NIKE, Inc. 10-Q Summary: Quarter Ended February 29, 2004
Business Context and Reporting Period
This Form 10-Q covers the third quarter and first nine months of fiscal year 2004, ended February 29, 2004. NIKE, Inc. is a global designer, marketer, and distributor of athletic footwear, apparel, and equipment. A significant event during this period was the acquisition of Converse Inc. in September 2003, which is now included in the "Other" operating segment.
Key Financial Metrics
| Metric (in millions) | Q3 2004 | Q3 2003 | 9 Months 2004 | 9 Months 2003 |
|---|---|---|---|---|
| Revenues | $2,904.0 | $2,400.9 | $8,766.0 | $7,711.9 |
| Gross Margin | $1,221.9 | $976.0 | $3,723.0 | $3,143.2 |
| Gross Margin % | 42.1% | 40.7% | 42.5% | 40.8% |
| Net Income | $200.3 | $124.7 | $640.6 | $227.8 |
| Diluted EPS | $0.74 | $0.47 | $2.38 | $0.85 |
| Cash from Operations (9mo) | $971.3 | $430.5 | ||
| Cash & Equivalents (End Period) | $914.7 | |||
| Total Debt (Current + Long-term) | $865.7 |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 21% in Q3 and 14% year-to-date (YTD). Growth was driven by the Converse acquisition (contributing 3 percentage points in Q3), favorable currency exchange rates (primarily the stronger euro), and timing shifts in shipments.
- Profitability: Net income surged 61% in Q3 and 181% YTD. The YTD comparison is significantly impacted by a $266.1 million non-cash charge for the cumulative effect of accounting changes (FAS 142) recorded in the prior year.
- Margins: Gross margin percentage improved by 140 basis points in Q3 and 170 basis points YTD. Drivers included better hedge rates, improved closeout sales profitability, and lower product costs.
- Segment Performance:
- EMEA: Revenue up 36% in Q3, driven largely by currency and shipment timing. Pre-tax income up 115%.
- Asia Pacific: Revenue up 21% in Q3, driven by volume increases in China and Japan.
- U.S. Region: Revenue up 4% in Q3. Footwear revenue was flat due to a redistribution strategy reducing orders from Foot Locker, offset by higher average selling prices.
Guidance, Outlook, and Risks
- Outlook: Management expects improved hedge rates to positively impact gross margins into the next fiscal year. They anticipate a net benefit to consolidated net income from the combination of hedge losses and favorable translation of foreign profits for the remainder of fiscal 2004 and into 2005.
- Orders: Worldwide futures and advance orders for footwear and apparel (March–July 2004) were 9.9% higher than the prior year, with 4 percentage points attributable to currency. Management notes that futures orders are not necessarily indicative of future revenue growth due to order mix and cancellation risks.
- Liquidity: The company maintains a $750 million revolving credit facility and a $1 billion shelf registration for debt. Cash generated from operations is expected to meet future needs. A $1 billion share repurchase program is ongoing.
- Risks: Key risks include foreign exchange rate fluctuations, intense competition, changes in consumer preferences, and the ability to manage complex supply chain systems. The company faces potential hedge losses as the euro strengthens against previously contracted rates.
Investor Verification Checklist
- Converse Integration: Verify the specific contribution of Converse to revenue and operating expenses in future quarters to assess integration success.
- Foot Locker Relationship: Monitor the execution of joint marketing programs with Foot Locker and the impact on U.S. footwear volume versus price.
- Currency Exposure: Track the impact of the strengthening euro on both revenue translation and hedge accounting losses in "Other expense, net."
- Inventory Levels: Review inventory turnover and obsolescence reserves, particularly given the increase in inventory to $1,667.6 million.
- Share Repurchases: Confirm the pace of the $1 billion share repurchase program and its impact on diluted share count.