NIKE, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended August 31, 2021; comparisons are with the three months ended August 31, 2020. The unaudited interim results are not necessarily indicative of the full fiscal year. NIKE designs, markets and sells athletic footwear, apparel, equipment and accessories through wholesale customers and NIKE Direct channels.
Financial performance
| Metric | Q1 FY2022 | Prior year | Change |
|---|---|---|---|
| Revenue | $12.248 billion | $10.594 billion | +16% reported; +12% currency-neutral |
| Gross profit / gross margin | $5.696 billion / 46.5% | $4.741 billion / 44.8% | Gross profit +20%; margin +170 bps |
| Selling and administrative expense | $3.572 billion | $2.975 billion | +20%; 29.2% of revenue vs. 28.1% |
| Income before tax | $2.106 billion | $1.715 billion | +23% |
| Net income / diluted EPS | $1.874 billion / $1.16 | $1.518 billion / $0.95 | Net income +23%; EPS +22% |
| Operating cash flow | $1.111 billion | $882 million | Increase of $229 million |
- NIKE reported EBIT was $2.163 billion, up 22%; EBIT margin was 17.7%, versus 16.8%.
- NIKE Direct revenue increased 28% reported (25% currency-neutral); digital commerce sales were $2.5 billion versus $1.9 billion. Direct represented about 40% of NIKE Brand revenue, versus 36%.
- Revenue by region: North America $4.879 billion (+15% currency-neutral); EMEA $3.307 billion (+8%); Greater China $1.982 billion (+1%); and APLA $1.465 billion (+31%). Converse revenue was $629 million (+7% currency-neutral).
- Gross-margin improvement reflected stronger NIKE Direct margins and full-price mix, partly offset by higher product and freight costs. Demand creation expense rose 36%, reflecting brand and digital marketing investment; operating overhead rose 15%.
Cash, debt and liquidity
- At August 31, 2021, cash and equivalents were $10.720 billion and short-term investments were $2.975 billion, totaling $13.695 billion. Long-term debt was $9.415 billion; current long-term debt was zero and notes payable were $15 million.
- Current assets were $26.390 billion and current liabilities were $8.269 billion. Inventory was $6.699 billion, down from $6.854 billion at May 31, 2021.
- Operating cash flow was $1.111 billion; investing activities provided $501 million, primarily reflecting net short-term investment activity; financing activities used $743 million, including $752 million of share repurchases and $435 million of dividends paid.
- NIKE repurchased 4.8 million shares for approximately $742 million during the quarter, at an average $155.30 per share. No amounts were outstanding under its committed credit facilities or $3 billion commercial paper program. Management said available liquidity and operating cash flows should meet foreseeable capital needs.
Material changes and management commentary
- Management reported strong consumer demand and growth, but major contract manufacturers in Vietnam and Indonesia were affected by COVID-19 shutdowns. NIKE estimated about ten weeks of lost production; it expected most Vietnam factories to reopen in October and said a return to full production would take several months. Indonesia factories were open at the time of the filing.
- Factory closures, port congestion, transportation delays, and labor and container shortages were disrupting product availability, particularly in wholesale, while raising logistics costs. Management expected these constraints to continue through FY2022, contributing to inventory shortages and weighing on revenue growth; Asia was expected to be more affected in Q2 and other regions later in the year. Mitigations included shifting production, using air freight selectively, and taking a seasonless approach to products.
- Greater China’s currency-neutral revenue rose just 1%, with NIKE Direct down 3%, amid COVID-19 resurgence and marketplace dynamics. Management cited declining comparable-store and digital sales in the region.
- Management maintained multi-year investment plans and said its Consumer Direct Acceleration strategy continued to support its long-term FY2025 financial goals. The filing provides no specific quarterly or full-year revenue or earnings guidance.
Risks, contingencies and unusual items
- COVID-19 and supply-chain disruption were identified as potential material risks to revenue growth and profitability, including further factory closures, inventory shortages or excesses, higher freight costs, wholesale customer payment changes, factory cancellation costs, and tax-rate volatility.
- NIKE reported total expected net losses of $344 million related to the planned sale of its Argentina, Chile and Uruguay entities and transfer of distribution rights. The balance sheet included a corresponding allowance in accrued liabilities; the amount is not presented as a separately identified current-quarter expense.
- NIKE was under IRS audit for fiscal years 2017–2019 and disclosed a European Commission investigation concerning Netherlands tax rulings. Management said the Commission matter was without merit; an adverse outcome could increase taxes. Gross unrecognized tax benefits were $906 million, of which $627 million would affect the effective tax rate if recognized.
- The effective tax rate was 11.0%, down from 11.5%, primarily due to more favorable stock-based compensation and prior-year discrete items, partly offset by a change in the U.S. share of earnings. The filing reported no material changes in risk factors or legal proceedings.
Important facts for investors to verify
- Whether Vietnam and Indonesia production, shipping times, and logistics costs developed as management expected, and the resulting effects on product availability and FY2022 revenue.
- Whether Greater China demand and NIKE Direct performance recovered, and whether digital growth and full-price sales continued to support margins.
- How freight and product-cost pressures, elevated investment spending, and inventory levels affected subsequent gross margin and operating cash flow.
- Progress and final economics of the Argentina, Chile and Uruguay divestiture, and developments in the disclosed tax audits and Netherlands investigation.
- Subsequent share repurchases, debt and liquidity levels, and whether management’s stated long-term strategy and FY2025 goals remained on track.