NIKE, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2017. The filing also reports fiscal fourth-quarter results; the metadata label “2016 Q4” does not match the filing’s fiscal 2017 reporting period.
Business context
NIKE designs, develops, markets and sells athletic footwear, apparel, equipment, accessories and services worldwide. Sales are made through wholesale customers, NIKE-owned stores and digital channels, and distributors and licensees. Virtually all footwear and apparel is manufactured by independent contractors outside the United States.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $34.350 billion | $32.376 billion | +6% reported; +8% currency-neutral |
| Gross profit / margin | $15.312 billion / 44.6% | $14.971 billion / 46.2% | Profit +2%; margin down 160 bps |
| Net income | $4.240 billion | $3.760 billion | +13% |
| Diluted EPS | $2.51 | $2.16 | +16% |
| Operating cash flow | $3.640 billion | $3.096 billion | +$544 million |
| Cash, equivalents and short-term investments | $6.179 billion | $5.457 billion | +$722 million |
| Long-term debt | $3.471 billion | $1.993 billion | +$1.478 billion |
| Inventories | $5.055 billion | $4.838 billion | +4% |
Current ratio was 2.9 at year-end versus 2.8 in FY2016. Cash and investments included $5.8 billion held by foreign subsidiaries. NIKE had $325 million of commercial paper outstanding and no borrowings under its $2 billion committed credit facility. Fiscal 2017 capital expenditures were $1.105 billion. The company repurchased 59.7 million shares for $3.249 billion and paid $1.133 billion in dividends.
Fiscal Q4: Revenue was $8.677 billion versus $8.244 billion, gross margin was 44.1% versus 45.9%, and net income was $1.008 billion versus $846 million in the comparable quarter.
Material changes and operating trends
- Growth was broad-based across NIKE Brand geographies, footwear and apparel. Greater China revenue rose 12% reported (17% currency-neutral); Western Europe rose 6% (11% currency-neutral); North America rose 3%.
- NIKE Brand direct-to-consumer revenue grew 16% reported and 18% currency-neutral, reaching approximately 28% of NIKE Brand revenue, up from 26%. Digital commerce sales were $2.2 billion, up from $1.7 billion.
- Footwear revenue increased 6% and apparel increased 6% reported; equipment revenue declined 5%. Sportswear and Jordan were prominent growth categories, while several categories, including Golf, Basketball and Football (Soccer), declined.
- Gross margin fell 160 basis points. Higher full-price average selling prices added approximately 70 basis points, but higher product costs reduced margin about 100 basis points, currency movements about 90 basis points, and lower DTC margins about 20 basis points.
- Selling and administrative expense rose 1% to $10.563 billion, while declining to 30.8% of revenue from 32.3%. EBIT increased 7% to $4.945 billion.
- Converse revenue rose 4% reported (6% currency-neutral), while EBIT declined 2% to $477 million.
Outlook, commentary and risks
- Management’s long-term average annual goals through fiscal 2020 were high-single-digit to low-double-digit revenue growth, mid-teens EPS growth, a high-twenties to low-thirties return on invested capital, and free cash flow growing faster than net income. These are goals, not near-term fiscal 2018 guidance.
- Management expected foreign-exchange headwinds to continue weighing on gross margin and net income in FY2018. Fiscal 2018 infrastructure investment was expected to average approximately 4% of revenue.
- Futures orders for NIKE Brand footwear and apparel scheduled for June–November 2017 were $14.7 billion, down 2% reported and flat excluding currency changes. The company cautioned that futures orders are less correlated with revenue and are not a reliable revenue forecast.
- Net income growth benefited from a 550-basis-point reduction in the effective tax rate to 13.2%, including a one-time first-quarter benefit from resolving an IRS foreign tax credit matter and lower foreign earnings taxed in the United States. The benefit is not necessarily recurring.
- Key risks include intense competition and shifts in consumer preferences; inventory and demand forecasting; reliance on concentrated independent footwear manufacturers; currency fluctuations; potential tariffs and trade-policy changes; customer and retail-channel health; digital and information-system disruptions, privacy and cybersecurity; and litigation and tax uncertainty. Five footwear contractors accounted for approximately 69% of NIKE Brand footwear production.
- Management reported no material pending legal proceedings beyond routine litigation and stated that identified legal matters were not expected to have a material impact. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- Whether revenue growth can continue while gross margin recovers from the 160-basis-point FY2017 decline and FY2018 currency headwinds.
- Whether higher inventory and off-price activity indicate persistent demand or product-mix pressure; inventory rose 4% year over year.
- How much of FY2017 earnings growth reflected recurring operations versus the one-time tax benefit and share repurchases.
- Whether DTC and digital growth can sustain margins while NIKE expands stores and digital capabilities.
- Whether futures orders, customer demand and the concentrated contract-manufacturer base support planned sales without supply disruption or excess inventory.
- How the announced fiscal 2018 segment realignment affects comparability of geographic results.
- The scale and cash-flow implications of long-term commitments: $26.449 billion in disclosed contractual obligations, including $9.850 billion of endorsement contracts and $3.905 billion of operating leases.