NIKE, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2015 (not calendar-year 2014). The filing also reports unaudited fiscal fourth-quarter results. NIKE designs, markets and sells athletic footwear, apparel, equipment and related products through wholesale accounts and direct-to-consumer (DTC) stores and digital channels. Nearly all footwear and apparel is made by independent contractors outside the United States.
Financial performance and position
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $30.601 billion | $27.799 billion | +10% reported; +14% currency-neutral |
| Gross profit / gross margin | $14.067 billion / 46.0% | $12.446 billion / 44.8% | Margin +120 bps |
| Selling and administrative expense | $9.892 billion (32.3% of revenue) | $8.766 billion (31.5%) | +13%; ratio +80 bps |
| EBIT | $4.233 billion | $3.577 billion | +18% |
| Net income from continuing operations | $3.273 billion | $2.693 billion | +22% |
| Diluted EPS from continuing operations | $3.70 | $2.97 | +25% |
| Effective tax rate | 22.2% | 24.0% | Down 180 bps |
Fourth-quarter revenue was $7.779 billion versus $7.425 billion a year earlier; net income was $865 million versus $698 million, and diluted EPS was $0.98 versus $0.78. Management said a tax-expense adjustment in the quarter corrected accruals from earlier fiscal 2015 quarters; it did not affect full-year net income or tax expense and was not material to prior interim periods.
Footwear revenue increased 13% to $18.318 billion; apparel rose 6% to $8.636 billion; equipment declined 2% to $1.632 billion. Converse revenue grew 18% to $1.982 billion, while Converse EBIT rose 4% to $517 million. NIKE Brand DTC revenue grew 25% to $6.634 billion and represented about 23% of NIKE Brand revenue, up from 20%; online sales through NIKE-owned websites rose 59%. All NIKE Brand geographies recorded currency-neutral revenue growth, although reported EBIT fell in Central & Eastern Europe, Japan and Emerging Markets.
Gross-margin expansion reflected higher average selling prices and DTC growth, partly offset by higher product costs, labor inflation and air freight costs. Selling and administrative expense grew faster than revenue, mainly from DTC, infrastructure, digital and consumer-engagement investment, and performance-based compensation. Foreign-exchange translation reduced reported revenue by an estimated $1.171 billion and income before tax by about $221 million.
Cash provided by operations was $4.680 billion, up from $3.013 billion. Capital expenditures were $963 million. Cash and equivalents were $3.852 billion; short-term investments were $2.072 billion; working capital was $9.642 billion. Current ratio was 2.5, compared with 2.7. Long-term debt was $1.079 billion, with $107 million current; the company had no borrowings under its $1 billion committed credit facility or commercial-paper program. Cash, equivalents and short-term investments totaled about $5.9 billion, including $4.2 billion held by foreign subsidiaries and $968 million of cash collateral received from hedge counterparties.
NIKE repurchased 29.0 million shares for $2.534 billion during the year and paid $899 million in dividends. Dividends declared per share increased to $1.08 from $0.93. Inventory increased to $4.337 billion from $3.947 billion; management cited business growth and West Coast port delays. Inventory turns declined to 4.0 from 4.1.
Material changes versus prior year
- Reported revenue rose 10%; currency-neutral growth was 14%, with particularly strong growth in Western Europe, Greater China and Converse.
- Gross margin expanded 120 basis points for a third consecutive year, reaching 46.0%; higher selling and administrative expense partly offset the improvement.
- DTC accelerated: currency-neutral revenue growth was 29%, comparable-store sales grew 16%, and online sales grew 59%.
- Operating cash flow increased substantially, while cash and equivalents rose to $3.852 billion from $2.220 billion.
- Foreign-exchange results in other income/expense improved from $103 million of expense to $58 million of income, but currency translation remained a material headwind.
- Prior-period cash-flow classifications were revised for immaterial misstatements: operating cash flow increased by $10 million for FY2014 and $64 million for FY2013; total cash changes and ending cash were unaffected.
Outlook, commentary, risks and contingencies
- Management’s long-term financial goals are high-single-digit revenue growth, mid-teens EPS growth, strong return on invested capital and accelerated cash flow. These are long-term goals, not specific FY2016 guidance.
- For FY2016, NIKE anticipated investing approximately 4% of revenue in infrastructure, including corporate facilities, new DTC stores and digital capabilities.
- Worldwide NIKE Brand footwear and apparel futures orders scheduled for June–November 2015 were $13.5 billion, up 2% reported and 13% excluding currency changes. The company cautioned that futures orders are not a reliable forecast of actual revenue because of cancellations, shipment timing, discounts, returns and sales outside the futures program.
- Key risks include fast-changing consumer tastes and intense competition; currency volatility; dependence on a concentrated base of contract footwear manufacturers; trade restrictions, sourcing and shipping disruption; inventory forecasting; retail and digital execution; data security; and compliance by contractors with labor, safety and product standards.
- West Coast port congestion caused product delays and higher air-freight costs. Emerging Markets results faced currency weakness and local economic pressures; Mexico also experienced inventory liquidation following distribution-center transition issues.
- Contractual commitments totaled $15.473 billion, including $6.192 billion for endorsement contracts, $2.974 billion for operating leases and $3.735 billion in product purchase obligations. Unrecognized tax benefits were $438 million, excluding interest and penalties; the company reported no material pending litigation and did not expect identified legal matters to materially affect results.
- About $8.3 billion of foreign earnings were designated indefinitely reinvested; estimated potential net deferred U.S. tax liability if repatriated was approximately $2.7 billion, assuming full use of foreign tax credits. A foreign tax holiday contributed $174 million of tax benefit in FY2015 and is set to expire in 2021, subject to extension or early termination conditions.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of May 31, 2015.
Important facts for investors to verify
- Whether currency-neutral growth, reported results and the $1.171 billion revenue translation headwind are interpreted consistently, including the effect of hedging.
- Whether DTC growth and new-store investment can continue to deliver returns while operating overhead grows faster than revenue.
- Inventory quality and sell-through after the port delays, and whether the futures-order backlog converts into shipments and sales.
- Exposure to major footwear manufacturers, overseas sourcing, freight costs, trade measures and labor-cost inflation.
- The sustainability of earnings growth given the lower tax rate, favorable audit resolutions, foreign tax-holiday benefits and foreign-earnings repatriation considerations.
- Cash-flow quality, including the $968 million of received hedge collateral, and capital allocation among repurchases, dividends, investment and debt.