10-QPeriod: Q1 FY2018

NIKE, Inc. Quarterly Report for Q1 Ended Aug 31, 2017

Filed October 6, 2017For Securities:NKE

Summary

NIKE, Inc. reported flat revenue for the first quarter of fiscal year 2018 compared to the prior year, with total revenues at $9.07 billion. However, net income saw a significant decrease of 24% to $950 million, leading to diluted earnings per share of $0.57, down 22%. This decline was primarily driven by a 4% contraction in gross profit, a 18% reduction in demand creation expenses, and a shift from other income to other expense, net. While the NIKE Brand saw a slight revenue increase of 1% (2% on a currency-neutral basis), the Converse segment experienced a significant 16% revenue drop. The company is navigating a changing retail landscape, particularly in North America, and is implementing its 'Consumer Direct Offense' strategy to drive future growth through digital acceleration and closer consumer connections. The company's effective tax rate increased substantially to 11.4% from 2.5% due to the adoption of a new accounting standard for stock-based compensation, which now recognizes excess tax benefits in income tax expense, rather than in equity. This change, while impacting the current period's tax rate, is expected to increase volatility in future quarterly rates. Despite the earnings decline, NIKE continued its aggressive share repurchase program, buying back over 15 million shares during the quarter, underscoring its commitment to returning capital to shareholders.

Financial Highlights

49 data points
Beta

Revenue

$9.07B

43.7% Gross Margin

Net Income

$950.00M

10.5% Net Margin

EPS (Diluted)

$0.57

Total Assets

$23.65B

Cash & Equivalents

$3.41B

Free Cash Flow

$305.00M

Financial Statements
Beta
Revenue$9.07B
Cost of Revenue$5.11B
Gross Profit$3.96B
SG&A Expenses$2.86B
Net Income$950.00M
EPS (Basic)$0.58
EPS (Diluted)$0.57
Shares Outstanding (Basic)1.64B
Shares Outstanding (Diluted)1.68B

Key Highlights

  • 1Total revenues remained flat at $9.07 billion for the first quarter of fiscal year 2018, reflecting mixed performance across segments.
  • 2Net income decreased by 24% to $950 million, with diluted EPS falling 22% to $0.57, indicating pressure on profitability.
  • 3Gross profit declined by 4% and gross margin contracted by 180 basis points, primarily due to lower NIKE Brand full-price Average Selling Price (ASP) and unfavorable foreign currency exchange rates.
  • 4The NIKE Brand reported a 1% revenue increase (2% on a currency-neutral basis), driven by international geographies and digital commerce growth.
  • 5Converse segment revenue experienced a significant 16% decline, impacting overall company performance.
  • 6Demand creation expense was reduced by 18%, reflecting a strategic shift in marketing spend compared to the prior year's major sporting events.
  • 7NIKE continued its robust share repurchase program, buying back approximately $849 million of its common stock during the quarter.

Frequently Asked Questions

The significant decrease in Net Income was primarily due to a 4% contraction in gross profit, a substantial increase in operating overhead expense (8% growth), and a shift from 'Other income, net' to 'Other expense, net'. These factors, combined with a lower gross margin partially offset by reduced demand creation expense, led to a 16% decline in Income before income taxes, ultimately impacting Net Income by 24%.

The adoption of ASU 2016-09, which requires excess tax benefits from stock-based compensation to be recorded in income tax expense, significantly impacted the effective tax rate. For the first quarter of fiscal 2018, the effective tax rate was 11.4%, compared to 2.5% in the prior year period. The prior year's rate included one-time benefits from the resolution of a foreign tax credit matter and an adjustment to a deferred tax asset. Management anticipates increased volatility in the quarterly effective tax rate due to this new standard.

NIKE announced the 'Consumer Direct Offense' in June 2017, a strategic realignment aimed at serving consumers more personally and at scale, particularly leveraging digital channels. This strategy focuses on accelerating innovation, moving closer to consumers in key cities, and deepening one-to-one connections. The company anticipates continued evolution in the North American retail landscape, with shifting consumer traffic patterns towards digital and physical channels, and is adapting to address third-party retail store closures and a promotional environment.

NIKE employs a centralized foreign exchange risk management program to mitigate the impact of currency fluctuations. This involves utilizing natural offsets and currency correlations within its portfolio of exposures and hedging remaining risks with derivative instruments like forward contracts and options. The company's foreign currency adjustment program with factories and the NIKE Trading Company (NTC) also enhance its ability to manage these risks. Unfavorable changes in foreign currency exchange rates, including hedges, negatively impacted gross margin by approximately 130 basis points in the quarter.