NKE

Business Context and Reporting Period

This Form 10-Q covers NIKE, Inc. for the quarter and nine months ended February 28, 2003. The company designs, produces, markets, and sells sports and fitness footwear, apparel, and equipment globally. The reporting period includes the adoption of SFAS No. 142 regarding goodwill and intangible assets, effective June 1, 2002, which resulted in a significant non-cash impairment charge.

Key Financial Metrics

Note: Gross margin calculated as (Revenues - Cost of Sales) / Revenues. Total Debt includes current portion of long-term debt ($205.6M) and long-term debt ($542.8M).

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 6% in the quarter and 7% year-to-date compared to the prior year, driven primarily by international growth and favorable currency exchange rates (specifically the Euro).
• Accounting Change Impact: A one-time, non-cash charge of $266.1 million was recorded for the cumulative effect of adopting SFAS 142. This charge relates to the impairment of goodwill and trademarks for the Bauer NIKE Hockey and Cole Haan reporting units.
• Segment Performance:
  • EMEA: Revenue grew 8% (quarter) and 19% (YTD), though pre-tax income declined in the quarter due to supply chain system implementation timing.
  • Asia Pacific: Revenue grew 17% (quarter) and 18% (YTD) with strong growth in China, Korea, and Japan.
  • USA: Revenue grew 3% in the quarter but declined 1% YTD. Footwear sales declined due to lower orders from Foot Locker and a shift in product mix toward lower-priced classic and kids' models.
  • Other: Revenues grew 10% (quarter) driven by the acquisition of Hurley, offset by weaker NIKE Golf performance.
• Expenses: Selling and administrative expenses increased as a percentage of revenue (31.4% vs 30.2% in the prior quarter) due to higher demand creation costs (including a new Manchester United endorsement) and operating overhead.

Guidance, Outlook, and Risks

• Outlook: Management has not revised revenue and profit growth goals for the remainder of fiscal 2003 despite global uncertainty (e.g., conflict in Iraq). Futures orders for footwear and apparel for the next five months are 5.8% higher than the prior year.
• U.S. Footwear Strategy: The company expects sales to Foot Locker to remain below prior year levels through the first half of fiscal 2004. Management is pursuing incremental sales with other retailers to offset this decline.
• Foreign Exchange: The strengthening Euro continues to drive reported revenue growth but also increases reported expenses for Euro-denominated costs. Hedge losses on intercompany charges are expected to continue in the fourth quarter.
• Liquidity: The company maintains strong liquidity with $443.2 million in cash and equivalents. It has a $1 billion share repurchase program (10.9 million shares repurchased to date) and access to $1 billion in committed credit facilities and a $1 billion shelf registration for debt issuance.
• Risks: Key risks include global economic conditions, currency fluctuations, supply chain disruptions, and the ability to realign product distribution in the U.S. market.

Investor Verification Checklist

• Impairment Charge: Verify the details of the $266.1 million goodwill and trademark impairment charge related to Bauer and Cole Haan under SFAS 142.
• Foot Locker Exposure: Assess the long-term impact of reduced orders from Foot Locker on U.S. footwear revenue and the success of diversification efforts.
• Currency Sensitivity: Monitor the impact of the strong Euro on both revenue translation and operating expenses, as well as the effectiveness of hedging strategies.
• Supply Chain Implementation: Review the resolution of supply chain system issues in EMEA and their effect on inventory levels and shipment timing.
• Share Repurchases: Track the pace of the $1 billion share repurchase program and its funding source (operating free cash flow).