NIKE, Inc. — Form 10-Q Summary
Business context and reporting period. NIKE designs, markets and sells athletic footwear, apparel, equipment and accessories worldwide through wholesale, owned stores and digital commerce. This unaudited filing covers the three months ended August 31, 2018, the first quarter of fiscal 2019; comparisons are with the three months ended August 31, 2017. Interim results are not necessarily indicative of full-year performance.
Key financial results
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $9.948 billion | $9.070 billion | +10% reported; +9% currency-neutral |
| Gross profit / margin | $4.397 billion / 44.2% | $3.962 billion / 43.7% | Gross profit +11%; margin +50 bps |
| Selling and administrative expense | $3.063 billion | $2.856 billion | +7%; 30.8% of revenue versus 31.5% |
| Income before taxes | $1.270 billion | $1.072 billion | +18% |
| Net income | $1.092 billion | $950 million | +15% |
| Diluted EPS | $0.67 | $0.57 | +18% |
| Cash provided by operations | $1.301 billion | $575 million | Up $726 million |
Gross-margin improvement primarily reflected higher full-price average selling prices, favorable full-price mix and improved NIKE Direct margins, partly offset by higher product costs. Demand-creation expense rose 13%, mainly due to sports marketing and advertising; operating overhead increased 5%, including investment in NIKE Direct and Consumer Direct Offense initiatives. Other expense, net, increased to $53 million from $18 million, primarily due to a $39 million unfavorable change in foreign-currency conversion gains and losses, including hedges.
Balance sheet, liquidity and capital allocation
- At August 31, 2018, cash and equivalents were $3.282 billion and short-term investments were $987 million, totaling $4.269 billion. Total current assets were $15.501 billion and current liabilities were $6.708 billion.
- Long-term debt was $3.467 billion and current debt was $6 million. Notes payable were $13 million, with no commercial-paper borrowings outstanding at quarter-end. NIKE reported no borrowings under its $2 billion committed credit facility and said it was in compliance with its covenants.
- Operating cash flow was $1.301 billion; investing activities used $333 million and financing activities used $1.832 billion. Financing outflows included $1.360 billion of share repurchases and $320 million of dividends. Cash and equivalents declined by $967 million during the quarter.
- NIKE repurchased 17.8 million shares for approximately $1.381 billion at an average $77.64 per share. It anticipated completing its existing $12 billion program in fiscal 2019; a new four-year, $15 billion authorization was expected to begin afterward.
- Management said cash, investments, operating cash generation and access to external funding should be sufficient for foreseeable domestic and foreign capital needs.
Material changes and business performance
- Growth was broad-based: NIKE Brand revenue rose 10% reported and currency-neutral; Converse revenue rose 9% reported and 7% currency-neutral. Greater China was the fastest-growing major region, up 24% reported and 20% currency-neutral.
- NIKE Direct revenue increased 12% currency-neutral. Digital commerce sales rose to $770 million from $567 million, up 34%; NIKE Direct represented about 30% of NIKE Brand revenue in both periods.
- Footwear revenue rose 10% and apparel 11%; equipment declined 1%. Management cited Sportswear as a leading growth category.
- The effective tax rate increased to 14.0% from 11.4%, reflecting the new U.S. statutory rate and implemented provisions of the Tax Cuts and Jobs Act. The filing reported no change to its fiscal 2018 provisional transition-tax and deferred-tax remeasurement amounts during the quarter.
Outlook, risks and unusual items
- No specific quarterly or full-year revenue or earnings guidance is provided in the filing. Management expressed confidence in long-term growth and profitability opportunities while noting foreign-exchange volatility, global trade uncertainty and geopolitical dynamics.
- Management anticipated completing the current share-repurchase program during fiscal 2019, subject to capital needs and market conditions, and expected the new $15 billion program to follow.
- NIKE adopted revenue standard Topic 606 on June 1, 2018. Revenue recognition for certain wholesale transactions and substantially all digital commerce sales shifted to shipment rather than delivery. Adoption increased retained earnings by $23 million at adoption and did not materially affect first-quarter income. At August 31, reported accounts receivable, prepaid expenses and other current assets, total assets, accrued liabilities and current liabilities each included a $1.029 billion gross-up versus balances without adoption; this presentation change should not be mistaken for equivalent underlying growth.
- Adoption of the intra-entity tax-transfer standard reduced retained earnings by $507 million, deferred tax assets and other assets by $422 million, and prepaid expenses and other current assets by $45 million, and increased deferred tax liabilities and other liabilities by $40 million.
- NIKE expected adoption of the leases standard on June 1, 2019 to materially increase reported assets and liabilities. It identified no significant changes to contractual obligations and no material off-balance-sheet arrangements.
- Gross unrecognized tax benefits were $773 million, of which $526 million would affect the effective tax rate if recognized. NIKE estimated these benefits could decrease by up to approximately $210 million within 12 months; audit outcomes and timing remain uncertain.
- Argentina was determined to be hyperinflationary. Beginning in fiscal Q2 2019, its subsidiary’s functional currency would change to the U.S. dollar; management did not anticipate a material impact at then-current rates, while continuing to evaluate the effects.
- Other stated risks include changing consumer demand and retail conditions, competition, inventory and forecasting, foreign exchange, tariffs and trade policy, supply and transportation costs, cybersecurity and technology, and litigation. The filing reported no material changes to previously disclosed risk factors and no material legal-proceeding developments.
Important facts for investors to verify
- Whether revenue growth, especially Greater China and digital commerce, persists and translates into profitable growth.
- Whether gross-margin gains withstand product-cost pressure, promotional activity and foreign-exchange movements.
- How buybacks, dividends and any debt funding affect cash balances, share count and financial flexibility.
- Whether Topic 606 and tax-standard adoption effects are clearly separated from underlying balance-sheet trends, and how the forthcoming lease standard changes reported leverage.
- Developments in tax audits and unrecognized tax benefits, U.S. trade and tariff policy, and Argentina’s hyperinflation accounting transition.