NIKE, Inc. 10-Q Summary: Period Ended November 30, 2008
Business Context and Reporting Period
This filing covers the second quarter of fiscal year 2009, ended November 30, 2008. NIKE, Inc. operates globally in the design, production, marketing, and selling of sports and fitness footwear, apparel, and equipment. The company is a large accelerated filer incorporated in Oregon. As of the period end, there were 484.1 million shares of common stock outstanding.
Key Financial Metrics
| Metric | Three Months Ended Nov 30, 2008 | Six Months Ended Nov 30, 2008 |
|---|---|---|
| Revenues | $4,590.1 million | $10,022.3 million |
| Net Income | $391.0 million | $901.5 million |
| Diluted EPS | $0.80 | $1.83 |
| Gross Margin | 44.7% | 46.0% |
| Operating Cash Flow (6mo) | $638.3 million | |
| Cash and Equivalents | $1,721.5 million | |
| Total Debt (Current + Long-term) | $477.9 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 6% in the quarter and 11% year-to-date compared to the prior year. International regions (EMEA, Asia Pacific, Americas) drove growth, while the U.S. region saw a 1% decline in the quarter.
- Profitability: Net income rose 9% in the quarter to $391.0 million. However, year-to-date net income decreased 3% to $901.5 million, primarily due to a one-time tax benefit in the prior year's first quarter.
- Expense Trends: Selling and administrative expenses increased 8% in the quarter and 19% year-to-date, driven by investments in company-owned retail, emerging markets, and non-NIKE branded businesses.
- Segment Performance: Pre-tax income in the U.S. Region declined 18% in the quarter due to lower apparel margins and higher retail overhead. Conversely, EMEA and Asia Pacific regions saw significant income growth (19% and 25% respectively) aided by favorable currency translation and margin expansion.
- Cash Flow: Operating cash flow decreased significantly year-to-date ($638.3 million vs. $949.9 million) due to increased investments in working capital (accounts receivable and inventory).
Guidance, Outlook, and Risks
Management Commentary: Management notes that the deteriorating macroeconomic environment has caused volatility in global financial markets and pressure on discretionary consumer spending. In response, the company has implemented a hiring freeze, reduced spending on travel and demand creation, and tightened inventory purchasing.
Outlook: Management expects selling and administrative expenses to grow at a mid-single digit rate in the third quarter and decline by a double-digit percentage in the fourth quarter. The estimated effective tax rate for fiscal year 2009 is approximately 28%.
Risks and Contingencies:
- Economic Conditions: Global credit market volatility poses risks of reduced consumer demand, order cancellations, and potential retailer insolvency.
- Currency: Continued volatility in foreign exchange rates impacts reported results, though hedging strategies are in place.
- Tax Matters: The company is under audit by the IRS for tax years 2005, 2006, and 2007. Total gross unrecognized tax benefits were $283.1 million as of November 30, 2008.
Investor Verification Checklist
- U.S. Retail Exposure: Verify the impact of the hiring freeze and reduced demand creation on the U.S. region's declining pre-tax income.
- Working Capital Efficiency: Monitor the trend in accounts receivable and inventory levels, which contributed to a significant drop in operating cash flow.
- Share Repurchases: Confirm the status of the $3 billion repurchase program (49.2 million shares repurchased to date) and the commencement of the new $5 billion program.
- Future Orders: Note that worldwide futures and advance orders for footwear and apparel were 1% lower than the prior year, though currency impacts were significant.
- Acquisition Integration: Assess the financial performance of the newly acquired Umbro brand, which contributed to the "Other" segment's net loss in the quarter.