NIKE, Inc. 10-Q Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended February 28, 1999, and the nine-month period ended on the same date. NIKE, Inc. is a global designer, marketer, and distributor of athletic footwear, apparel, and equipment. The filing reflects the company's third quarter of fiscal year 1999.
Key Financial Metrics
| Metric | Q3 1999 | Q3 1998 | 9 Months 1999 | 9 Months 1998 |
|---|---|---|---|---|
| Revenues | $2,176.8 million | $2,224.0 million | $6,594.6 million | $7,245.4 million |
| Net Income | $124.2 million | $73.1 million | $357.0 million | $467.3 million |
| Diluted EPS | $0.44 | $0.25 | $1.24 | $1.58 |
| Gross Margin % | 37.3% | 35.8% | 37.0% | 37.8% |
| Cash from Operations (9mo) | $614.1 million (vs. $160.8 million prior year) | |||
| Inventory | $1,147.4 million (27% lower than Feb 1998) | |||
| Current Ratio | 2.10:1 | |||
| Long-Term Debt | $388.7 million |
Material Changes vs. Prior Period
- Profitability: Net income for the quarter increased 70% year-over-year, driven by a higher gross margin (37.3% vs. 35.8%) and a 13% reduction in selling and administrative expenses. However, year-to-date net income decreased 24% due to lower revenues.
- Revenue Trends: Consolidated revenues declined 2% for the quarter and 9% year-to-date.
- U.S. Region: Revenues increased 1% for the quarter (first increase in five quarters), driven by a 4% rise in footwear sales. Apparel sales declined 8%.
- Europe: Revenues increased 5% for the quarter, driven by a 15% surge in apparel sales.
- Asia Pacific: Revenues dropped 19% for the quarter and 39% year-to-date, heavily impacted by the regional economic crisis and currency fluctuations.
- Americas (ex-U.S.): Revenues fell 22% for the quarter, primarily due to a sluggish Canadian retail environment and a strengthening U.S. dollar.
- Inventory Management: Inventory levels decreased significantly (27% vs. prior year), contributing to a $453 million increase in cash provided by operations year-to-date.
- Restructuring: The company recorded a $19.5 million restructuring charge in the current quarter (part of a larger $129.9 million charge initiated in FY98 and an $18.7 million charge in Q2 FY99) related to workforce reductions and facility downsizing in Asia Pacific and Japan.
Guidance, Outlook, and Risks
- Forward Orders: Worldwide futures and advance orders for delivery between March and July 1999 totaled $3.8 billion, a 4% decrease from the prior year. Management notes this is not necessarily indicative of future revenue due to order mix shifts and cancellation rates.
- Year 2000 (Y2K) Readiness:
- Total estimated Y2K costs are $105-$120 million, with $78 million already incurred.
- Management expects to complete remediation of critical (Tier 1 & 2) IT projects by November 30, 1999, and non-IT projects by August 31, 1999.
- Risk: Significant risk exists regarding the Y2K compliance of suppliers and customers. A substantial majority have not provided assurance of readiness. Contingency plans are being developed to mitigate potential supply chain disruptions.
- Capital Allocation: The company continues a $1 billion share repurchase program, having purchased 6.8 million shares for $264 million in the first nine months of FY99. Dividends remain at $0.12 per share.
- Accounting Changes: The company adopted SFAS 130 (Comprehensive Income) and is preparing for SFAS 133 (Derivatives), effective June 1, 2000.
Investor Verification Checklist
- Verify the sustainability of the 1.5% gross margin improvement in the quarter given the 9% year-to-date revenue decline.
- Monitor the execution of inventory reduction strategies to ensure they do not lead to stockouts in key growth categories like Running and Brand Jordan.
- Assess the impact of the Asian economic crisis and currency fluctuations on the Asia Pacific region's recovery trajectory.
- Review the status of supplier Y2K compliance surveys, as supply chain disruption is identified as the primary operational risk.
- Track the conversion rate of the $3.8 billion in forward orders into actual revenue for the upcoming quarters.