NIKE, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended May 31, 2016. The filing is an FY2016 annual report, not an FY2015 Q4 filing; it reports fourth-quarter results for the three months ended May 31, 2016. Unless otherwise noted, financial amounts are in U.S. dollars.
Business context and reporting period
NIKE designs, markets and sells athletic footwear, apparel, equipment, accessories and services globally. It sells through wholesale customers, NIKE-owned Direct to Consumer (DTC) stores and websites, distributors and licensees. Most products are made by independent contractors. NIKE Brand operations are reported across six geographies; Converse is a separate reportable segment.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $32.376 billion | $30.601 billion |
| Gross profit / gross margin | $14.971 billion / 46.2% | $14.067 billion / 46.0% |
| Income before tax | $4.623 billion | $4.205 billion |
| Net income | $3.760 billion | $3.273 billion |
| Diluted EPS | $2.16 | $1.85 |
| Cash from operations | $3.096 billion | $4.680 billion |
- Revenue increased 6% as reported and 12% excluding currency effects; net income rose 15% and diluted EPS rose 17%. EBIT increased 10% to $4.642 billion.
- Gross margin expanded 20 basis points. Higher full-price selling prices and DTC growth were partly offset by higher product costs, off-price sales, currency effects and Converse mix.
- DTC revenue was $7.857 billion, up 18% reported and 25% currency-neutral, and represented about 26% of NIKE Brand revenue. Online sales through NIKE-owned websites increased 51%.
- At May 31, cash and equivalents were $3.138 billion and short-term investments were $2.319 billion. The current ratio was 2.8; working capital was $9.667 billion.
- Long-term debt was $2.010 billion, plus $44 million current portion. Cash and short-term investments exceeded reported debt. NIKE had no outstanding borrowings under its $2 billion committed credit facility or $2 billion commercial paper program.
- Capital expenditures were $1.143 billion. Repurchases totaled $3.238 billion and dividends paid were $1.022 billion during FY2016.
- Inventory rose to $4.838 billion from $4.337 billion; inventory turns declined to 3.8 from 4.0.
Material changes versus comparable periods
- Growth was broad across NIKE Brand geographies and most major categories. Greater China revenue grew 23% reported (27% currency-neutral); Western Europe grew 3% reported (14% currency-neutral). Emerging Markets fell 5% reported but grew 13% currency-neutral.
- NIKE Brand footwear revenue rose 8% reported and 15% currency-neutral; apparel rose 5% reported and 11% currency-neutral. Equipment revenue declined 8% reported.
- Converse revenue declined 1% reported, while EBIT declined 6%. Management cited currency effects, weaker licensed-market sales and lower gross margin.
- Cash from operations fell $1.584 billion year over year, principally reflecting working-capital movements, including lower cash collateral received from hedging counterparties. Investing cash use increased to $1.034 billion, including higher capital spending and net purchases of short-term investments.
- The effective tax rate fell to 18.7% from 22.2%, principally as a greater proportion of earnings came from lower-tax foreign operations. Share repurchases reduced weighted-average diluted shares by about 1%.
- In Q4, revenue was $8.244 billion versus $7.779 billion, while net income was $846 million versus $865 million. Diluted EPS was $0.49 in both quarters.
Outlook, management commentary, risks and contingencies
- Management’s long-term goals through FY2020, on average annually, are high-single-digit to low-double-digit revenue growth, mid-teens EPS growth, a high-twenties to low-thirties return on invested capital, and free cash flow growing faster than net income. These are goals, not a specific FY2017 forecast.
- NIKE expected FY2017 investment of approximately 4% of revenue, including infrastructure, DTC stores and digital capabilities. Futures orders for NIKE Brand footwear and apparel scheduled for June–November 2016 were $14.9 billion, up 8% reported and 11% excluding currency effects; the company cautioned that futures orders are not necessarily indicative of actual revenue.
- Foreign currency was a significant headwind: translation reduced reported revenue by about $1.985 billion and income before tax by about $449 million in FY2016. Management estimated combined translation and year-over-year currency-related gains and losses adversely affected pretax income by approximately $423 million.
- Key operating risks include intense competition and changing consumer preferences; forecasting and inventory risk; currency volatility; reliance on concentrated independent manufacturers (five footwear contractors supplied about 69% of NIKE Brand footwear production); international trade restrictions; supply-chain, logistics and technology disruptions; data security; and brand, endorsement and product-quality risks.
- NIKE contested an IRS notice proposing $223 million of additional tax for FY2012 related to foreign tax credits, in addition to a previously disclosed $31 million FY2011 notice. The company said it did not expect the outcome to have a material financial statement impact; no payment was due until final resolution. No material pending legal proceedings were otherwise reported.
- About $10.7 billion of foreign earnings were designated indefinitely reinvested offshore. The company estimated a potential net deferred U.S. tax liability of approximately $3.6 billion if those earnings were repatriated, assuming full use of foreign tax credits.
- Management and the auditor concluded internal control over financial reporting was effective as of May 31, 2016. The filing states there were no material pending legal proceedings beyond routine business matters.
Important facts for investors to verify
- Whether DTC growth and full-price selling trends can continue to offset currency pressure, higher product costs and discounting.
- Inventory levels, inventory turns and North America’s excess-inventory clearance, which weighed on margin.
- Cash conversion and working-capital drivers behind the decline in operating cash flow, including the impact of hedge collateral movements.
- Execution of the FY2020 growth and return goals, and whether planned FY2017 investment generates adequate returns.
- Progress and potential exposure in the IRS foreign-tax-credit dispute, along with the consequences of any future repatriation of offshore earnings.
- Supplier concentration, currency exposure and the reliability of futures orders as indicators of future sales.