NIKE, Inc. — Fiscal 2011 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended February 28, 2011. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. The filing is a fiscal 2011 Q3 report, although the request metadata labels the period “2010 Q3.”
Business context and performance
NIKE designs, markets and sells athletic footwear, apparel and equipment. Its reportable NIKE Brand regions are North America, Western Europe, Central and Eastern Europe, Greater China, Japan and Emerging Markets. Other Businesses include Cole Haan, Converse, Hurley, NIKE Golf and Umbro.
- Quarter revenue rose 7% to $5.079 billion; excluding currency changes, it increased 8%. Nine-month revenue rose 8% to $15.096 billion, or 9% excluding currency changes.
- Quarter net income increased 5% to $523 million; diluted EPS rose 7% to $1.08. Nine-month net income increased 11% to $1.539 billion; diluted EPS rose 12% to $3.16.
- Quarter gross margin was 45.8%, down 110 basis points year over year; nine-month gross margin was 46.1%, up 20 basis points. Quarter selling and administrative expense was 32.2% of revenue, versus 33.0% a year earlier.
- Quarter income before tax was $707 million, up 7%; nine-month income before tax was $2.071 billion, up 13%. Effective tax rates were 26.0% for the quarter and 25.7% year to date, respectively 110 and 120 basis points higher than the comparable periods.
- Regional highlights for the quarter: Greater China revenue grew 21% and EBIT grew 21%; Emerging Markets revenue grew 19% and EBIT grew 36%; North America revenue grew 9% and EBIT grew 5%. Japan revenue declined 8% and EBIT declined 23%. Western Europe revenue declined 2% as reported but grew 6% currency-neutral; EBIT declined 19%.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $970 million, compared with $1.889 billion in the prior year. Management attributed the decline primarily to working-capital investment: inventory and receivables increased, and working capital used $837 million of cash versus a $30 million source in the prior period.
- Cash and equivalents were $2.132 billion and short-term investments were $2.333 billion at February 28, 2011. Current assets were $10.785 billion and current liabilities were $3.342 billion.
- Inventory was $2.536 billion, up from $2.041 billion at May 31, 2010 and 18% above the prior-year quarter-end. Management cited higher future orders, replenishment needs and inventory pre-builds.
- Long-term debt, including its current portion, totaled $474 million; notes payable were $139 million. No amounts were outstanding under the $1 billion revolving credit facility or the $1 billion commercial paper program. The company reported compliance with credit-facility covenants.
- Nine-month investing cash outflow was $602 million and financing cash outflow was $1.338 billion. Share repurchases were $1.252 billion in the cash-flow statement; the company reported purchasing 16.3 million shares for $1.265 billion during the nine months under its $5 billion program. Dividends declared were $0.31 per share for the quarter.
Changes, outlook and risks
- Growth was led by footwear and apparel; currency-neutral NIKE Brand revenue increased 9% for both the quarter and nine-month period. Direct-to-Consumer revenue grew 18% for the quarter and 14% year to date; comparable store sales rose 11% and 10%, respectively.
- Quarter gross margin pressure came mainly from higher product input and transportation costs and a lower licensee-revenue mix. Management expected these pressures, including unfavorable currency effects and freight costs, to continue for the remainder of fiscal 2011.
- Management expected the fiscal 2011 effective tax rate to be in line with the nine-month rate of 25.7%. Futures and advance orders for NIKE Brand footwear and apparel scheduled for March–July 2011 were up 9% at prior-year exchange rates, or 11% at forecast exchange rates. The company cautioned that futures orders are not necessarily indicative of actual revenue growth.
- Following the March 11, 2011 earthquake and tsunami in Japan, NIKE reported no material damage to its Japanese organization or assets but anticipated lower Japan revenue and profits for the remainder of fiscal 2011 and into fiscal 2012. The effects of infrastructure damage, consumer confidence, power disruptions and industry shutdowns remained uncertain.
- Endorsement commitments totaled approximately $4.350 billion and other commitments $389 million. Letters of credit outstanding were $77 million. Gross unrecognized tax benefits were $273 million; management said they could decrease by up to $62 million within 12 months as examinations are resolved or statutes expire.
- Management stated that cash, short-term investments, operating cash generation and access to external funding should meet foreseeable operating and capital needs. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Key facts for investors to verify
- Whether margin pressure from input costs, freight and currencies persists, and how it affects profitability.
- Whether the elevated inventory and receivables convert into sales and cash flow without increased discounting or obsolescence.
- Whether futures-order growth translates into shipments and revenue, given management’s stated limitations on its predictive value.
- The financial impact of the Japan earthquake and related disruptions on the Japanese business and fiscal 2011–2012 results.
- Share-repurchase pace, remaining authorization and cash returned through dividends relative to operating cash generation.
- Developments in tax examinations and the possible resolution of unrecognized tax benefits and related interest and penalties.