NIKE, Inc. — Q1 FY2020 Form 10-Q
Business context and period: The filing covers the three months ended August 31, 2019, NIKE’s first quarter of fiscal 2020. NIKE designs, markets and sells athletic footwear, apparel, equipment and related products worldwide through wholesale accounts and NIKE Direct, including owned stores and digital platforms. Unless otherwise noted, financial figures are in U.S. dollars.
Financial results
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $10.660 billion | $9.948 billion | +7% reported; +10% currency-neutral |
| Gross profit / margin | $4.871 billion / 45.7% | $4.397 billion / 44.2% | Profit +11%; margin +150 bps |
| Selling and administrative expense | $3.328 billion | $3.063 billion | +9%; 31.2% of revenue vs. 30.8% |
| Income before tax | $1.561 billion | $1.270 billion | +23% |
| Net income | $1.367 billion | $1.092 billion | +25% |
| Diluted EPS | $0.86 | $0.67 | +28% |
| Cash from operations | $394 million | $1.301 billion | Down $907 million |
Revenue and operating drivers: NIKE Brand revenue rose 7% reported and 10% currency-neutral; Converse grew 5% and 8%, respectively. NIKE Direct revenue increased 14% reported (17% currency-neutral) and represented about 32% of NIKE Brand revenue, versus 30% a year earlier. Digital commerce sales were $1.1 billion, up from $770 million. Greater China was the fastest-growing NIKE Brand region, with revenue up 22% reported and 27% currency-neutral.
Gross-margin expansion was attributed mainly to higher full-price average selling prices and a larger share of higher-margin NIKE Direct sales. These benefits were partly offset by unfavorable currency effects and higher NIKE Brand product costs. SG&A rose as NIKE increased marketing and sports-marketing spending and invested in wages, digital commerce, data and analytics, and an enterprise resource planning system. The effective tax rate declined to 12.4% from 14.0%.
Cash, liquidity and capital
- Cash and equivalents were $3.446 billion at August 31, down from $4.466 billion at May 31; short-term investments were $198 million. Operating cash flow fell principally because working capital and other changes used $1.235 billion, including higher receivables, inventory and compensation-related payments.
- Investing activities used $348 million, including $284 million of property and equipment additions. Financing activities used $1.010 billion, including $999 million of share repurchases and $345 million of dividends. Cash declined by $1.020 billion during the quarter.
- Long-term debt was $3.463 billion, with $6 million current; notes payable were $250 million, including $225 million outstanding under the commercial-paper program at a 2.10% weighted-average rate. Operating lease liabilities totaled $3.102 billion following adoption of the new lease standard.
- NIKE reported $3.6 billion of cash, cash equivalents and short-term investments and said it expects available liquidity, operating cash flow and access to external funding to meet foreseeable capital needs. It reported compliance with credit-facility covenants and no material off-balance-sheet arrangements.
- During the quarter, NIKE repurchased 11.9 million shares for about $995 million. It had repurchased 23.5 million shares for about $2.0 billion under its four-year, $15 billion authorization by August 31, 2019.
Material changes, outlook and risks
- Management said broad-based growth and gross-margin expansion drove higher pretax income, partly offset by higher SG&A. It cited continued opportunities for long-term growth and profitability but provided no specific financial guidance in this filing.
- Management noted volatile foreign-exchange markets and a stronger U.S. dollar. Currency translation reduced reported revenue by about $313 million and pretax income by about $86 million versus the prior-year quarter; currency-neutral growth was higher than reported growth.
- NIKE adopted ASC Topic 842 for leases on June 1, 2019. Adoption added $2.7 billion to assets and liabilities at transition; at August 31, operating lease right-of-use assets were $2.832 billion. The company said adoption had no material impact on income or cash-flow statements. Comparative balance-sheet figures were not restated.
- Unrecognized tax benefits were $897 million, of which $624 million would affect the effective tax rate if recognized. NIKE said the European Commission’s investigation into Netherlands tax rulings was without merit; an adverse outcome could result in additional tax assessments and higher future Netherlands taxes. Management considered a decrease of up to $150 million in gross unrecognized tax benefits reasonably possible within 12 months.
- Risk factors and legal proceedings had no material changes from the prior annual filing. Disclosed risks include consumer-demand and competition changes, supply and inventory execution, technology and data security, foreign exchange, trade policy, and litigation or regulatory matters.
Important facts for investors to verify
- Whether NIKE Direct and digital growth, particularly in Greater China, remains strong and supports full-price selling and gross margin.
- Whether working-capital investment moderates and operating cash flow recovers after the sharp year-over-year decline.
- How higher operating costs and ongoing digital, data and ERP investments affect expense growth and profitability.
- How currency movements, product costs and trade or tariff developments affect reported results and margins.
- Developments in the Netherlands tax investigation and the level and timing of resolution of uncertain tax positions.
- Share repurchases, dividends, and debt and lease obligations relative to cash generation and liquidity.