NIKE, Inc. 10-Q Summary: Quarter Ended November 30, 2003
Business Context and Reporting Period
This Form 10-Q covers the second quarter and first six months of fiscal year 2004, ending November 30, 2003. NIKE, Inc. designs, distributes, and markets athletic footwear, apparel, and equipment globally. A significant corporate event during this period was the acquisition of Converse Inc. on September 4, 2003, for approximately $310 million in cash.
Key Financial Metrics
| Metric | Q2 2004 (3 Months) | Q2 2003 (3 Months) | YTD 2004 (6 Months) | YTD 2003 (6 Months) |
|---|---|---|---|---|
| Revenues | $2,837.1 million | $2,514.7 million | $5,862.0 million | $5,311.0 million |
| Gross Margin | $1,199.6 million (42.3%) | $1,010.1 million (40.2%) | $2,501.1 million (42.7%) | $2,167.2 million (40.8%) |
| Net Income | $179.1 million | $152.0 million | $440.3 million | $103.1 million* |
| Diluted EPS | $0.66 | $0.57 | $1.64 | $0.39* |
| Cash from Operations (YTD) | -- | $769.1 million | $400.0 million | |
| Total Cash & Equivalents | -- | $968.9 million | $555.8 million | |
| Long-Term Debt | -- | $649.6 million | $551.6 million |
*YTD 2003 Net Income and EPS include a $266.1 million cumulative effect of accounting change (FAS 142) related to goodwill impairment.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 13% in Q2 and 10% YTD. International regions contributed significantly, with growth driven largely by favorable currency exchange rates (primarily the Euro) and the inclusion of Converse.
- Margin Expansion: Gross margin percentage improved by 210 basis points in Q2 (40.2% to 42.3%). Drivers included reduced closeout sales, better product mix, lower air freight costs, and favorable currency impacts.
- Expense Increases: Selling and administrative expenses rose 18% in Q2, driven by higher demand creation (advertising and endorsements) and operating overhead. Currency fluctuations accounted for a portion of this increase.
- Acquisition Impact: The Converse acquisition contributed 2 percentage points to Q2 consolidated revenue growth and added $66.7 million to goodwill and $246.2 million to unamortized trademarks.
- Working Capital: Cash provided by operations improved significantly YTD ($769.1M vs $400.0M) due to better net income and a reduction in accounts receivable, contrasting with the prior year's accelerated shipping in Europe.
Guidance, Outlook, and Risks
- Outlook: Management expects the net impact of foreign currency hedge losses and favorable translation to result in a net benefit to fiscal 2004 consolidated net income versus the prior year. Worldwide futures and advance orders for footwear and apparel were 9.7% higher than the prior year period, though management notes this is not necessarily indicative of future revenue growth.
- Capital Allocation: The company continues a $1 billion share repurchase program, having purchased 3.3 million shares for $190.0 million YTD. Dividends were increased to $0.20 per share for the quarter.
- Liquidity: A new 5-year, $750 million revolving credit facility was established in November 2003. The company maintains strong credit ratings (A/A2) and believes cash from operations and external sources are sufficient for foreseeable needs.
- Risks: Key risks include foreign exchange rate fluctuations, intense competition, changes in consumer preferences, and the ability to manage complex supply chain systems. The company also faces potential variability in endorsement contract costs based on athlete performance.
Investor Verification Checklist
- Verify the sustainability of gross margin improvements once currency effects normalize.
- Monitor the integration and performance of the Converse Inc. acquisition.
- Assess the impact of the redistribution strategy with Foot Locker on U.S. footwear volume.
- Review the trajectory of foreign currency hedge losses versus translation gains for the remainder of fiscal 2004.
- Confirm the execution of the $1 billion share repurchase program and its impact on earnings per share.