NIKE, Inc. Form 10-Q Summary
Business context and reporting period
NIKE designs, markets and sells athletic footwear, apparel, equipment and accessories globally, through wholesale customers and its NIKE Direct stores and digital channels. This unaudited filing covers the fiscal quarter and six months ended November 30, 2018; comparisons are with the corresponding 2017 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $9,374; up 10% reported and 14% currency-neutral | $19,322; up 10% reported and 11% currency-neutral |
| Gross profit / margin | $4,105 / 43.8%; margin up 80 basis points | $8,502 / 44.0%; margin up 70 basis points |
| Operating income (EBIT) | $1,011; up 13% | $2,292; up 16% |
| Income before taxes | $997; up 13% | $2,267; up 16% |
| Net income | $847; up 10% | $1,939; up 13% |
| Diluted EPS | $0.52; up 13% | $1.19; up 16% |
Quarterly revenue growth reflected broad gains across NIKE Brand regions and product lines. Greater China revenue rose 26% reported (31% currency-neutral); North America rose 9% reported. NIKE Direct revenue increased 14% reported for the quarter, while digital commerce sales grew 41% currency-neutral. Converse revenue rose 4% reported, but quarterly Converse EBIT declined 8%.
Gross-margin expansion reflected higher full-price selling prices and improved NIKE Direct margins, partly offset by higher product costs and unfavorable currency effects. Selling and administrative expense rose 14% for the quarter, faster than revenue, and increased to 33.5% of revenue from 32.4%; higher operating overhead was a principal factor. The quarterly effective tax rate was 15.0%, versus 12.7%.
Cash flow, debt and liquidity
- Six-month operating cash flow was $2,825, versus $1,898 a year earlier. Working-capital movements provided $173, compared with a $148 use in the prior period; management noted cash collateral received from derivative counterparties affected this comparison.
- Investing activities used $245, including $630 of capital expenditures. Financing activities used $3,290, including $2,637 of share repurchases and $638 of dividends.
- At November 30, cash and equivalents were $3,423 and short-term investments were $618. Long-term debt was $3,466, with a $6 current portion; notes payable were $9. NIKE had no outstanding commercial paper or borrowings under its $2 billion committed credit facility.
- Management said existing cash, investments, operating cash flow and access to external funding should be sufficient for foreseeable domestic and foreign capital needs. The company reported compliance with credit-facility covenants.
Material changes, outlook and risks
- NIKE reported continued growth and said it remained focused on its Consumer Direct Offense and Triple Double strategy. Management cited foreign-currency volatility, global trade uncertainty and geopolitical dynamics, but provided no specific financial guidance in this filing.
- The company expected to complete its existing $12 billion share-repurchase program during fiscal 2019. A new four-year, $15 billion program is expected to begin after the current program ends.
- Adoption of revenue-recognition Topic 606 changed the timing of revenue recognition for certain wholesale and digital sales and increased reported accounts receivable, prepaid assets, and accrued liabilities by $695, $384 and $1,079, respectively, at November 30. The filing says the adoption did not materially affect income for the quarter or six months. Comparatives were not recast.
- Adoption of the intra-entity tax-transfer standard reduced retained earnings by $507 at June 1, 2018. NIKE completed its Tax Act analysis during the quarter; the filing reports $773 of gross unrecognized tax benefits, with up to approximately $200 potentially decreasing within 12 months.
- NIKE expected lease-accounting adoption on June 1, 2019 to materially increase balance-sheet assets and liabilities. Argentina was treated as hyperinflationary beginning in the quarter, with its functional currency changed to the U.S. dollar; management reported no material current-period impact.
- Reported risks include currency fluctuations, trade and tariff policy, changing consumer demand, competition, inventory and forecasting challenges, supply-chain costs, information-technology and data-security risks, and litigation or regulatory claims. The filing reported no material change in risk factors or significant new legal-proceeding developments. Letters of credit outstanding were $161.
Important facts for investors to verify
- Whether reported growth and margin gains persist after accounting for currency effects, higher costs and increased operating overhead.
- How the $1,079 Topic 606 gross-up to current assets and liabilities affects comparisons with prior periods, and how return and discount reserves develop.
- Whether operating cash generation remains strong without the favorable derivative-collateral and working-capital movements noted for this period.
- The pace and funding of planned repurchases, given the $3,290 six-month financing cash outflow and the announced successor buyback program.
- Developments in the Tax Act-related tax position, foreign-exchange exposure, trade uncertainty, and the expected material balance-sheet effect of lease accounting.