NIKE, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2013. Although the request metadata says “2012 Q4,” this filing reports fiscal 2013 annual results and includes fourth-quarter data; it is not a standalone quarterly filing.
Business context
NIKE designs, markets and sells athletic footwear, apparel, equipment, accessories and services worldwide. Sales are made through wholesale customers and NIKE’s Direct to Consumer stores and websites. Most footwear and apparel are produced by independent contractors outside the United States. NIKE completed the divestitures of Umbro and Cole Haan during fiscal 2013 to focus on the NIKE, Jordan, Converse and Hurley brands.
Key financial metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $25.313 billion | $23.331 billion | +8% reported; +11% excluding currency changes |
| Gross profit / margin | $11.034 billion / 43.6% | $10.148 billion / 43.5% | Profit +9%; margin +10 basis points |
| Selling and administrative expense | $7.780 billion | $7.065 billion | +10%; 30.7% of revenue versus 30.3% |
| Operating earnings (EBIT) | $3.269 billion | $3.029 billion | +8% |
| Net income from continuing operations | $2.464 billion | $2.269 billion | +9% |
| Diluted EPS from continuing operations | $2.69 | $2.42 | +11% |
| Cash from operations | $3.027 billion | $1.899 billion | +$1.128 billion |
| Cash and short-term investments | $5.965 billion | $3.757 billion | +$2.208 billion |
| Long-term debt, including current portion | $1.267 billion | $277 million | Increased, primarily following a $1 billion bond issuance |
Total net income was $2.485 billion, including $21 million from discontinued operations, compared with $2.223 billion in FY2012. Working capital was $9.718 billion; the current ratio was 3.5. Inventory was $3.434 billion, up 7% year over year, while accounts receivable was $3.117 billion, approximately flat. Capital expenditures were $636 million. NIKE repurchased $1.674 billion of shares and declared $0.81 per share in dividends, adjusted for the two-for-one stock split.
Material changes and operating trends
- NIKE Brand revenue rose 9% reported and 11% excluding currency effects. Footwear increased 8% reported; apparel increased 8%; equipment increased 17%.
- Direct to Consumer revenue grew 23% reported and 24% excluding currency effects, reaching approximately 19% of NIKE Brand revenue, versus 17% in FY2012. Comparable store sales grew 14%.
- North America revenue increased 18%. Emerging Markets grew 9% reported and 16% excluding currency effects.
- Greater China revenue declined 3% reported and 5% excluding currency effects; segment EBIT fell 11%. Management cited sluggish economic growth, weak retail sell-through, inventory pressure, discounts and order cancellations.
- Western Europe revenue was flat reported but up 5% excluding currency effects. Conditions remained weak in parts of Southern Europe.
- Gross margin improved slightly: higher prices and favorable product mix were largely offset by higher product costs, especially factory labor, and unfavorable currency effects. Selling and administrative expense grew faster than revenue, reflecting Direct to Consumer, personnel, corporate and marketing investments.
- Cash from operations increased substantially as working-capital outflow narrowed to $42 million from $799 million. Inventory growth slowed from 23% in FY2012 to 7%.
Outlook, commentary, risks and unusual items
- Management reiterated long-term goals of high-single-digit revenue growth, mid-teens EPS growth, improved return on invested capital and accelerated cash flow. It did not provide a specific full-year FY2014 earnings or revenue forecast in the supplied filing text.
- Worldwide NIKE Brand footwear and apparel futures orders for June–November 2013 were $12.1 billion, up 8% from the comparable period. Management cautioned that futures orders are not a reliable stand-alone forecast because of order mix, cancellations, discounts, returns, exchange rates and shipment timing.
- For Greater China, management expected first-half FY2014 revenue below the prior year while it continued to manage shipments and inventory; it expected revenue to stabilize around prior-year levels in the second half. China futures orders were described as in line with the prior year.
- Divestiture results included a $231 million after-tax gain on Cole Haan and a $107 million after-tax loss on Umbro. Discontinued operations also included operating losses, taxes and approximately $20 million in wind-down costs. NIKE retained guarantees on certain Cole Haan leases with maximum exposure of $44 million; their fair value was reported as not material.
- Key risks include intense competition and changing consumer preferences; inventory forecasting and retailer credit; foreign-exchange movements; reliance on overseas contract manufacturers and global shipping; trade restrictions, labor and input-cost inflation; information-technology and data-security disruptions; and tax, intellectual-property and litigation uncertainties.
- Unrecognized tax benefits were $447 million, excluding related interest and penalties. Approximately $6.7 billion of foreign earnings were considered indefinitely reinvested; the filing estimated a potential net deferred tax liability of about $2.2 billion if repatriated, assuming full use of foreign tax credits.
- The filing reported no material pending legal proceedings beyond ordinary-course matters. Management and the independent auditor concluded internal control over financial reporting was effective as of May 31, 2013.
Important facts for investors to verify
- Whether Greater China retail inventories, sell-through and profitability improved as management expected, and whether the projected stabilization occurred.
- How much of reported growth and margin performance reflects underlying volume and pricing versus foreign exchange, product mix and discounting.
- Whether futures orders converted into revenue at expected timing and margins, particularly given the filing’s stated limitations of the metric.
- Whether Direct to Consumer expansion and higher operating costs generated adequate returns, and whether inventory productivity continued to improve.
- The effects of the new debt, continued buybacks and dividends on future liquidity and capital allocation; also review the $11.815 billion of disclosed contractual obligations, including endorsement and product-purchase commitments.
- Potential outcomes of tax examinations and the implications of indefinitely reinvested foreign earnings, as well as the remaining Cole Haan lease guarantees.