NIKE, Inc. — Form 10-Q summary
Business context and period: NIKE designs, markets and sells athletic footwear, apparel, equipment and accessories through wholesale and direct-to-consumer channels. This unaudited report covers the three months ended August 31, 2022, the first quarter of fiscal 2023; comparisons are with the three months ended August 31, 2021.
Key financial results
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $12.687 billion | $12.248 billion | +4% reported; +10% currency-neutral |
| Gross profit / margin | $5.615 billion / 44.3% | $5.696 billion / 46.5% | Gross margin down 220 basis points |
| Selling and administrative expense | $3.920 billion | $3.572 billion | +10%; 30.9% of revenue versus 29.2% |
| Income before taxes | $1.828 billion | $2.106 billion | -13% |
| Net income | $1.468 billion | $1.874 billion | -22% |
| Diluted EPS | $0.93 | $1.16 | -20% |
| Operating cash flow | $357 million | $1.111 billion | Down $754 million |
Cash, liquidity and debt: At August 31, cash and equivalents were $7.226 billion and short-term investments were $4.650 billion, totaling $11.876 billion. Current assets were $28.877 billion and current liabilities $10.919 billion. Current and long-term debt totaled $9.422 billion; no borrowings were outstanding under committed credit facilities or the $3 billion commercial paper program. NIKE said available liquidity, operating cash generation and access to external funding should cover foreseeable capital needs.
Cash uses and working capital: Investing activities used $214 million and financing activities used $1.404 billion. The quarter included $983 million of cash share repurchases and $480 million of dividends. Inventory was $9.662 billion, up from $8.420 billion at May 31; increased inventory absorbed cash as product flow and transit times shifted.
Material changes and operating trends
- Revenue growth was led by North America (+13% reported), EMEA (+1%) and APLA (+5%); Greater China declined 16% reported, or 13% currency-neutral, amid COVID-19 disruptions.
- NIKE Brand revenue rose 4% reported and 10% currency-neutral. NIKE Direct revenue increased 8% reported; it represented about 42% of NIKE Brand revenue, versus 40% a year earlier. NIKE Brand Digital sales were $2.9 billion, up from $2.5 billion.
- Foreign exchange reduced reported revenue by about $823 million. Management estimated currency effects, including translation of foreign profits and foreign-exchange gains and losses, reduced pretax income by approximately $234 million year over year.
- Gross margin pressure reflected elevated freight and logistics costs, product mix, inventory obsolescence, promotional activity and unfavorable currency. Higher full-price average selling prices partly offset those pressures.
- Operating overhead rose 12%, mainly from wage-related expense, strategic technology investments and NIKE Direct costs. The effective tax rate increased to 19.7% from 11.0%, primarily because of lower benefits from stock-based compensation.
- Segment EBIT declined 15% overall. Greater China EBIT fell 23%; EMEA rose 11%, while North America declined 4%. Converse revenue increased 2% reported and 8% currency-neutral.
Outlook, risks and unusual items
- Management expected higher promotional activity in Q2 to clear excess inventory and make room for new seasonal product. It also expected elevated freight and logistics costs and promotions to pressure Q2 gross margin, while unfavorable currency movements net of hedges would materially reduce reported revenue and pretax income.
- Management cited macroeconomic uncertainty, inflation and consumer demand, supply-chain volatility, possible renewed COVID-19 restrictions, inventory obsolescence, order reductions or cancellations, and foreign-exchange movements as risks to future growth and profitability.
- After quarter-end, NIKE completed the sale of its Argentina and Uruguay entities. The total sale loss was approximately $550 million, of which $389 million had been recognized in prior periods; the remaining loss, primarily related to currency devaluation and transferred cash, was expected to be recognized in Q2 FY2023. The Chile sale completed during the quarter and was not material.
- NIKE disputed Belgian customs claims concerning alleged underpaid duties on imports beginning in fiscal 2018. It could not estimate the loss range, and an adverse outcome could materially affect results, financial position and cash flows. The filing also discusses an ongoing European Commission investigation into Netherlands tax rulings; NIKE considers it without merit.
- The Inflation Reduction Act includes a 15% minimum tax effective for NIKE beginning June 1, 2023, and a 1% excise tax on net stock repurchases after December 31, 2022. The company said it was evaluating the law’s application to its business.
Important facts for investors to verify
- Whether inventory levels normalize and promotional activity, freight costs and obsolescence continue to weigh on gross margin.
- Whether Greater China demand recovers and the expected currency headwinds affect reported revenue and earnings as management anticipated.
- The Q2 accounting impact of the Argentina and Uruguay sale and the longer-term effects of shifting those markets to distributors.
- Developments in the Belgian customs matter and Netherlands tax investigation, including any changes to estimated exposure.
- How share repurchases, dividends and the new $18 billion repurchase authorization affect cash and capital allocation, particularly alongside the new excise tax.