NIKE, Inc. — Form 10-Q Summary
Reporting period: Three months ended August 31, 2015, the first quarter of fiscal 2016. Comparisons are with the three months ended August 31, 2014, unless noted. Amounts are in U.S. dollars.
Business context and results
NIKE designs, markets and sells athletic footwear, apparel and equipment through the NIKE Brand and Converse. The NIKE Brand represented more than 90% of company revenue. Management attributed growth to product innovation, consumer engagement and retail execution, while expanding direct-to-consumer (DTC) and digital sales.
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $8.414 billion | $7.982 billion | +5% reported; +14% excluding currency changes |
| Gross profit / gross margin | $3.995 billion / 47.5% | $3.721 billion / 46.6% | Gross profit +7%; margin +90 bps |
| Selling and administrative expense | $2.577 billion | $2.480 billion | +4%; 30.6% of revenue versus 31.1% |
| Income before taxes | $1.445 billion | $1.229 billion | +18% |
| Net income | $1.179 billion | $962 million | +23% |
| Diluted EPS | $1.34 | $1.09 | +23% |
| Cash provided by operations | $491 million | $683 million | Down $192 million |
Revenue, margins and segment trends
- NIKE Brand revenue was $7.898 billion, up 6% reported and 15% excluding currency changes. Footwear revenue rose 9% reported (18% currency-neutral); apparel rose 5% (12% currency-neutral). Equipment revenue declined 10% reported.
- DTC revenue increased 13% reported and 21% currency-neutral; it was about 24% of NIKE Brand revenue, versus 23% a year earlier. Online sales through NIKE-owned websites grew 46% currency-neutral.
- Greater China revenue increased 30% reported and EBIT rose 51%. All NIKE Brand geographies grew on a currency-neutral basis. Converse revenue declined 3% reported but increased 3% currency-neutral; Converse EBIT fell 21%.
- Gross margin expansion primarily reflected higher average selling prices and DTC mix, partly offset by product-cost inflation and higher warehousing costs. Consolidated foreign-exchange effects on gross margin were described as insignificant.
- Net income growth also benefited from a lower effective tax rate, 18.4% versus 21.7%, and a 1% decline in weighted-average diluted shares, attributed to repurchases. Dividends declared per share were $0.28, compared with $0.24.
Cash flow, debt and liquidity
- Operating cash flow was $491 million. Management reported a $908 million working-capital cash outflow, mainly reflecting lower accrued liabilities as cash collateral received from hedge counterparties fell from $968 million at May 31 to $468 million at August 31.
- Investing activities used $385 million, including $327 million of property and equipment additions. Financing activities used $674 million, including $588 million of share repurchases and $240 million of dividends paid. Cash and equivalents ended the quarter at $3.246 billion, down from $3.852 billion at May 31.
- Cash, cash equivalents and short-term investments totaled $5.4 billion, including $4.3 billion held by foreign subsidiaries. Total debt and notes payable were approximately $1.2 billion; the filing reports $1.079 billion of long-term debt, $106 million current debt and $23 million of notes payable.
- NIKE entered a new $2 billion committed credit facility, maturing in 2020 with extension options through 2022; there were no borrowings under it at quarter-end. The company reported compliance with facility covenants and said available liquidity and expected cash generation should meet foreseeable needs.
Outlook, commentary and risks
- Management anticipated a full-year fiscal 2016 effective tax rate of approximately 22.0%. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- NIKE Brand futures orders for delivery September 2015 through January 2016 were $11.6 billion, up 9% reported and 17% excluding currency changes. Management cautioned that futures orders are not necessarily indicative of actual revenue because of shipment timing, order mix, cancellations, discounts and returns.
- Foreign-currency translation reduced reported revenue by approximately $701 million and income before taxes by approximately $173 million year over year. Management estimated that translation of foreign profits together with the year-over-year change in foreign-currency gains and losses in other income/expense had an unfavorable $151 million impact on pretax income.
- Management cited risks including currency volatility, consumer demand and forecasting, competition, product costs and supply chain execution, information systems and data security, and international economic conditions. Risk factors were reported as unchanged from the prior Form 10-K.
- Gross unrecognized tax benefits were $460 million; $258 million would affect the effective tax rate if recognized. The IRS was auditing fiscal 2013 and 2014. NIKE was contesting a $31 million proposed fiscal 2011 tax deficiency and did not expect a material financial-statement impact. The filing said gross unrecognized tax benefits could decrease by up to $43 million within 12 months.
- The company disclosed a prior-period cash-flow classification revision: operating cash flow for the three months ended August 31, 2014 was increased by $95 million to $683 million, with no change to net change in cash or ending cash. Management concluded the prior misstatements were not material.
- Letters of credit totaled $154 million; the maximum exposure under guarantees of certain Cole Haan lease payments was $21 million. NIKE reported no material developments in legal proceedings, no off-balance-sheet arrangements with a material effect, and effective disclosure controls as of August 31, 2015.
Important facts for investors to verify
- Whether reported revenue and earnings trends remain strong after the substantial currency headwinds, especially in Greater China and other fast-growing markets.
- Whether the $11.6 billion futures-order growth converts into shipments and sales, bearing in mind management’s stated limitations on using orders as a revenue indicator.
- Whether margin gains persist as product, labor and logistics costs change and DTC expansion continues to raise operating overhead.
- Whether operating cash flow recovers as working-capital movements and hedge-related collateral balances normalize.
- Developments in tax audits and uncertain tax positions, including the contested $31 million assessment and the potential change in unrecognized tax benefits.
- How foreign-exchange movements and hedge accounting affect reported revenue, earnings and accumulated other comprehensive income.