NIKE, Inc. — Form 10-Q Summary
Business context and period. NIKE reported results for its fiscal second quarter and six months ended November 30, 2015. The filing is unaudited. Results are not necessarily indicative of the full fiscal year. NIKE sells athletic footwear, apparel and equipment through geographic NIKE Brand segments and Converse.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $7.686 billion, up 4% reported and 12% excluding currency effects | $16.100 billion, up 5% reported and 13% excluding currency effects |
| Gross profit / margin | $3.501 billion; 45.6%, up 50 basis points | $7.496 billion; 46.6%, up 70 basis points |
| Net income | $785 million, up 20% | $1.964 billion, up 21% |
| Diluted EPS | $0.45, up 22% | $1.12, up 23% |
| Income before tax | $970 million, up 10% | $2.415 billion, up 15% |
| Effective tax rate | 19.1%, versus 25.4% | 18.7%, versus 23.3% |
Six-month consolidated EBIT was $2.424 billion, up 14%. Selling and administrative expense increased 5% in the quarter and 4% year to date; as a share of revenue it was 33.3% and 31.9%, respectively. Foreign currency translation was a significant headwind: management estimated an unfavorable $109 million impact on quarterly pretax income and $260 million for the six-month period from translation of international profits and year-over-year foreign-currency gains and losses.
Cash flow, balance sheet and capital
- Six-month operating cash flow was $1.036 billion, down from $1.547 billion. Management attributed the decline principally to a $1.401 billion working-capital cash outflow, including a $243 million reduction in cash collateral received from derivative counterparties.
- Investing cash outflow was $697 million, including $615 million of property and equipment additions. Financing cash outflow was $282 million; the period included $981 million of net proceeds from long-term debt issuance.
- At November 30, cash and equivalents were $3.851 billion and short-term investments $2.265 billion. Total cash, equivalents and short-term investments were $6.1 billion; $4.6 billion was held by foreign subsidiaries. Cash includes $725 million of collateral received on hedges.
- Total debt was approximately $2.171 billion, including $2.067 billion long-term debt, $5 million current long-term debt and $99 million notes payable. Long-term debt rose from $1.186 billion at May 31, primarily following issuance of $1.0 billion of 3.875% notes due 2045. NIKE had no borrowings under its $2 billion committed credit facility or commercial-paper program.
- Inventory increased to $4.600 billion from $4.337 billion. The company repurchased 22.1 million shares for $1.240 billion in the first six months and approved a new $12 billion, four-year buyback program to follow completion of its existing program.
Material changes and operating trends
- NIKE Brand revenue grew 13% in constant currency for the quarter. Footwear revenue rose 16% constant currency; apparel rose 10%; equipment declined 1%. Greater China was particularly strong, with revenue up 28% constant currency. Converse revenue declined 5% constant currency.
- Direct-to-consumer (DTC) revenue grew 26% constant currency in the quarter and represented about 24% of NIKE Brand revenue, versus 21% a year earlier. Online sales through NIKE-owned websites grew 49% constant currency.
- Gross-margin expansion reflected higher average selling prices and product mix, partly offset by higher product costs, warehousing and development costs, and unfavorable currency effects. North American liquidation activity also weighed on margins.
- Operating overhead increased with DTC expansion, new stores, infrastructure and digital investment. Demand-creation expense was nearly flat for the quarter; year-to-date expense was lower, partly reflecting prior-year World Cup advertising.
- Operating cash flow was lower despite increased net income, while inventory and capital expenditures increased. Net income also benefited from a lower effective tax rate and $34 million of quarterly other income, including a favorable legal settlement.
Outlook, risks and unusual items
- Management anticipated a full-year fiscal 2016 effective tax rate of approximately 20%.
- NIKE Brand futures orders for delivery December 2015 through April 2016 totaled $12.3 billion, up 15% reported and 20% excluding currency. Management cautioned that futures orders are not necessarily indicative of revenue, given shipment timing, order mix, cancellations, discounts, returns and sales channels not captured in futures orders.
- North American inventory was described as somewhat elevated. Management expected liquidation efforts to pressure NIKE and North America gross margins in the third quarter, with inventory levels expected to normalize over the third and fourth quarters of fiscal 2016.
- Key risks include foreign-exchange movements, consumer demand and changing preferences, competition, inventory and forecasting execution, input-cost inflation, supply-chain and technology disruptions, and international economic and political conditions. Management stated that existing liquidity, operating cash generation and access to external funding should meet foreseeable capital needs.
- Endorsement-contract cash commitments totaled approximately $7.019 billion, including base compensation and minimum guaranteed royalties; actual payments may vary. Letters of credit outstanding were $151 million, and maximum exposure on retained Cole Haan lease guarantees was $20 million.
- Gross unrecognized tax benefits were $479 million, of which $278 million would affect the effective tax rate if recognized. NIKE was contesting a $31 million proposed tax deficiency relating to foreign tax credits and did not expect the matter to have a material financial-statement impact. No material changes to previously disclosed legal proceedings or risk factors were reported.
- NIKE announced a two-for-one stock split in November 2015, payable December 23, 2015; the filing’s share and per-share amounts reflect the split.
Important facts for investors to verify
- Whether elevated North American inventory cleared as expected and whether the projected third-quarter margin pressure and normalization occurred.
- Whether constant-currency growth, futures-order growth and DTC expansion translated into realized sales and sustainable profitability.
- How currency movements, hedge results and collateral requirements affected subsequent earnings and operating cash flow.
- Whether buybacks, endorsement commitments and capital investment remained consistent with cash generation and liquidity.
- Updates to the tax-credit dispute, unrecognized tax benefits and the stated full-year tax-rate outlook.