NIKE, Inc. — Q1 Fiscal 2012 Form 10-Q
Reporting period: Three months ended August 31, 2011; comparisons are to the three months ended August 31, 2010 unless noted. Financial statements are unaudited. Balance-sheet comparisons are to May 31, 2011.
Business context and results
NIKE designs, markets and sells athletic footwear, apparel and equipment. Its reportable NIKE Brand segments are geographic; “Other Businesses” includes Cole Haan, Converse, Hurley, NIKE Golf and Umbro.
- Revenue was $6.081 billion, up 18% reported and 11% excluding currency changes. NIKE Brand revenue rose 12% currency-neutral; Other Businesses revenue rose 8%.
- Net income was $645 million, up 15%. Diluted EPS was $1.36, up 19%; basic EPS was $1.39. The faster EPS growth reflected fewer diluted shares, primarily from repurchases.
- Gross profit was $2.693 billion, up 11%, but gross margin fell 270 basis points to 44.3%. Selling and administrative expense rose 9% to $1.823 billion, while its share of revenue declined to 30.0% from 32.3%.
- Income before taxes and consolidated EBIT were $852 million, up 13%. The effective tax rate declined to 24.3% from 26.0%.
- Demand creation expense was $692 million, up 2%; operating overhead was $1.131 billion, up 14%. Management attributed overhead growth mainly to Direct to Consumer investment, performance-based compensation and personnel costs.
Cash flow, balance sheet and capital allocation
- Cash from operations was $87 million, down from $212 million. Working capital consumed $698 million, including a $398 million inventory cash outflow. Inventory on the balance sheet increased to $3.107 billion from $2.715 billion at May 31.
- Investing activities provided $317 million, chiefly reflecting net maturities and sales of short-term investments; the comparable prior-year period used $684 million. Capital expenditures were $114 million.
- Financing activities used $744 million, including $626 million for repurchases and $145 million of dividends paid. Cash and equivalents fell by $347 million to $1.608 billion.
- At August 31, current assets were $11.039 billion and current liabilities $3.760 billion. Cash plus short-term investments totaled $3.700 billion. Debt comprised $116 million current and $238 million long-term debt, plus $164 million notes payable.
- NIKE repurchased 7.7 million shares for approximately $649 million during the quarter. Since the December 2009 start of its $5 billion program, it had repurchased 38.0 million shares for approximately $3.0 billion. The declared dividend was $0.31 per share, versus $0.27.
- The $1 billion revolving credit facility and $1 billion commercial paper program had no borrowings outstanding. Management said cash, short-term investments, operating cash flow and access to external funding should meet foreseeable operating and capital needs.
Changes by market and business
- North America revenue increased 15% currency-neutral and EBIT rose 21% to $534 million. Emerging Markets revenue increased 24% currency-neutral and EBIT rose 53% to $190 million.
- Greater China revenue increased 9% currency-neutral, but EBIT rose only 4% to $171 million; apparel sales declined currency-neutral, partly due to lower sell-through and higher returns.
- Western Europe revenue was flat currency-neutral, while EBIT fell 21% to $223 million. Management cited lower gross margin, increased expenses, product-delivery delays and a tough prior-year World Cup comparison.
- Other Businesses revenue increased 8% currency-neutral, but EBIT fell 21% to $86 million. Growth at Converse and NIKE Golf offset declines at Umbro and Hurley.
- Direct to Consumer revenue grew 21% currency-neutral and was approximately 17% of NIKE Brand revenue, compared with 16% in fiscal 2011. Comparable store sales grew 14%.
Outlook, risks and unusual items
- Management expected gross margins to remain under pressure for the rest of fiscal 2012, particularly from rising product input costs, which could outweigh planned price increases and cost-efficiency initiatives. Higher product costs and a greater mix of close-out sales had already reduced quarterly gross margin by approximately 220 and 60 basis points, respectively.
- NIKE Brand footwear and apparel futures and advance orders for September through January 2012 were up 16% reported and 13% excluding currency changes. Management cautioned that futures orders are not necessarily indicative of revenue because of shipment timing, order mix, cancellations, discounts and sales not represented by futures orders.
- Key disclosed risks include consumer demand and economic conditions, competition, forecasting and inventory management, higher materials and freight costs, foreign-exchange movements, international operations, supply and delivery disruptions, and access to credit markets. The filing reported no material change in risk factors from the latest Form 10-K.
- Foreign-currency effects were significant: translation increased reported revenue by approximately $318 million and income before taxes by approximately $63 million year over year. Management estimated the combined translation and foreign-currency-related net-loss change increased year-over-year income before taxes by approximately $32 million.
- Gross unrecognized tax benefits were $220 million, excluding interest and penalties; up to $62 million could reasonably decrease within 12 months as examinations are resolved or statutes expire. The filing reported $93 million of accrued interest and penalties related to uncertain tax positions.
- Letters of credit outstanding totaled $93 million, primarily for inventory purchases. No significant new developments in previously reported legal proceedings or contractual obligations were disclosed. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether inventory growth and weak operating cash generation reflect planned preparation for higher demand or create elevated inventory and markdown risk.
- Whether gross-margin pressure from input costs, freight and close-out sales persists, and whether price increases and efficiency measures offset it.
- Whether futures-order growth converts into sales; the filing expressly cautions that futures are not a reliable standalone revenue forecast.
- Whether Western Europe’s declining EBIT and Greater China’s apparel weakness improve in subsequent periods.
- How repurchases and dividends are funded relative to operating cash flow, liquidity needs and the remaining share-repurchase authorization.
- Developments in tax examinations, uncertain tax positions, foreign-exchange exposure and access to capital markets.