NIKE, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended February 28, 2014, the third quarter of NIKE’s fiscal 2014; results also cover the nine months ended that date. Unless noted, results are from continuing operations. Cole Haan and Umbro were divested in fiscal 2013 and are reported as discontinued operations.
Key financial metrics
| Metric | Quarter | Nine months |
|---|---|---|
| Revenue | $6.972 billion, up 13% reported and 14% excluding currency effects | $20.374 billion, up 9% reported and 10% excluding currency effects |
| Gross margin | 44.5%, up 30 basis points | 44.5%, up 100 basis points |
| Net income from continuing operations | $685 million, up 3% | $2.002 billion, up 13% |
| Diluted EPS from continuing operations | $0.76, up 4% | $2.20, up 14% |
| Operating cash flow | Not separately reported for the quarter | $1.683 billion, versus $1.692 billion |
Quarterly selling and administrative expense was $2.166 billion, up 16%, and rose to 31.1% of revenue from 30.1%. Income before tax was $883 million, up 3%; the effective tax rate was 22.4%, compared with 22.8%. For the nine months, the tax rate was 24.2%, versus 25.4%.
At February 28, cash and equivalents were $1.864 billion and short-term investments were $3.165 billion, totaling approximately $5.0 billion in cash, equivalents and short-term investments. Total borrowings were approximately $1.327 billion, including notes payable. Inventory was $3.825 billion, up $295 million from May 31, 2013; accounts receivable was $3.355 billion, up $238 million.
Nine-month capital expenditures were $670 million. NIKE repurchased $1.716 billion of common stock and paid $587 million in dividends during the period. Operating cash flow less capital expenditures was approximately $1.013 billion.
Material changes and operating performance
- Quarterly total net income fell 21% to $685 million, while continuing-operations income increased 3%. The prior-year quarter included $204 million of discontinued-operations income, primarily associated with the Cole Haan sale; comparisons of total net income are therefore not like-for-like.
- NIKE Brand revenue grew 14% on a constant-currency basis in the quarter. Converse constant-currency revenue grew 16%. Management cited demand for new products and growth across geographies and major categories.
- Direct-to-consumer revenue grew 23% on a constant-currency basis in the quarter and represented about 21% of NIKE Brand revenue, versus 19% a year earlier. Online sales through NIKE-owned websites grew 57%.
- Gross margin benefited from pricing, product mix and DTC growth, partly offset by higher product costs and unfavorable currency. Demand-creation expense rose 18% in the quarter, including World Cup-related spending; operating overhead rose 15%, partly reflecting digital, infrastructure and DTC investments.
- Regional constant-currency revenue growth was strong in Western Europe (19%), Central & Eastern Europe (22%) and Emerging Markets (19%). Greater China grew 7%; Japan grew 10% despite a 9% reported decline, largely reflecting currency effects.
Outlook, risks and unusual items
- NIKE Brand futures orders for March through July 2014 were $10.9 billion, up 12% reported and 14% excluding currency effects. Management cautioned that futures orders are not necessarily indicative of revenue growth because of shipment timing, order mix, cancellations, discounts and returns.
- Management expected Greater China fourth-quarter revenue to be flat to slightly down year over year, citing planned changes in seasonal product flow. It did not provide overall company revenue or earnings guidance in the supplied filing text. Management did not expect the effective tax rate to change substantially from the nine-month rate.
- Foreign currency was a material headwind: management estimated an unfavorable $40 million impact on pretax income in the quarter and $110 million for the nine months from the combined translation of international profits and year-over-year foreign-exchange gains and losses. Nine-month other expense was $86 million, versus $28 million of other income in the prior-year period, partly reflecting currency losses and an adverse legal judgment related to a former Western European customer’s bankruptcy.
- Gross unrecognized tax benefits were $563 million, excluding interest and penalties; the company said up to $185 million could reasonably possibly be resolved or decrease within 12 months. The IRS was auditing tax years 2011–2013, including foreign tax credits and transfer pricing.
- Outstanding commitments included approximately $2.779 billion of operating-lease payments and $4.050 billion of endorsement-contract payments. Letters of credit totaled $141 million. A pre-existing Cole Haan lease guarantee had maximum exposure of $35 million; its fair value was described as immaterial.
- NIKE reported no material change in previously disclosed risk factors, no material developments in previously reported legal proceedings, and no off-balance-sheet arrangements with a current or reasonably likely future effect. Management said disclosure controls were effective as of February 28, 2014.
- The company revised certain prior-year balance-sheet and cash-flow amounts relating to inventory held by third parties and noncash property additions, concluding the misstatements were not material to prior periods.
Important facts for investors to verify
- Whether futures-order growth converts into shipped revenue, particularly given the disclosed China outlook and changes in seasonal product flow.
- Whether DTC growth and pricing can continue to offset product-cost inflation, foreign-exchange effects and higher operating and marketing expenses.
- How working-capital investment, capital expenditures, share repurchases and dividends affect cash balances and liquidity.
- Outcomes of tax audits and transfer-pricing discussions, including potential changes to unrecognized tax benefits and tax expense.
- Exposure to currency movements, the former-customer legal judgment, lease and endorsement commitments, and the Cole Haan guarantee.