NIKE, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended February 28, 2018. Amounts are U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and results
NIKE designs, markets and sells athletic footwear, apparel, equipment and accessories globally. The company’s fiscal 2018 reporting segments reflect its June 2017 organizational realignment. Results below compare with the corresponding 2017 periods.
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $8,984 | $8,432 | $26,608 | $25,673 |
| Gross profit | $3,938 | $3,750 | $11,578 | $11,489 |
| Gross margin | 43.8% | 44.5% | 43.5% | 44.8% |
| Income before tax | $1,159 | $1,323 | $3,110 | $3,718 |
| Net income (loss) | $(921) | $1,141 | $796 | $3,232 |
| Diluted EPS | $(0.57) | $0.68 | $0.48 | $1.91 |
Financial position and cash flow
- For the first nine months, operating cash flow was $2,685, versus $2,884 a year earlier. Investing activities provided $526, while financing activities used $3,448.
- Capital expenditures were $728 for the nine-month period. Cash and equivalents declined to $3,662 at February 28 from $3,808 at May 31, 2017.
- Cash, cash equivalents and short-term investments totaled $4,751 at February 28. Current assets were $15,355 and current liabilities $5,783.
- Long-term debt was $3,469, with a further $6 current portion; no commercial paper was outstanding at quarter-end. The company reported no borrowings under its $2 billion committed credit facility and said it was in compliance with its covenants.
- Inventory was $5,366, up from $5,055 at May 31, 2017. The company repurchased 46.6 million shares for $2,713 during the nine months and paid $920 in dividends.
Material changes and operating trends
- Q3 revenue rose 7% reported, or 3% currency-neutral. Nine-month revenue rose 4% reported, or 2% currency-neutral. NIKE Brand revenue grew 7% in Q3; NIKE Direct revenue grew 14% reported and digital commerce sales rose 18%.
- Growth was strongest in Greater China, where Q3 revenue increased 19% currency-neutral, and EMEA and APLA, each up 9% currency-neutral. North America revenue fell 6% currency-neutral in Q3, while Converse fell 8% currency-neutral.
- Gross margin declined 70 basis points in Q3 and 130 basis points for the nine months. Management cited unfavorable currency effects and lower full-price average selling prices, partly offset by lower product costs and NIKE Direct growth.
- Q3 selling and administrative expense increased 11% to $2,767, or 30.8% of revenue versus 29.6%. Nine-month expense increased 6% to $8,391. Higher marketing, administrative and NIKE Direct investment contributed.
- Q3 income before tax declined 12%; nine-month income before tax declined 16%. Other income/expense also worsened versus the prior year, largely due to foreign currency gains and losses.
- The net loss reflects the Tax Act: Q3 income tax expense was $2,080, including a provisional $2,030 charge, primarily a $2,010 transition tax on accumulated foreign earnings. The nine-month effective tax rate was 74.4%, versus 13.1%.
Outlook, risks and unusual items
- Management expected a Q4 FY2018 effective tax rate of approximately 10%–12%, excluding possible adjustments to the provisional Tax Act estimate and further legislative or regulatory guidance. The filing does not provide a clear consolidated revenue or earnings forecast.
- The transition-tax estimate remains provisional and may change; NIKE expected to pay the tax in installments over eight years. It recorded $1,242 of the provisional liability as non-current and estimated total future cash payments of $1,350, net of expected foreign tax credits.
- NIKE said existing cash and investments, operating cash generation and access to external funding should meet foreseeable capital needs. It expected to continue share repurchases, subject to capital needs and market conditions.
- Key disclosed risks include changing consumer demand and retail-channel dynamics, competition, inventory and forecasting challenges, foreign exchange exposure, supply and logistics disruption, information-system and data-security risks, and uncertainty around Tax Act implementation. Management reported no material change in previously disclosed risk factors.
- Foreign-exchange derivatives were a notable liquidity exposure: NIKE posted $354 of cash collateral at quarter-end and reported net derivative liabilities of $565 for credit-contingent-feature purposes. The company stated it did not use derivatives for speculation.
- No material developments were reported in previously disclosed legal proceedings, and no material off-balance-sheet arrangements were reported. Letters of credit outstanding totaled $155.
Important facts for investors to verify
- How the provisional $2.03 billion Tax Act charge and the estimated transition-tax liability may change as NIKE completes its accounting analysis.
- Whether North America and Converse stabilize, and whether international growth and NIKE Direct can offset weakness in those businesses.
- Whether margin pressure from currency, pricing and product mix eases, and how inventory levels develop.
- Cash generation and capital allocation, including share repurchases, dividends and derivative collateral requirements.
- Whether the expected Q4 effective tax rate of 10%–12% is achieved and how subsequent tax guidance affects reported results.