate a settlement range. Letters of credit outstanding totaled $87.
Most important facts for investors to verify
- Use the filing’s fiscal 2010 Q3 period, not the “2009 Q3” label in the request.
- Assess underlying earnings growth after adjusting for the prior-year Umbro impairment; reported growth substantially overstates comparable Q3 improvement.
- Monitor whether gross-margin gains persist as discounts, foreign exchange and product mix change, and whether higher marketing and compensation costs weigh on earnings.
- Check whether futures-order growth converts into shipments and revenue, given management’s stated limitations on using orders as a sales forecast.
- Review currency exposure, tax audit developments and the company’s continued use of cash for share repurchases and dividends.