NIKE, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended February 28, 2015, in NIKE’s fiscal 2015. The financial statements are unaudited. The filing metadata says “2014 Q3,” but the filing itself identifies the period as fiscal 2015 Q3.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $7.460 billion, up 7% reported and 13% excluding currency changes | $22.822 billion, up 12% reported and 15% excluding currency changes |
| Gross margin | 45.9%, up 140 basis points | 45.9%, up 140 basis points |
| Net income | $791 million, up 16% | $2.408 billion, up 21% |
| Diluted EPS | $0.89, up 19% | $2.72, up 24% |
| Operating cash flow | Not stated separately for the quarter | $3.338 billion, versus $1.685 billion |
Quarterly income before taxes rose 19% to $1.046 billion. Selling and administrative expense increased 10% to $2.379 billion, equal to 31.9% of revenue versus 31.1% a year earlier. Nine-month capital expenditures were $723 million. Cash used in financing was $2.095 billion, including $1.855 billion of share repurchases and $658 million of dividends.
Balance sheet and liquidity
At February 28, 2015, cash and equivalents were $3.015 billion and short-term investments were $2.346 billion, totaling $5.361 billion. Total debt, including current maturities, was $1.190 billion; notes payable were $61 million. NIKE reported no outstanding borrowings under its $1 billion committed credit facility or $1 billion commercial paper program. It said available cash, investments, operating cash flow and access to external funding should cover foreseeable capital needs.
Inventories were $4.246 billion, up from $3.947 billion at May 31, 2014. Management attributed some inventory buildup in North America to West Coast port congestion. The cash-flow statement includes $769 million of cash collateral received from derivatives counterparties, recorded in accrued liabilities.
Material changes and business drivers
- NIKE Brand revenue grew 11% excluding currency changes in the quarter; Converse revenue grew 33% on the same basis. Converse growth partly reflected shipment timing ahead of a fourth-quarter systems go-live and conversions from licensed to direct distribution.
- Direct-to-consumer (DTC) revenue grew 29% excluding currency changes in the quarter and represented about 24% of NIKE Brand revenue, compared with 21% a year earlier. Online sales through NIKE-owned websites grew 46% on a currency-neutral basis.
- Gross-margin expansion reflected higher average selling prices and product mix, partly offset by labor-related product-cost inflation and a shift to higher-cost products. DTC growth also contributed.
- Regional results were mixed: Greater China revenue increased 17% excluding currency changes, while Central & Eastern Europe increased 7%; reported regional earnings were pressured by currency and, in some markets, operating conditions.
- Share repurchases reduced weighted-average diluted shares by 2% year over year in the quarter. NIKE repurchased 22.2 million shares for $1.855 billion during the first nine months under its $8 billion program.
Outlook, risks and unusual items
- Management expected a full-year fiscal 2015 effective tax rate of approximately 24.5%. No broader quantified revenue or earnings guidance is provided in the filing.
- NIKE Brand futures orders for delivery March through July 2015 were $11.2 billion, up 2% reported and 11% excluding currency changes. Management cautioned that futures orders do not necessarily predict revenue because of shipment timing, order mix, cancellations, discounts and returns.
- Foreign-currency translation reduced quarterly reported revenue by approximately $375 million and income before taxes by approximately $73 million. NIKE uses derivatives to manage exposures and states that it does not use them for trading or speculation.
- Management cited West Coast port congestion as disrupting North American supply and reducing revenue growth while increasing inventory. Other disclosed business risks include currency volatility, consumer demand changes, competition, supply-chain and technology disruptions, and rising material, labor and freight costs.
- The company revised cash-flow statement classifications for unrealized foreign-currency gains and losses in prior periods, concluding the errors were not material; the revisions did not affect net changes in cash or reported cash balances. Comparative 2014 income figures also reflect an immaterial correction to expense internally developed patent and trademark costs.
- NIKE was contesting an IRS notice proposing $31 million of additional tax for fiscal 2011 and did not expect a material financial-statement impact. Gross unrecognized tax benefits were $444 million. Letters of credit totaled $158 million; the maximum exposure on guarantees of former Cole Haan lease payments was $26 million.
Important facts for investors to verify
- Whether currency-adjusted sales growth and futures-order momentum convert into reported revenue as exchange rates and shipment timing change.
- Whether elevated inventory, including inventory affected by port congestion, is sold without increased discounting or margin pressure.
- Whether DTC expansion and Converse’s direct-distribution transitions sustain growth while operating costs and investment rise.
- How product-cost inflation, foreign exchange and regional pressures affect gross margin and segment profitability.
- Whether the expected full-year tax rate, disputed IRS matter and unrecognized tax positions change materially.
- The sustainability and funding of share repurchases, alongside capital spending and dividends.