NIKE, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended November 30, 2017 (fiscal 2018); comparisons are with the corresponding prior-year periods. Amounts are in U.S. dollars.
Business context and performance
NIKE designs, markets and sells athletic footwear, apparel, equipment and related products worldwide. Management’s Consumer Direct Offense aims to accelerate innovation, use digital channels and build closer consumer connections. The company cited a changing North American retail landscape, store closures and promotional activity, alongside international market momentum.
Key financial results
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $8.554 billion, up 5% reported and 3% currency-neutral | $17.624 billion, up 2% reported and 2% currency-neutral |
| Gross profit / gross margin | $3.678 billion / 43.0%, down 120 basis points | $7.640 billion / 43.3%, down 160 basis points |
| Net income | $767 million, down 9% | $1.717 billion, down 18% |
| Diluted EPS | $0.46, down 8% | $1.03, down 16% |
| Selling and administrative expense | $2.768 billion, up 10%; 32.4% of revenue | $5.624 billion, up 4%; 31.9% of revenue |
| Operating cash flow | $1.898 billion for the six months, versus $1.770 billion |
Quarterly income before tax fell 21% to $879 million; for the six months it fell 19% to $1.951 billion. Revenue growth did not translate into earnings growth, principally because of lower gross margins, higher selling and administrative costs, and less favorable foreign-currency results. Quarter and six-month effective tax rates were 12.7% and 12.0%, respectively.
NIKE Brand revenue rose 5% in the quarter and 3% year to date. NIKE Direct grew 16% and 13% on a reported basis, respectively; currency-neutral growth was 15% and 13%. Digital commerce sales grew 29% in the quarter and 24% for the six months. Converse revenue declined 2% in the quarter and 10% year to date on a reported basis; its EBIT declined 38% and 41%, respectively.
Regional revenue was mixed: North America declined 5% in the quarter and 4% year to date; EMEA grew 19% and 10%; Greater China grew 16% and 12%; and Asia Pacific & Latin America grew 6% and 5%. Reported growth rates include currency effects.
Balance sheet, liquidity and capital allocation
- At November 30, 2017, cash and equivalents were $4.304 billion and short-term investments were $2.085 billion, totaling $6.389 billion. The company reported $5.7 billion of that liquidity held by foreign subsidiaries.
- Current assets were $16.582 billion and current liabilities $6.750 billion. Inventory was $5.326 billion, up from $5.055 billion at May 31, 2017.
- Debt included $3.472 billion of long-term debt, $10 million current long-term debt and $1.229 billion of notes payable. Commercial paper borrowings were $1.224 billion at a weighted-average rate of 1.21%.
- Six-month capital expenditures were $498 million. Financing activities used $1.214 billion, including $1.776 billion of share repurchases and $595 million of dividends paid.
- NIKE repurchased 32.0 million shares for $1.751 billion in the six months. Under its four-year, $12 billion program, cumulative repurchases were $6.189 billion at November 30, 2017.
Management said existing cash, investments, operating cash flow and access to credit should be sufficient for foreseeable capital needs. It reported no borrowings under its $2 billion committed credit facility and compliance with its covenants.
Changes, outlook and risks
- Gross margin was pressured by unfavorable foreign exchange rates and hedges, higher product costs and lower NIKE Direct margins. Foreign exchange effects reduced gross margin by approximately 120 basis points in both the quarter and six-month period.
- Quarterly demand creation expense rose 15%, primarily on higher sports marketing and advertising. Operating overhead increased 8% in both the quarter and six-month period; year-to-date expense included one-time wage-related costs tied to the organizational realignment and investments in NIKE Direct.
- North America’s wholesale revenue weakness and Converse’s U.S. demand and inventory-management challenges were notable offsets to international and direct-channel growth. Management gave no specific consolidated revenue or earnings guidance in the provided filing text.
- After the quarter, the Tax Cuts and Jobs Act was enacted on December 22, 2017. NIKE anticipated a material, one-time income tax expense in fiscal Q3, mainly from the transition tax on accumulated foreign earnings, repeal of foreign tax credits and remeasurement of deferred tax balances; the amount was not yet quantifiable.
- Foreign exchange remains a significant exposure: NIKE reported $11.2 billion notional of designated foreign-currency cash-flow hedges and $10.3 billion of undesignated derivatives. It posted $127 million in cash collateral at period end.
- Other disclosed risks include competition, changing consumer preferences, inventory and demand forecasting, supply-chain and input-cost pressures, technology and data-security risks, international-market conditions and tax-law changes. The filing reported no material change in risk factors or material legal-proceeding developments.
Most important facts for investors to verify
- Whether revenue growth, particularly in NIKE Direct and international markets, can offset North American wholesale weakness and Converse declines.
- Whether gross-margin pressure from currency, product costs, discounting and direct-channel mix eases, and how that affects earnings conversion.
- The final fiscal Q3 tax-reform charge and the ongoing effects of the new tax rules on cash, earnings and foreign-held funds.
- Inventory trends, promotional conditions and the results of NIKE’s consumer-direct investments and organizational realignment.
- Foreign-exchange exposure, hedge-related earnings volatility, commercial-paper borrowing levels and continued share repurchases.