NIKE, Inc. — Q2 FY2012 Form 10-Q
Reporting period: Three and six months ended November 30, 2011; unaudited. Amounts are in U.S. dollars unless stated otherwise. NIKE designs, markets and sells athletic footwear, apparel and equipment through global geographic segments and other businesses.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Revenue | $5.731 billion (+18%) | $4.842 billion | $11.812 billion (+18%) | $10.017 billion |
| Gross profit | $2.450 billion (+12%) | $2.193 billion | $5.143 billion (+11%) | $4.627 billion |
| Gross margin | 42.7% (down 260 bps) | 45.3% | 43.5% (down 270 bps) | 46.2% |
| Net income | $469 million (+3%) | $457 million | $1.114 billion (+10%) | $1.016 billion |
| Diluted EPS | $1.00 (+6%) | $0.94 | $2.36 (+13%) | $2.08 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $597 million | $647 million |
- Q2 income before taxes rose 1% to $618 million; six-month income before taxes rose 8% to $1.470 billion. Lower effective tax rates supported net income growth: 24.1% in Q2 versus 25.0%, and 24.2% for six months versus 25.5%.
- Q2 selling and administrative expense was $1.820 billion, up 13%, but fell to 31.8% of revenue from 33.3%. For six months it was $3.643 billion, up 11%, and 30.8% of revenue versus 32.8%.
- Cash and short-term investments totaled $3.365 billion at November 30. Cash and equivalents were $1.929 billion. Current assets were $10.725 billion and current liabilities $3.563 billion (derived current ratio: approximately 3.0).
- Long-term debt, including current portion, was $348 million; notes payable were $123 million. No borrowings were outstanding under the revolving credit facility or commercial paper program. The company reported $597 million of operating cash flow and $259 million of capital expenditures for the first half (derived operating cash flow less capital expenditures: $338 million).
Changes and operating trends
- Revenue growth was broad-based. On a currency-neutral basis, consolidated revenue increased 16% in Q2 and 14% in the first half; NIKE Brand revenue increased 18% and 15%, respectively.
- Q2 reported revenue grew fastest in Greater China (+35%), Emerging Markets (+26%), North America (+21%) and Central & Eastern Europe (+17%). Japan was weak on a currency-neutral basis (down 7% in Q2); Western Europe grew only 2% currency-neutral and its EBIT declined 35% reported.
- Higher materials and labor costs drove most of the gross-margin contraction, partly offset by Direct to Consumer growth, price increases and cost-reduction initiatives. Q2 product input costs reduced consolidated gross margin by approximately 290 basis points, according to management.
- Management said NIKE Brand inventories were up 39% year over year, reflecting higher unit inventories and product costs. Consolidated inventory was $3.164 billion at November 30, compared with $2.715 billion at May 31.
- First-half operating cash flow declined to $597 million from $647 million, primarily reflecting a larger working-capital outflow, including a $555 million cash use from inventory increases. Financing cash outflow rose to $1.454 billion, including $1.325 billion of share repurchases and $289 million of dividends.
- NIKE repurchased 15.2 million Class B shares for approximately $1.321 billion in the first half. Since the $5 billion program began in December 2009, it had repurchased 45.6 million shares for about $3.6 billion; $1.354 billion remained authorized at quarter-end.
Outlook, risks and other notable items
- Futures and advance orders for NIKE Brand footwear and apparel scheduled for December through April 2012 were up 13% year over year: unit orders grew 7% and average price per unit 6%. Growth included 31% reported in Greater China and a 5% decline in Japan. NIKE cautioned that orders are not necessarily indicative of revenue because of shipment timing, order mix, cancellations, discounts and sales not covered by futures orders.
- Management expected gross margin to remain under pressure for the rest of FY2012, particularly from rising product input costs and unfavorable foreign exchange, which could outweigh planned price increases and production efficiencies. The filing does not provide a specific full-year revenue or earnings forecast.
- Foreign exchange remains a key exposure. Management estimated currency translation and year-over-year foreign-currency gains and losses had an unfavorable $17 million effect on Q2 pretax income, but a favorable $15 million effect for the first half. Outstanding derivatives had approximately $7 billion of notional value.
- Liquidity resources included a new revolving facility of approximately $1 billion, with an option to increase it to $1.5 billion, maturing in November 2016; no amounts were drawn. Management said existing liquidity and expected operating cash generation should meet foreseeable capital needs. It also noted that much foreign earnings were indefinitely reinvested and repatriation could create additional U.S. tax.
- Gross unrecognized tax benefits were $225 million, excluding interest and penalties; up to $61 million could decrease within 12 months as examinations resolve or statutes expire. Accrued interest and penalties on uncertain tax positions were $100 million. Letters of credit outstanding were $74 million; no other significant changes to previously reported contingencies were noted.
- Management cited risks including demand and consumer-preference changes, competition, inventory and forecasting challenges, higher material and freight costs, foreign exchange, international operations, information-system disruptions and access to capital markets. It reported no material changes to previously disclosed risk factors or market-risk disclosures, and stated disclosure controls were effective.
Key facts for investors to verify
- Whether sales growth can continue while input-cost inflation and foreign-exchange pressures weigh on gross margins.
- Whether elevated inventories convert into sales without increased discounting or further working-capital strain.
- Whether futures-order growth translates into shipments and revenue, particularly given the weakness in Japan and Western Europe.
- Whether share repurchases remain supportable alongside dividends, investment needs and cash-flow variability.
- Developments in tax examinations, uncertain tax positions and any implications of repatriating foreign cash.