NIKE, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Quarter and six months ended November 30, 2020. Comparisons are against the corresponding prior-year periods unless noted. Amounts are in U.S. dollars; financial statement amounts are in millions.
Business context
NIKE designs, markets and sells athletic footwear, apparel, equipment and accessories worldwide through wholesale partners and NIKE Direct, including its stores and digital channels. Results reflect the continuing effects of COVID-19, including reduced physical-store traffic and changing consumer demand.
Financial results and liquidity
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Revenue | $11.243bn | $10.326bn | $21.837bn | $20.986bn |
| Gross profit / margin | $4.847bn / 43.1% | $4.544bn / 44.0% | $9.588bn / 43.9% | $9.415bn / 44.9% |
| Net income | $1.251bn | $1.115bn | $2.769bn | $2.482bn |
| Diluted EPS | $0.78 | $0.70 | $1.73 | $1.56 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $3.355bn | $1.306bn |
- Quarterly revenue increased 9% reported and 7% currency-neutral; six-month revenue increased 4% on both bases. Quarterly net income rose 12% and diluted EPS rose 11%.
- Gross margin declined 90 basis points in the quarter and 100 basis points year to date. Management cited promotional activity, lower full-price sales mix, currency effects and higher warehousing and freight costs, partly offset by lower product costs.
- Quarterly selling and administrative expense fell 2%; six-month expense fell 6%. Demand creation expense decreased, while operating overhead rose, partly due to restructuring and digital investment.
- Cash, cash equivalents and short-term investments totaled $11.812bn at November 30. Long-term debt was $9.410bn and reported notes payable were $41m; cash and investments exceeded these borrowings by about $2.36bn, excluding lease liabilities. Current assets were $23.607bn and current liabilities $8.871bn.
- Six-month investing cash outflow was $2.877bn, primarily reflecting purchases of short-term investments. Financing cash outflow was $292m, including $769m of dividends. No shares were repurchased during the six-month period.
Material changes and operating trends
- NIKE Direct revenue grew 32% reported in Q2 and 22% for the six-month period; currency-neutral growth was 30% and 22%, respectively. NIKE Brand digital sales grew 80% in Q2 and 81% year to date.
- Wholesale revenue declined 2% in Q2 and 5% for the six months. NIKE Direct represented about 40% of NIKE Brand revenue in Q2, compared with 33% a year earlier.
- Greater China and EMEA were key growth regions. Q2 reported revenue increased 24% in Greater China and 17% in EMEA; APLA was down 3% year to date on a currency-neutral basis.
- Inventory was $6.090bn, down 17% from May 31, 2020. Operating cash flow improved substantially year over year, with management attributing the working-capital improvement mainly to inventory reductions and strong digital sales.
Outlook, commentary, risks and unusual items
- Management gave no specific quantitative revenue or earnings guidance in the provided filing text. It described fiscal 2021 as uncertain and market recoveries as dynamic, with COVID-19 potentially harming revenue, profitability, inventory levels, wholesale customer payment terms, sales reserves and the effective tax rate.
- NIKE’s Consumer Direct Acceleration strategy prioritizes digital and owned retail, selected strategic wholesale partners, product alignment around Men’s, Women’s and Kids’, and technology and data investment. Management expects to accelerate marketplace changes over the next two fiscal years and reinvest future wage-related savings.
- Management expects demand creation expense to rise in future periods as major sporting events and key sports moments resume and as strategic growth investments continue. More than 80% of owned stores were open as of January 4, 2021, with some operating reduced hours.
- The organizational realignment is expected to result in approximately $315m of pretax charges, primarily employee termination costs. $218m was recognized in the first six months of FY2021; related actions were expected to be substantially complete by fiscal year-end.
- NIKE recognized a $47m loss related to the Brazil business sale; the transaction closed December 1, 2020, after quarter-end. Separately, the sale agreement for Argentina, Chile and Uruguay was terminated after quarter-end. NIKE remained committed to finding third-party distributors and reported a $438m total expected loss allowance for that transition, most of which had been recorded in FY2020.
- The six-month effective tax rate was 12.7%, up from 11.7%, including a reserve related to Altera Corp. v. Commissioner. Gross unrecognized tax benefits were $872m; the filing states that $587m would affect the effective tax rate if recognized.
- Foreign-exchange exposure remains relevant: derivative liabilities were $584m at November 30, versus $207m at May 31, and NIKE had posted $170m of cash collateral. Management reported no material change to its hedging strategy.
Important facts for investors to verify
- Whether digital and NIKE Direct growth can continue to offset wholesale softness and physical-store traffic declines.
- Whether gross margins recover as promotions, inventory levels, freight costs and foreign-exchange impacts change.
- Progress and final costs of the restructuring, and whether expected savings are realized while being reinvested.
- Resolution and financial effects of the Brazil, Argentina, Chile and Uruguay transitions, including the terminated sale agreement and expected loss allowance.
- COVID-19 developments, tax disputes and unrecognized tax benefits, and the effects of currency movements and hedging on earnings and cash flows.