10-QPeriod: Q1 FY2017

NIKE, Inc. Quarterly Report for Q1 Ended Aug 31, 2016

Filed October 11, 2016For Securities:NKE

Summary

NIKE, Inc.'s Q1 FY17 filing for the period ending August 31, 2016, shows robust revenue growth driven by strong performance across its geographic segments, particularly Greater China and Western Europe, with currency-neutral revenue increasing by 10%. While net income and diluted EPS saw modest increases of 6% and 9% respectively, this was significantly bolstered by a one-time tax benefit stemming from the resolution of a foreign tax credit matter with the IRS, which dramatically lowered the effective tax rate to 2.5% from 18.4% in the prior year. Investors should note the decrease in gross margin by 200 basis points, attributed to a combination of unfavorable foreign currency exchange rates, increased off-price sales, and higher costs associated with sourcing, logistics, and exiting the golf equipment business. Despite these margin pressures, the company continues to execute its strategy, with direct-to-consumer (DTC) sales showing strong growth, particularly in digital commerce.

Financial Highlights

49 data points
Beta

Revenue

$9.06B

45.5% Gross Margin

Net Income

$1.25B

13.8% Net Margin

EPS (Diluted)

$0.73

Total Assets

$21.16B

Cash & Equivalents

$2.66B

Free Cash Flow

$511.00M

Financial Statements
Beta
Revenue$9.06B
Cost of Revenue$4.94B
Gross Profit$4.12B
SG&A Expenses$2.90B
Net Income$1.25B
EPS (Basic)$0.75
EPS (Diluted)$0.73
Shares Outstanding (Basic)1.67B
Shares Outstanding (Diluted)1.71B

Key Highlights

  • 1Revenues increased by 8% to $9.1 billion, with a 10% increase on a constant currency basis, demonstrating solid global demand.
  • 2Net income rose by 6% to $1,249 million, and diluted EPS increased by 9% to $0.73, significantly aided by a substantial one-time tax benefit.
  • 3Gross margin declined by 200 basis points to 45.5% due to unfavorable foreign currency movements, increased off-price sales, and higher operating costs.
  • 4Demand creation expenses increased by 25%, driven by investments in marketing for major sporting events like the Rio Olympics and European Football Championship.
  • 5Direct-to-Consumer (DTC) revenue grew by 19% (22% on a currency-neutral basis), with digital commerce sales surging by 49%.
  • 6Futures orders for the upcoming season increased by 5% (7% excluding currency changes), indicating continued demand for NIKE Brand products.
  • 7The company repurchased $1.054 billion of common stock during the quarter, demonstrating a commitment to returning capital to shareholders.

Frequently Asked Questions

The effective tax rate decreased from 18.4% in the prior year to 2.5% in the current period primarily due to a one-time discrete benefit related to the resolution of a foreign tax credit matter with the U.S. Internal Revenue Service (IRS). The company also benefited from a one-time adjustment to its deferred tax asset related to its nonqualified deferred compensation plan.

NIKE's consolidated gross margin decreased by 200 basis points due to several factors including unfavorable changes in foreign currency exchange rates (net of hedges), an increased proportion of off-price sales, higher product costs (driven by labor input cost inflation), lower margins from Direct-to-Consumer (DTC) channels (particularly factory stores), and increased investments in sourcing, manufacturing resources, warehousing, and logistics, as well as costs associated with exiting the Golf equipment business.

The DTC business is performing very strongly, with revenues growing by 19% (22% on a currency-neutral basis). This segment now represents approximately 27% of total NIKE Brand revenues, up from 24% in the prior year. Digital commerce sales within DTC saw particularly impressive growth of 49%, indicating the increasing importance of online channels for NIKE.

Futures orders for NIKE Brand footwear and apparel, scheduled for delivery from September 2016 through January 2017, totaled $12.3 billion, a 5% increase over the prior year (7% on a currency-neutral basis). This suggests continued positive momentum and demand for NIKE products in the upcoming season, though the company cautions that futures orders are not necessarily indicative of future revenue due to various factors.