Business Context and Reporting Period
This Form 10-Q covers NIKE, Inc.'s operations for the quarter and six months ended November 30, 2002 (Fiscal Year 2003). The company designs, produces, markets, and sells sports and fitness footwear, apparel, and equipment globally. A significant event during this period was the adoption of FAS 142 (Goodwill and Other Intangible Assets) effective June 1, 2002, which resulted in a non-cash impairment charge.
Key Financial Metrics
| Metric | Q2 FY2003 | Q2 FY2002 | 6 Months FY2003 | 6 Months FY2002 |
|---|---|---|---|---|
| Revenues | $2,514.7M | $2,336.8M | $5,311.0M | $4,950.5M |
| Net Income | $152.0M | $129.3M | $103.1M | $328.5M |
| Diluted EPS | $0.57 | $0.48 | $0.39 | $1.21 |
| Gross Margin % | 40.2% | 38.3% | 40.7% | 38.8% |
| Cash from Operations (6mo) | $400.0M (vs $447.3M prior year) | |||
| Cash & Equivalents | $555.8M (Nov 30, 2002) | |||
| Total Debt (Current + Long-term) | $997.3M (Nov 30, 2002) |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 8% in Q2 and 7% year-to-date (YTD), driven primarily by international regions which grew 21% in Q2. The U.S. region declined 8% in Q2 due to supply chain delays, port labor disputes, and a shift in product mix.
- Profitability: Q2 Net Income rose 18% to $152.0M. However, YTD Net Income fell 69% to $103.1M due to a one-time $266.1M cumulative effect of accounting change charge related to FAS 142 adoption.
- Excluding Accounting Change: Income before the accounting change increased 15% in Q2 and 11% YTD. Gross margins improved 1.9 percentage points in both periods due to lower sourcing costs and a favorable mix of classic/kids footwear.
- Expenses: Selling and administrative expenses increased as a percentage of revenue (30.2% in Q2 vs 29.0% prior year) due to higher demand creation spending (e.g., Manchester United endorsement) and overhead from new retail stores.
Guidance, Outlook, and Risks
- Foot Locker Realignment: Management expects U.S. sales to Foot Locker to remain below prior year levels through Q1 FY2004. Foot Locker will no longer distribute elite U.S. footwear products after February 2003. Nike expects to offset this loss over time through other retailers.
- Order Trends: Worldwide futures and advance orders for footwear and apparel (Dec 2002–Apr 2003) were 2.4% higher than the prior year, though management notes this is not necessarily indicative of future revenue growth due to order mix and cancellation risks.
- Legal Contingencies: Nike agreed to settle securities class action lawsuits for $8.9 million, funded by D&O insurance. The company continues to appeal the Kasky v. Nike case pending Supreme Court review.
- Accounting Risks: Future goodwill impairment charges may occur if estimated fair values of reporting units decline. The company is also evaluating the impact of FAS 148 regarding stock-based compensation.
Investor Verification Checklist
- Foot Locker Impact: Verify the extent of revenue loss from Foot Locker and the success of alternative distribution channels in the U.S. region.
- International Growth Sustainability: Assess whether the 21% international revenue growth is sustainable or inflated by the acceleration of Q3 orders into Q2 due to supply chain system implementation in Europe.
- Inventory Levels: Monitor inventory balances ($1,386.9M) relative to sales velocity, particularly given the shift in U.S. product mix toward lower-priced classic models.
- Debt Reduction: Confirm the trajectory of debt reduction, as the company utilized operating cash flow to reduce notes payable and long-term debt during the period.