NIKE, Inc. — Fiscal 2013 First-Quarter 10-Q
Business context and reporting period: The filing covers the three months ended August 31, 2012, compared with the three months ended August 31, 2011. NIKE designs, markets and sells athletic footwear, apparel and equipment; its reportable NIKE Brand segments are geographic. The interim financial statements are unaudited.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Revenue | $6.669 billion | $6.081 billion | +10% reported; +15% excluding currency effects |
| Gross profit / gross margin | $2.903 billion / 43.5% | $2.693 billion / 44.3% | Gross profit +8%; margin down 80 basis points |
| Selling and administrative expense | $2.153 billion | $1.823 billion | +18%; 32.3% of revenue versus 30.0% |
| Income before taxes | $782 million | $852 million | -8% |
| Net income | $567 million | $645 million | -12% |
| Diluted EPS | $1.23 | $1.36 | -10% |
| Cash provided by operations | $535 million | $87 million | Up $448 million |
- Revenue mix and growth: NIKE Brand revenue was $5.864 billion, up 10% reported and 16% currency-neutral. Footwear, apparel and equipment rose 11%, 10% and 13% reported, respectively. Direct-to-Consumer revenue grew 21% reported (24% currency-neutral) and represented about 19% of NIKE Brand revenue.
- Profitability drivers: Management attributed the gross-margin decline chiefly to higher materials and labor costs and a shift toward lower-margin geographic and business mix. Price increases, fewer close-out sales, Direct-to-Consumer growth and cost-reduction efforts partly offset those pressures. Demand-creation expense rose 29%, reflecting spending around the Olympics and European Football Championships and support for product initiatives; overhead rose 12%.
- Cash, liquidity and debt: Cash and equivalents were $2.165 billion and short-term investments $1.102 billion at quarter-end, totaling $3.267 billion. Current assets were $11.136 billion and current liabilities $3.776 billion. Long-term debt was $226 million, with a $9 million current portion; notes payable were $129 million. NIKE reported no borrowings under its $1 billion revolving credit facility or $1 billion commercial-paper program. Operating cash flow improved as working-capital cash outflow fell to $189 million from $698 million. Capital expenditures were $107 million.
- Capital returns: NIKE repurchased 8.2 million Class B shares for $779 million during the quarter and paid $165 million in dividends. In September 2012, it announced a new four-year, $8 billion share-repurchase authorization after completing its prior $5 billion program.
Material changes and business trends
- Reported revenue growth was strongest in North America (+23%) and weaker in Western Europe (-5%) and Japan (-6%); currency-neutral revenue grew in all NIKE Brand geographies except Japan. Greater China revenue increased 8% reported, but EBIT declined 4%; Japan EBIT fell 29%.
- North America revenue and EBIT rose 23% and 17%, respectively. Emerging Markets revenue increased 8% reported (22% currency-neutral) and EBIT rose 17%. The NIKE Brand’s total EBIT declined 2%, while consolidated EBIT fell 9% to $779 million, including higher Global Brand Divisions and Corporate costs.
- The effective tax rate increased to 27.5% from 24.3%, primarily due to a greater share of earnings in higher-tax jurisdictions and changes in uncertain tax positions. Share repurchases reduced diluted weighted-average shares to 461.4 million from 474.3 million, partially supporting EPS.
- Foreign-exchange translation was a reported revenue headwind of approximately $326 million, versus a benefit of approximately $318 million in the prior-year quarter. Management estimated that currency translation and year-over-year currency-related gains and losses reduced year-over-year pretax income growth by approximately $28 million.
Outlook, risks and unusual items
- Futures orders for NIKE Brand footwear and apparel scheduled for September 2012 through January 2013 were up 6% reported and 8% excluding currency effects. Growth varied by geography, including 13% in North America, -6% in Greater China and 14% in Emerging Markets on a currency-neutral basis. NIKE cautioned that futures orders are not necessarily indicative of revenue growth, given shipment timing, at-once orders, cancellations, discounts and sales not included in futures orders.
- The filing provides no specific full-year revenue, earnings or margin guidance. Management cited product demand and brand strength, while emphasizing cost, mix and spending pressures.
- NIKE intended to divest Cole Haan and Umbro. The businesses generated $195 million of revenue and an $18 million EBIT loss in the quarter. Management said future non-cash charges related to Umbro were anticipated; the ultimate sale gain or loss could not be estimated. Umbro’s cumulative translation adjustment was $155 million before tax ($100 million after tax), and its deferred tax asset was $32 million.
- Gross unrecognized tax benefits were $310 million, excluding interest and penalties; $168 million would affect the effective tax rate if recognized. NIKE said these benefits could decrease by up to $63 million within 12 months as examinations are resolved or statutes expire. Accrued interest and penalties were $116 million.
- Key disclosed risks include foreign-exchange movements, product input costs, changing consumer demand, competition, inventory and forecasting challenges, supply-chain and information-system disruptions, and the execution and financial effects of the planned divestitures. NIKE reported no material change in risk factors or legal-proceeding developments from its latest 10-K; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether currency-neutral sales growth, especially in North America and Emerging Markets, is sustained and converts into profitable growth.
- Whether pricing, product mix and cost initiatives can offset materials and labor inflation without weakening demand or increasing discounting.
- Whether elevated marketing and overhead spending produces returns, particularly as consolidated EBIT and net income declined despite revenue growth.
- How futures orders translate into shipments and recognized revenue, and whether Greater China and Japan trends improve.
- The timing, terms and eventual accounting impact of the Cole Haan and Umbro divestitures, including potential Umbro charges.
- The resolution of tax examinations and uncertain tax positions, and the effects of NIKE’s substantial share repurchases and new $8 billion authorization on cash and per-share results.