NIKE, Inc. 10-Q Summary: Quarter Ended August 31, 2001
Business Context and Reporting Period
This Form 10-Q covers the three-month period ended August 31, 2001 (first quarter of fiscal 2002). NIKE, Inc. designs, produces, and markets sports and fitness footwear, apparel, and equipment globally. The filing notes the adoption of SFAS No. 133 regarding derivative instruments, resulting in a one-time after-tax charge of $5.0 million. The report also addresses the uncertainty surrounding the September 11, 2001 terrorist attacks, which caused immediate declines in retail store sales and increased order cancellations.
Key Financial Metrics
| Metric | Q1 2002 (Aug 31, 2001) | Q1 2001 (Aug 31, 2000) |
|---|---|---|
| Revenues | $2,613.7 million | $2,636.7 million |
| Net Income | $199.2 million | $210.2 million |
| Diluted EPS | $0.73 | $0.77 |
| Gross Margin | 39.4% | 40.5% |
| Cash from Operations | $235.4 million | $175.9 million |
| Cash and Equivalents | $364.9 million | $407.1 million |
| Total Debt (Current + Long-term) | $1,243.6 million | $1,296.6 million |
| Inventory | $1,486.8 million | $1,424.1 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 0.9% year-over-year. U.S. revenues fell 3.5% due to a 7.0% drop in footwear sales (driven by lower mid-range demand and supply chain disruptions from a new planning system). International revenues rose 1.4% but were negatively impacted by foreign currency fluctuations; in constant dollars, international revenue grew 10.2%.
- Margin Compression: Gross margin declined 110 basis points to 39.4%, primarily due to the weakening euro against the U.S. dollar and lower margins in U.S. licensed team apparel.
- Expense Management: Selling and administrative expenses decreased 0.7% due to lower demand creation spending compared to the prior year's Olympic and European Football Championship marketing. Other expenses dropped significantly from $20.0 million to $5.5 million.
- Accounting Change: The adoption of SFAS 133 resulted in a $5.0 million after-tax charge, reducing net income. This also adjusted the balance sheet, increasing current assets by $116.4 million and current liabilities by $151.6 million.
Guidance, Outlook, and Risks
- Outlook: Management continues to expect earnings growth for the full fiscal year despite current headwinds. Futures orders for footwear and apparel for the period September 2001 through January 2002 were 6% higher than the prior year.
- September 11 Impact: The filing highlights significant uncertainty regarding the economic impact of the September 11 attacks. Retail sales dropped immediately post-attack but have recovered somewhat. Order cancellations have increased, and the company is developing contingency plans focused on inventory and cost management.
- Accounting Standards: NIKE will adopt FAS 142 (Goodwill and Other Intangible Assets) on June 1, 2002. This will cease goodwill amortization, expected to decrease other expenses by approximately $13 million annually.
- Liquidity: The company maintains strong liquidity with $364.9 million in cash and equivalents and access to significant credit lines. A $250 million bond was issued in August 2001 to reduce commercial paper outstanding.
Investor Verification Checklist
- Supply Chain Stability: Verify the resolution of disruptions caused by the new global demand and supply planning system and their impact on future footwear deliveries.
- Post-9/11 Demand: Monitor subsequent quarters for the sustained impact of the September 11 attacks on retail sales and wholesale order cancellations.
- Currency Exposure: Assess the ongoing impact of foreign currency fluctuations, particularly the euro, on reported international revenues and gross margins.
- Inventory Levels: Review inventory turnover rates given the $1,486.8 million inventory balance and the company's stated focus on inventory management.
- Debt Structure: Confirm the utilization of the new $1 billion debt registration statement filed in October 2001 and the company's strategy for managing its $1.24 billion total debt load.