NIKE, Inc. 10-K Summary: Fiscal Year Ended May 31, 2007
Business Context and Reporting Period
This report covers the fiscal year ended May 31, 2007. NIKE, Inc. is the world's largest seller of athletic footwear and apparel, operating through a portfolio of brands including NIKE, Converse, Cole Haan, Hurley, and NIKE Bauer Hockey. The company designs, develops, and markets products globally, with manufacturing primarily outsourced to independent contractors in Asia. Fiscal 2007 marked the first full year of adoption for FAS 123R (Share-Based Payment), which significantly impacted reported expenses.
Key Financial Metrics
| Metric | Fiscal 2007 | Fiscal 2006 |
|---|---|---|
| Revenues | $16,325.9 million | $14,954.9 million |
| Gross Margin | $7,160.5 million (43.9%) | $6,587.0 million (44.0%) |
| Net Income | $1,491.5 million | $1,392.0 million |
| Diluted EPS | $2.93 | $2.64 |
| Cash Flow from Operations | $1,878.7 million | $1,667.9 million |
| Cash and Equivalents | $1,856.7 million | $954.2 million |
| Long-Term Debt | $409.9 million | $410.7 million |
| Working Capital | $5,492.5 million | $4,733.6 million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 9% to $16.3 billion, driven by growth in all geographic regions and product categories. Currency exchange rates contributed 2 percentage points to this growth.
- Profitability: Net income grew 7% to $1.5 billion. However, excluding the impact of the Converse arbitration settlement and the adoption of FAS 123R, net income grew 11% and diluted EPS grew 15%.
- Expense Impact: Selling and administrative expenses increased 12% to $5.0 billion. This included a $141.9 million pre-tax charge for stock-based compensation due to the adoption of FAS 123R.
- Effective Tax Rate: The effective tax rate decreased to 32.2% from 35.0% in the prior year, primarily due to a finalized European tax agreement.
- Share Repurchases: The company repurchased 22.1 million shares for $975.3 million during the fiscal year.
Guidance, Outlook, and Risks
- Outlook: Management aims for high single-digit revenue growth and mid-teens earnings per share growth long-term. Futures and advance orders for the period June through November 2007 were up nearly 12% compared to the prior year.
- Key Risks:
- Supply Chain: Reliance on independent contractors outside the U.S. exposes the company to labor, political, and trade risks (e.g., tariffs, quotas).
- Currency: Significant exposure to foreign currency fluctuations, particularly the Euro and Yen, which impacts both revenue translation and product costs.
- Consumer Preferences: Rapid changes in fashion and sports trends require constant innovation; failure to anticipate shifts could lead to excess inventory.
- Intellectual Property: Protection of trademarks and patents is critical, with ongoing litigation risks regarding counterfeits.
- Unusual Items: The fiscal 2007 results included a $14.2 million benefit from the settlement of a Converse arbitration dispute. The prior year included a $51.9 million charge related to the same dispute.
Investor Verification Checklist
- FAS 123R Impact: Verify the sustainability of earnings growth by analyzing results excluding the one-time $141.9 million stock-based compensation charge.
- Converse Arbitration: Confirm that the $14.2 million settlement benefit is non-recurring and does not distort the underlying profitability of the "Other" segment.
- Inventory Levels: Monitor inventory balances ($2.12 billion) relative to sales growth to assess potential markdown risks or supply chain bottlenecks.
- Foreign Exchange Sensitivity: Review hedging strategies and the impact of currency fluctuations on future margins, given the 53% of sales generated outside the U.S.
- Share Repurchase Program: Track the remaining capacity of the $3.0 billion share repurchase program authorized in June 2006.