NIKE, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2010, with fourth-quarter results included. The filing covers FY2010, not FY2009; the fourth quarter ended May 31, 2010. Dollar amounts are U.S. dollars.
Business context
NIKE designs, develops and markets footwear, apparel, equipment and accessories worldwide, selling through wholesale accounts, company-owned retail and digital channels, distributors and licensees. Nearly all footwear and apparel is made by independent contractors outside the United States. The company reorganized NIKE Brand reporting into six geographic segments effective June 1, 2009.
Key financial metrics
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $19.014 billion | $19.176 billion |
| Gross profit / gross margin | $8.800 billion / 46.3% | $8.604 billion / 44.9% |
| Selling and administrative expense | $6.326 billion; 33.3% of revenue | $6.150 billion; 32.1% of revenue |
| Net income | $1.907 billion | $1.487 billion |
| Diluted EPS | $3.86 | $3.03 |
| Cash from operations | $3.164 billion | $1.736 billion |
| Cash and short-term investments at year-end | $5.146 billion | $3.455 billion |
| Inventory at year-end | $2.041 billion | $2.357 billion |
| Long-term debt at year-end | $446 million | $437 million |
| Working capital / current ratio | $7.595 billion / 3.3 | $6.457 billion / 3.0 |
FY2010 revenue declined 1% reported and 2% excluding currency effects. Gross margin improved 140 basis points, primarily on product mix, lower input and freight costs, leaner inventories and growth in NIKE-owned retail. Operating cash flow rose substantially, with management citing working-capital improvements; receivables fell 8% and inventory fell 13% year over year. The company repurchased 11.3 million shares for approximately $754 million and paid $505 million in dividends.
Fourth-quarter revenue was $5.077 billion versus $4.713 billion in FY2009 Q4; net income was $522 million versus $341 million, and diluted EPS was $1.06 versus $0.70.
Material changes versus the prior period
- Reported net income rose 28% and diluted EPS rose 27%. However, FY2009 included after-tax restructuring and Umbro impairment charges totaling $386 million; excluding those items, FY2010 net income increased 2% and diluted EPS increased 1%.
- NIKE Brand revenue declined 1% reported (2% excluding currency). Footwear revenue was broadly flat; apparel and equipment revenues declined 5% and 7%, respectively.
- Other Businesses revenue increased 5% reported, led by Converse, Umbro and Hurley; Cole Haan and NIKE Golf declined. Other Businesses EBIT recovered to $299 million from a FY2009 loss that included the Umbro impairment.
- Regional performance varied: Emerging Markets revenue grew 20% and Greater China was flat; Central and Eastern Europe fell 16%, Western Europe 6%, Japan 5% and North America 1%.
- Cash from operations increased by $1.428 billion. Net purchases of short-term investments and shareholder returns contributed to investing and financing cash outflows.
Outlook, commentary and risks
- Management’s long-term targets were high-single-digit revenue growth, mid-teens EPS growth, higher return on invested capital and accelerated cash flow. These are goals, not a specific FY2011 earnings forecast.
- Worldwide NIKE Brand footwear and apparel futures orders for June–November 2010 were $8.8 billion. They were up 10% using prior-year exchange rates and 7% at forecast exchange rates; management cautioned that orders do not necessarily predict realized revenue.
- For FY2011, management anticipated potential gross-margin pressure from currency movements and rising product input costs, plus higher air-freight costs for some running footwear. It expected demand-creation expense to rise slightly slower than revenue and operating overhead to grow at a mid-single-digit rate. The expected effective tax rate was in line with FY2010.
- Principal risks include weak consumer demand and retailer financial health, changing preferences and intense competition, inventory forecasting, foreign exchange, sourcing and transport disruptions, trade restrictions and tariffs, commodity costs, and supply-chain information-system reliability. Production concentration in Asia and reliance on outside contractors heighten supply-chain exposure.
- Trade matters included extended EU anti-dumping measures on certain leather footwear through March 2011, Brazilian duties on Chinese footwear under challenge, and Turkish safeguard duties extended through August 2012. Management did not expect the Brazil decision to have a material impact, but outcomes remain uncertain.
- Contractual commitments totaled $9.014 billion, including $3.790 billion for endorsement contracts, $2.676 billion for product purchases and $1.609 billion for operating leases. Uncertain tax-position liabilities were $282 million, excluding interest and penalties; timing of any cash payments was not estimable.
- The company reported no material pending legal proceedings and stated that it was in compliance with its revolving-credit covenants. It had no borrowings under its $1 billion revolving facility or commercial-paper program at year-end.
Investor facts to verify
- Reconcile FY2010’s reported profit growth with the FY2009 restructuring and Umbro impairment adjustments, and assess the sustainability of underlying earnings growth.
- Review the drivers and durability of the 140-basis-point gross-margin improvement against management’s FY2011 cost and currency cautions.
- Track the conversion of futures orders into shipments and revenue, including cancellations, discounts, at-once sales and foreign-exchange effects.
- Assess the cash-flow improvement’s reliance on working capital, and compare planned buybacks and dividends with capital needs and contractual commitments.
- Monitor regional and brand performance, particularly weakness in Europe and Japan, momentum in Greater China and Emerging Markets, and the recovery in Umbro.
- Review exposure to currency hedges, sourcing concentration, trade actions, customer credit and the $282 million uncertain-tax-position balance.