Why did net income rise even though revenue fell?

Net income rose 13% to $451.4 million because of a better gross margin (37.4% vs. 36.5%), driven by fewer closeout sales and improved inventory management, and nearly $200 million in lower selling and administrative expenses that resulted from fiscal 1998 cost-cutting. The restructuring charge was also much smaller ($45.1 million vs. $129.9 million), but excluding restructuring in both years, earnings were essentially flat.

How concentrated is NIKE's manufacturing and customer base?

Virtually all footwear is produced outside the U.S., with China (40%) and Indonesia (30%) accounting for about 70% of NIKE brand footwear production; the largest single supplier provided about 8%. On the customer side, about 20,000 U.S. retail accounts generate roughly 57% of revenue, with the three largest U.S. customers representing about 26% of U.S. sales, and Venator Group about 10% of global NIKE brand sales.

What are the main risks to the outlook?

Key risks include continued weak retail demand and inventory adjustments, Asia Pacific's ongoing weakness (revenue down 33%, Japan down 37%), U.S. apparel softness, and dependence on China and other Asian suppliers. Policy risks include a potential revocation of China's normal trade relations status, which would substantially raise tariffs, and possible changes to EU quotas and anti-dumping duties on footwear. Management also flagged Year 2000 supplier readiness as a risk, with a estimated total cost of $110-120 million.

Is NIKE's cash generation and shareholder return sustainable?

Fiscal 1999 operating cash flow of $961 million comfortably covered capital expenditures of $384 million, dividends of $136 million, and stock buybacks of about $300 million, though the cash flow was boosted by a one-time working capital release from inventory and receivable reductions. Management expects fiscal 2000 capital spending to rise by about $200 million, partly due to the purchase of a Japanese distribution facility, so future buybacks will depend on working capital needs and market conditions.

What is the status of NIKE's leadership and the trade-related issues facing the company?

Philip Knight serves as Chief Executive Officer and Chairman, and Thomas Clarke as President and Chief Operating Officer, while Robert Harold is Interim Chief Financial Officer, a role he has held since January 1998, which may signal a need for a permanent CFO. On trade, the EU's footwear quotas and anti-dumping duties have not materially affected NIKE because most of its sourced footwear qualifies for the STAF and sports footwear exclusions, though the European Commission has considered tightening those exclusions.

NKE 10-K FY1999 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed August 26, 1999. Cited figures are marked; the original filing is the authoritative source.

NIKE's fiscal 1999 10-K (year ended May 31, 1999) shows a company in a demand-driven revenue slowdown that nonetheless protected profitability.

Revenues fell 8.1% to $8.78 billion^a, the first decline in five years, driven by a 8% drop in U.S. revenues and a 33% collapse in Asia Pacific, partly offset by 8% growth in Europe. Despite this, net income rose 13% to $451.4 million, or $1.57 per diluted share, helped by a gross margin improvement to 37.4% from 36.5%, nearly $200 million in lower selling and administrative expenses, and a smaller net restructuring charge ($45.1 million versus $129.9 million the prior year). Excluding restructuring charges in both years, earnings were essentially flat.

Balance sheet and cash flow were the strongest parts of the report. Operating cash flow nearly doubled to $961.0 million^b as inventories fell 14% to $1.2 billion and receivables fell 8%. Cash rose to $198.1 million, working capital held at $1.8 billion, and the current ratio improved to 2.26:1.

Management repurchased $302 million^c of stock and maintained its dividend, raising it to $0.48 per share, while shareholders' equity stood at $3.3 billion. Looking forward, management guided to fiscal 2000 revenues up slightly, with footwear futures orders trending up in every region except the Americas and Asia Pacific showing improvement.

Investors should weigh the near-term risks: U.S. apparel futures had declined for seven consecutive quarters, Asia Pacific remains weak, and the company depends on contract manufacturers concentrated in China (40%^d of footwear) and Indonesia (30%), with China's trade status an ongoing policy risk. Fiscal 2000 SG&A will also carry investments in a new systems project, new retail stores, and expanded headquarters.

02—Key points

Key Highlights

Revenue declined 8.1% to $8,776.9 million, the first annual decline in five years, with U.S. revenue down 8% and Asia Pacific down 33%, while Europe grew 7.6%.
Net income rose 13% to $451.4 million ($1.57 diluted EPS), driven by gross margin expansion to 37.4% and roughly $200 million in lower selling and administrative expenses; excluding restructuring charges, earnings were roughly flat.
Operating cash flow nearly doubled to $961.0 million, supported by a 14% reduction in inventories to $1,199.3 million and an 8% decline in accounts receivable.
Restructuring charges totaled $45.1 million net in fiscal 1999 (versus $129.9 million in fiscal 1998), with expected annual savings of about $36 million from the 1999 actions.
Management repurchased 7.4 million Class B shares for $302 million and raised the annual dividend to $0.48 per share, consistent with a 15%-25% payout policy.
Balance sheet remained strong: shareholders' equity of $3.3 billion, working capital of $1.8 billion, current ratio of 2.26:1, and long-term debt of $386.1 million.
Forward outlook calls for fiscal 2000 revenue up slightly, with footwear futures orders trending up in every region except the Americas, though U.S. apparel futures have declined for seven straight quarters.

03—Questions

Frequently Asked Questions

Why did net income rise even though revenue fell?
Net income rose 13% to $451.4 million because of a better gross margin (37.4% vs. 36.5%), driven by fewer closeout sales and improved inventory management, and nearly $200 million in lower selling and administrative expenses that resulted from fiscal 1998 cost-cutting. The restructuring charge was also much smaller ($45.1 million vs. $129.9 million), but excluding restructuring in both years, earnings were essentially flat.
How concentrated is NIKE's manufacturing and customer base?
Virtually all footwear is produced outside the U.S., with China (40%) and Indonesia (30%) accounting for about 70% of NIKE brand footwear production; the largest single supplier provided about 8%. On the customer side, about 20,000 U.S. retail accounts generate roughly 57% of revenue, with the three largest U.S. customers representing about 26% of U.S. sales, and Venator Group about 10% of global NIKE brand sales.
What are the main risks to the outlook?
Key risks include continued weak retail demand and inventory adjustments, Asia Pacific's ongoing weakness (revenue down 33%, Japan down 37%), U.S. apparel softness, and dependence on China and other Asian suppliers. Policy risks include a potential revocation of China's normal trade relations status, which would substantially raise tariffs, and possible changes to EU quotas and anti-dumping duties on footwear. Management also flagged Year 2000 supplier readiness as a risk, with a estimated total cost of $110-120 million.
Is NIKE's cash generation and shareholder return sustainable?
Fiscal 1999 operating cash flow of $961 million comfortably covered capital expenditures of $384 million, dividends of $136 million, and stock buybacks of about $300 million, though the cash flow was boosted by a one-time working capital release from inventory and receivable reductions. Management expects fiscal 2000 capital spending to rise by about $200 million, partly due to the purchase of a Japanese distribution facility, so future buybacks will depend on working capital needs and market conditions.
What is the status of NIKE's leadership and the trade-related issues facing the company?
Philip Knight serves as Chief Executive Officer and Chairman, and Thomas Clarke as President and Chief Operating Officer, while Robert Harold is Interim Chief Financial Officer, a role he has held since January 1998, which may signal a need for a permanent CFO. On trade, the EU's footwear quotas and anti-dumping duties have not materially affected NIKE because most of its sourced footwear qualifies for the STAF and sports footwear exclusions, though the European Commission has considered tightening those exclusions.

04—Continue

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