NIKE, Inc. 10-Q Summary: Quarter Ended February 28, 1997
Business Context and Reporting Period
This Form 10-Q covers the third quarter and nine-month period ended February 28, 1997. NIKE, Inc. reported record revenues driven by global brand strength, with significant growth in U.S. footwear and apparel, as well as international markets. The filing notes a change in accounting for certain international subsidiaries, eliminating a one-month reporting lag to improve timeliness. A two-for-one stock split was effected during the quarter, and all per-share data has been adjusted accordingly.
Key Financial Metrics
| Metric | Three Months Ended Feb 28, 1997 | Nine Months Ended Feb 28, 1997 |
|---|---|---|
| Revenues | $2,423.6 million | $6,812.6 million |
| Net Income | $237.1 million | $640.1 million |
| Diluted EPS | $0.80 | $2.16 |
| Gross Margin % | 40.8% | 40.1% (implied) |
| Cash from Operations (9mo) | $56.8 million | |
| Cash and Equivalents (End of Period) | $300.8 million | |
| Long-Term Debt | $289.4 million | |
| Current Ratio | 2.2 | |
| Debt-to-Equity Ratio | 0.6 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 53% for the quarter and 47% year-to-date compared to the prior year. U.S. footwear revenue rose 47% (driven by a 34% increase in pairs sold and 10% price increase), while U.S. apparel grew 63% for the quarter.
- International Expansion: International revenues surged 67% for the quarter. Europe grew 62%, Asia Pacific 76%, and the Americas 64%. Japan and the UK were the top growth countries, up 86% and 94% respectively.
- Profitability: Net income increased 77% for the quarter and 55% year-to-date. Gross margin percentage improved from 39.7% to 40.8% for the quarter, attributed to price increases and product mix changes in U.S. Footwear and centralized distribution in Europe.
- Working Capital: Accounts receivable increased $504 million (37%) and inventories increased $158 million, consistent with business growth. Inventory turns improved to 5.3 from 5.0.
- Debt Structure: Long-term debt increased significantly due to a $200 million seven-year note issuance in December 1996 and a 10.5 billion yen private placement by the Japanese subsidiary.
Guidance, Outlook, and Risks
- Order Book: Worldwide orders for delivery from March 1997 through July 1997 were approximately $4.3 billion, a 34% increase over the prior year. Management cautions that the mix of "futures" vs. "at once" orders has shifted, making direct revenue correlation difficult.
- Margin Outlook: Management expects full-year gross margins to be more in line with the prior fiscal year, as strong demand and price increases are offset by increased air freight costs.
- Expense Outlook: Selling and administrative expenses are expected to be slightly higher as a percentage of revenues for the remainder of the year due to increased advertising, marketing, and infrastructure spending.
- Tax Rate: The effective tax rate is anticipated to remain at approximately 38.75% for fiscal 1997.
- Foreign Exchange: Exchange rates negatively impacted revenue by $64 million (11%) for the quarter and $157 million (10%) year-to-date.
Investor Verification Checklist
- Verify the sustainability of the 40.8% gross margin given the expected offset from increased air freight costs.
- Confirm the conversion of the $4.3 billion order book into actual revenue, considering the shift toward futures orders.
- Monitor the impact of foreign exchange rates on future international revenue growth, particularly in Japan and the UK.
- Review the utilization of the $500 million committed credit line and the $158 million commercial paper outstanding.
- Assess the inventory turnover efficiency as inventory levels rise to support global expansion.