NKE

Business Context and Reporting Period

Company: NIKE, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended November 30, 2004 (Fiscal Year 2005)
Business Overview: NIKE designs, produces, markets, and sells sports and fitness footwear, apparel, and equipment globally. The company operates through geographic segments (U.S., EMEA, Asia Pacific, Americas) and an "Other" category including brands like Converse, Cole Haan, and Exeter Brands.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 11% for the quarter and 14% year-to-date compared to the prior year. International regions contributed significantly, aided by favorable foreign currency translation (primarily the Euro).
• Profitability: Net income surged 46% for the quarter and 34% year-to-date. Diluted EPS grew 47% and 33% respectively.
• Gross Margin Expansion: Consolidated gross margin percentage improved by 180 basis points for the quarter (to 44.1%) and 160 basis points year-to-date (to 44.3%). Drivers included better currency hedge rates, higher footwear pricing in the U.S., and lower royalties due to the expiration of the NBA license.
• Expense Management: Selling and administrative expenses grew 8% for the quarter and 16% year-to-date. Demand creation spending was relatively flat in the quarter (excluding currency) but increased 23% year-to-date due to global sporting events and endorsement contracts.
• Acquisitions: The acquisition of Official Starter (Exeter Brands) in August 2004 contributed to the "Other" segment's revenue and margin growth. The Converse acquisition (completed in the prior fiscal year) continued to positively impact year-to-date results.

Guidance, Outlook, and Risks

• Outlook: Management expects a positive impact on gross margins for the remainder of fiscal 2005 and into fiscal 2006 due to improved year-over-year currency hedge rates. Futures and advance orders for footwear and apparel for the period December 2004 through April 2005 were 9.1% higher than the prior year.
• Dividends: Dividends declared per share increased to $0.25 for the quarter (up from $0.20 in the prior year).
• Share Repurchases: The company repurchased 2.8 million shares for $203.7 million year-to-date under a $1.5 billion program. Approximately $1.3 billion remains available under the program.
• Accounting Changes: The company is evaluating the impact of SFAS No. 151 (Inventory Costs) and SFAS No. 123R (Share-Based Payment). SFAS 123R will require expensing of stock options starting in fiscal 2006; pro forma analysis suggests a reduction in net income of approximately $31.4 million for the six-month period if applied currently.
• Risks: Key risks include foreign exchange rate fluctuations, changes in consumer preferences, inventory management challenges (notably higher closeout sales in Europe and Asia), and the expiration of the NBA license agreement impacting U.S. licensed apparel sales.

Investor Verification Checklist

• Currency Impact: Verify the extent to which reported revenue and margin growth is driven by favorable foreign exchange rates versus organic volume and price growth.
• Inventory Levels: Review inventory balances ($1,692.4 million) and obsolescence reserves, particularly in Europe and Asia, where closeout sales impacted margins.
• Stock-Based Compensation: Assess the potential future impact of SFAS 123R on net income and EPS once the new standard is adopted in fiscal 2006.
• Licensed Apparel: Monitor the trajectory of U.S. licensed apparel sales following the expiration of the NBA license agreement.
• Capital Allocation: Track the pace of share repurchases and dividend increases relative to operating cash flow generation.