NIKE, Inc. Form 10-Q Summary
Business context and period: NIKE designs, markets and sells athletic footwear, apparel, equipment and accessories worldwide through wholesale partners and NIKE Direct. This unaudited report covers the first quarter of fiscal 2021, the three months ended August 31, 2020, compared with the three months ended August 31, 2019.
Financial and operating highlights
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $10.594 billion | $10.660 billion |
| Gross profit / gross margin | $4.741 billion / 44.8% | $4.871 billion / 45.7% |
| Selling and administrative expense | $2.975 billion | $3.328 billion |
| Income before income taxes | $1.715 billion | $1.561 billion |
| Net income | $1.518 billion | $1.367 billion |
| Diluted EPS | $0.95 | $0.86 |
| Cash provided by operations | $882 million | $394 million |
- Revenue declined 1% reported and was flat excluding currency changes. Gross margin fell 90 basis points. Net income rose 11%, and diluted EPS rose 10%; lower selling and administrative expense was the main support to pretax income despite lower revenue and gross margin.
- NIKE Direct revenue increased 12% reported (13% currency-neutral); NIKE Brand digital commerce grew 83%. Wholesale revenue declined 7%. Footwear revenue rose 4% reported, while apparel fell 8% and equipment fell 17%.
- Regional revenue was stronger in EMEA (+5%) and Greater China (+6%) and weaker in North America (-2%) and APLA (-18%) on a reported basis. Converse revenue increased 1% and EBIT increased 22%.
- Operating cash flow increased year over year, while investing activities used $889 million, mainly reflecting net purchases of short-term investments. Financing activities used $248 million; NIKE made no share repurchases in the quarter, compared with $999 million in the prior-year quarter.
- At August 31, cash and equivalents were $8.148 billion and short-term investments were $1.332 billion. Long-term debt was $9.408 billion, with a $1 million current portion; notes payable were $137 million. Inventory was $6.705 billion, down from $7.367 billion at May 31, 2020. Management said liquidity sources were sufficient for foreseeable needs; no amounts were outstanding under committed credit facilities.
Material changes, outlook and risks
- COVID-19 continued to affect store traffic, wholesale shipments and operations. Nearly all NIKE-owned stores were open in North America, EMEA and Greater China, and about 90% in APLA, but comparable store sales declined in several regions. Management cautioned that the recovery remained uncertain and dynamic.
- Gross margin was pressured by promotions to reduce excess inventory, higher product costs including North American tariffs, and foreign exchange, partly offset by higher full-price selling prices and lower other costs. Demand creation expense fell 33%, reflecting reduced advertising, sports marketing and retail presentation costs, partly offset by increased digital marketing.
- NIKE announced Consumer Direct Acceleration, emphasizing digital and owned retail, a consumer-focused product organization, and investment in data, analytics and inventory capabilities. Workforce and operating-model changes are expected to produce approximately $315 million of pretax charges, mostly employee termination costs; most were expected to be recognized in Q2, with cash expenditures during fiscal 2021. Future wage-related savings are expected to be reinvested.
- NIKE agreed to sell its Brazil, Argentina, Chile and Uruguay NIKE Brand businesses as it shifts to a distributor model in those markets. The transactions were expected to close before January 1, 2021; the Brazil transaction was subject to antitrust approval. The company had recognized $438 million of total expected transaction losses, largely related to foreign-currency translation losses.
- COVID-19 may adversely affect revenue, profitability, inventory, wholesale customer payment terms, sales-related reserves and the effective tax rate. Other notable exposures include foreign exchange movements, tariffs, and tax matters: unrecognized tax benefits totaled $860 million, and the company disclosed an IRS audit of fiscal 2017–2019 and a Netherlands State Aid investigation it believes is without merit.
- No specific revenue or earnings guidance for the remainder of fiscal 2021 is provided in the filing text; management describes continued uncertainty rather than quantified guidance.
Important facts for investors to verify
- Whether the strong digital growth and NIKE Direct gains can offset weaker wholesale demand and store traffic as COVID-19 conditions evolve.
- Whether inventory reductions are sustainable without further discounting and gross-margin pressure.
- The timing, final costs and realized savings from the approximately $315 million restructuring, and completion and final economics of the APLA distributor transactions.
- Cash conversion and working-capital trends, particularly receivables, and the company’s capital allocation choices while repurchases are suspended.
- Developments in tax audits and disputes, including the Altera-related reserve and Netherlands investigation, and the effects of currency and tariff movements.