Business context and reporting period
NIKE, Inc.’s unaudited first quarter of fiscal 2018 covered the three months ended August 31, 2017; comparisons are with the quarter ended August 31, 2016. NIKE sells footwear, apparel, equipment and accessories globally through wholesale accounts and NIKE Direct. The company reorganized its NIKE Brand reporting segments effective June 1, 2017; prior-period segment data was reclassified, with no effect on consolidated results.
Financial results
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $9.070 billion | $9.061 billion | Flat |
| Gross profit / margin | $3.962 billion / 43.7% | $4.123 billion / 45.5% | Profit down 4%; margin down 180 bps |
| Selling and administrative expense | $2.856 billion | $2.897 billion | Down 1%; 31.5% of revenue vs. 32.0% |
| Income before tax | $1.072 billion | $1.281 billion | Down 16% |
| Net income | $950 million | $1.249 billion | Down 24% |
| Diluted EPS | $0.57 | $0.73 | Down 22% |
| Cash from operations | $575 million | $788 million | Down $213 million |
Revenue was flat on both reported and currency-neutral bases. NIKE Brand revenue increased 1% reported (2% currency-neutral), while Converse revenue fell 16%. NIKE Direct revenue grew 10% reported (11% currency-neutral), with digital commerce sales up 19% currency-neutral. Gross-margin pressure reflected lower full-price selling prices and higher discounts, unfavorable foreign exchange, and lower NIKE Direct and off-price margins; lower product and other costs partially offset these effects.
Segments
Currency-neutral revenue grew 12% in Greater China, 6% in Asia Pacific & Latin America, and 5% in Europe, Middle East & Africa; North America declined 3%. Converse revenue fell 16%, primarily due to weaker direct distribution markets, especially the United States and Europe. NIKE Brand EBIT rose 10% to $1.432 billion, but total company EBIT fell 16% to $1.088 billion, including a larger Corporate loss and lower Converse EBIT.
Liquidity, debt and capital allocation
At August 31, 2017, cash and equivalents were $3.413 billion and short-term investments were $2.106 billion, totaling $5.519 billion. Long-term debt was $3.472 billion, current long-term debt $7 million, and notes payable $335 million. The notes payable balance primarily represented commercial paper; $325 million was outstanding at a 1.15% weighted-average rate. NIKE reported no borrowings under its $2 billion committed credit facility and said it expected available cash, operating cash generation and external funding access to meet foreseeable capital needs.
Operating cash flow was affected by working-capital outflows, including a $273 million increase in cash collateral posted with derivative counterparties. Investing activities used $12 million, including $270 million of property and equipment additions; financing activities used $998 million. The company repurchased 15.3 million shares for $849 million during the quarter and declared dividends of $0.18 per share. It had repurchased $5.287 billion under its $12 billion, four-year program as of quarter-end.
Outlook, management commentary and notable risks
Management anticipated a fiscal-year effective tax rate of approximately 15%–17%, noting quarterly tax-rate volatility may increase under newly adopted stock-compensation accounting rules. The quarter’s effective tax rate was 11.4%, including an $88 million tax benefit from stock-based compensation; the prior-year 2.5% rate included one-time tax benefits.
Management described changing consumer shopping patterns, digital growth and a promotional North American retail environment, including third-party store closures. It cited the Consumer Direct Offense realignment as a strategy to accelerate innovation and deepen consumer connections; related one-time wage costs contributed to higher operating overhead. Foreign currency effects and hedging were material: management estimated currency translation and year-over-year currency-related gains and losses had an unfavorable $88 million impact on pretax income. The quarter also included a $373 million net other comprehensive loss, mainly from cash-flow hedges.
Key risks identified include competition and changing consumer preferences, forecasting demand and managing inventory, foreign exchange movements, supply and input costs, digital and information-system disruption and data security, and risks of international operations. NIKE reported no material changes to previously disclosed risk factors, no significant changes to contractual obligations, and no off-balance-sheet arrangements expected to affect its financial condition. Gross unrecognized tax benefits were $498 million; the company said up to $78 million could decrease within 12 months, though timing of tax-audit resolutions is uncertain. It had $143 million of letters of credit outstanding. No material new legal-proceeding developments were reported.
Important facts for investors to verify
- Whether NIKE Brand and NIKE Direct growth can offset North American weakness and the continued decline at Converse.
- Whether promotional activity, product mix and foreign exchange continue to pressure gross margin.
- How cash generation and working capital evolve, including derivative collateral requirements and inventory levels.
- Progress and costs of the Consumer Direct Offense realignment, alongside the stated full-year tax-rate outlook.
- Potential changes in uncertain tax positions, foreign-exchange exposures and share-repurchase pace.