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| NKE > SEC Filings for NKE > Form 10-K on 24-Jul-2012 | All Recent SEC Filings |
24-Jul-2012
Annual Report
NIKE designs, develops, markets and sells high quality footwear, apparel, equipment, accessories and services worldwide. We are the largest seller of athletic footwear and apparel in the world. We sell our products to retail accounts, through NIKE-owned retail stores and internet sales, which we refer to as our "Direct to Consumer" operations, and through a mix of independent distributors, licensees and sales representatives, worldwide. Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear, apparel, equipment, accessories and service businesses. Our strategy is to achieve long-term revenue growth by creating innovative, "must have" products, building deep personal consumer connections with our brands, and delivering compelling consumer experiences at retail and online.
In addition to achieving long-term revenue growth, we continue to strive to deliver shareholder value by driving operational excellence in several key areas:
• Expanding gross margin by:
- Making our supply chain a competitive advantage,
- Reducing product costs through a continued focus on manufacturing efficiency, product design and innovation,
- Utilizing price increases to effectively manage the price-to-value equation for our customers.
• Improving selling and administrative expense productivity by focusing on investments that drive economic returns in the form of incremental revenue and gross profit, and leveraging existing infrastructure across our portfolio of businesses to eliminate duplicative costs,
• Improving working capital efficiency, and
• Deploying capital effectively.
Through execution of this strategy, our long-term financial goals continue to be:
• High-single-digit revenue growth,
• Mid-teens earnings per share growth,
• Increased return on invested capital and accelerated cash flows, and
• Consistent results through effective management of our diversified portfolio of businesses.
Over the past ten years, we have achieved or exceeded all of these financial goals. During this time, NIKE, Inc.'s revenues and earnings per share have grown 9% and 15%, respectively, on an annual compounded basis. Our return on invested capital has increased from 15% to 22% and we expanded gross margins by 4 percentage points.
Our fiscal 2012 results demonstrated our continued focus toward delivering appropriate returns to our shareholders, while positioning ourselves for sustainable, profitable long-term growth. Despite the ongoing challenges in the global economy, we delivered record revenues and earnings per share in fiscal 2012. Our revenues grew 16% to $24.1 billion, net income increased 4% to $2.2 billion, and we delivered diluted earnings per share of $4.73, an 8% increase from fiscal 2011.
Income before income taxes increased 5% for fiscal 2012, driven by revenue growth and improved leverage on selling and administrative expense, which more than offset a decrease in gross margin and an increase in other expense. The increase in revenues was driven by growth across all NIKE Brand geographies, key categories and product types. Brand strength, innovative products and strong category retail presentation continues to fuel the demand for our NIKE Brand products. During fiscal 2012, we introduced a number of innovations, including the NIKE Fuelband and the Flyknit technology. The NIKE Fuelband is a digital device that tracks one's daily activities through a sport-tested accelerometer, while Flyknit is a new footwear technology that uses advanced materials and proprietary manufacturing technology to produce a form-fitting, lightweight and seamless upper. During this time, we also expanded our NIKE + platform into our Basketball and Training categories, and launched new high performance uniforms for all 32 NFL teams. Revenue for our Other Businesses also grew, reflective of growth across most businesses, led by Converse. Our gross margin continued to be impacted by higher product input costs, including materials and labor, which more than offset the positive impacts of higher product selling prices, the growth of our Direct to Consumer business and benefits from ongoing product cost reduction initiatives.
For fiscal 2012, the growth of our net income was negatively affected by a year-over-year increase in our effective tax rate. However, diluted earnings per share grew at a higher rate than net income due to a 3% decrease in the weighted average number of diluted common shares outstanding, driven by share repurchases during fiscal 2012 and 2011.
As part of our long-term growth strategy, we continually evaluate our existing portfolio of businesses to ensure the Company is investing in those businesses that are accretive to the NIKE Brand, and with the largest growth potential and highest returns. On May 31, 2012, we announced our intention to divest of the Cole Haan and Umbro businesses, which will allow us to focus our resources on driving growth in the NIKE, Jordan, Converse and Hurley brands. For additional details, refer to our "Other Businesses" section below.
While we will continue to face headwinds from higher input costs and foreign exchange volatility in fiscal 2013, we continue to see opportunities to drive future growth and remain committed to effectively managing our business to achieve our financial goals over the long-term, by executing against the operational strategies outlined above.
Results of Operations
FY12 vs. FY11 FY11 vs. FY10
(Dollars in millions, except per share data) Fiscal 2012 Fiscal 2011 % Change Fiscal 2010 % Change
Revenues $ 24,128 $ 20,862 16 % $ 19,014 10 %
Cost of sales 13,657 11,354 20 % 10,214 11 %
Gross profit 10,471 9,508 10 % 8,800 8 %
Gross margin % 43.4 % 45.6 % 46.3 %
Demand creation expense 2,711 2,448 11 % 2,356 4 %
Operating overhead expense 4,720 4,245 11 % 3,970 7 %
Total selling and administrative expense 7,431 6,693 11 % 6,326 6 %
% of Revenues 30.8 % 32.1 % 33.3 %
Income before income taxes 2,983 2,844 5 % 2,517 13 %
Net income 2,223 2,133 4 % 1,907 12 %
Diluted earnings per share 4.73 4.39 8 % 3.86 14 %
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Consolidated Operating Results
Revenues
FY12 vs. FY11 FY11 vs. FY10
% Change % Change
Excluding Excluding
FY12 vs. FY11 Currency FY11 vs. FY10 Currency
(Dollar in millions) Fiscal 2012 Fiscal 2011 % Change Changes (1) Fiscal 2010 % Change Changes(1)
NIKE, Inc. Revenues:
NIKE Brand Revenues by:
Footwear $ 13,426 $ 11,518 17% 15% $ 10,301 12% 12%
Apparel 6,333 5,513 15% 13% 5,026 10% 10%
Equipment 1,202 1,018 18% 16% 1,030 -1% -2%
Global Brand Divisions 111 96 16% 13% 86 12% 16%
Total NIKE Brand 21,072 18,145 16% 15% 16,443 10% 10%
Other Businesses 3,095 2,786 11% 11% 2,564 9% 8%
Corporate(2) (39 ) (69 ) - - 7 - -
TOTAL NIKE, INC. REVENUES $ 24,128 $ 20,862 16% 14% $ 19,014 10% 10%
Supplemental NIKE Brand Revenues
Details:
NIKE Brand Revenues by:
Sales to Wholesale Customers $ 17,431 $ 15,173 15% 14% 13,876 9% 9%
Sales Direct to Consumer 3,530 2,876 23% 21% 2,481 16% 16%
Global Brand Divisions 111 96 16% 13% 86 12% 15%
TOTAL NIKE BRAND REVENUES $ 21,072 $ 18,145 16% 15% $ 16,443 10% 10%
NIKE Brand Revenues on a Wholesale
Equivalent Basis:(3)
Sales to Wholesale Customers $ 17,431 $ 15,173 15% 14% $ 13,876 9% 9%
Sales from our Wholesale Operations
to Direct to Consumer Operations 1,978 1,598 24% 22% 1,347 19% 18%
NIKE BRAND WHOLESALE EQUIVALENT
REVENUES $ 19,409 $ 16,771 16% 14% $ 15,223 10% 10%
NIKE Brand Wholesale Equivalent
Revenues by Category:(3)
Running $ 3,702 $ 2,795 32% 31% $ 2,134 31% 30%
Basketball 2,230 1,908 17% 16% 1,711 12% 11%
Football (Soccer) 2,006 1,765 14% 12% 1,650 7% 8%
Men's Training 2,007 1,698 18% 17% 1,459 16% 15%
Women's Training 1,015 842 21% 19% 739 14% 13%
Action Sports 499 470 6% 5% 403 17% 17%
Sportswear 5,560 5,150 8% 6% 5,018 3% 3%
Others(4) 2,390 2,143 12% 10% 2,109 2% 2%
TOTAL NIKE BRAND WHOLESALE EQUIVALENT
REVENUES $ 19,409 $ 16,771 16% 14% $ 15,223 10% 10%
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(1) Results have been restated using actual exchange rates in use during the comparative period to enhance the visibility of the underlying business trends by excluding the impact of translation arising from foreign currency exchange rate fluctuations.
(2) Corporate revenues primarily consist of intercompany revenue eliminations and foreign currency revenue-related hedge gains and losses generated by entities within the NIKE Brand geographic operating segments and certain Other Businesses through our centrally managed foreign exchange risk management program.
(3) References to NIKE Brand wholesale equivalent revenues are intended to
provide context as to the overall current NIKE Brand market footprint on a
wholesale revenue basis. NIKE Brand wholesale equivalent revenues consist of
1) sales to external wholesale customers and 2) internal sales from our
wholesale operations to our Direct to Consumer operations at prices that are
comparable to prices charged to external wholesale customers. NIKE Brand
wholesale equivalent revenues do not include the estimation of sales made by
NIKE Brand licensees as the amounts are not material.
(4) Others include all other categories and certain adjustments that are not allocated at the category level.
Fiscal 2012 Compared to Fiscal 2011
On a currency neutral basis, revenues for NIKE, Inc. grew 14% for fiscal 2012, driven by increases in revenues for both the NIKE Brand and our Other Businesses. Excluding the effects of changes in currency exchange rates, revenues for the NIKE Brand increased 15%, as every NIKE Brand geography delivered higher revenues for fiscal 2012. North America contributed approximately 7 percentage points to the NIKE Brand revenue increase, while the Emerging Markets and Greater China geographies contributed approximately 4 and 2 percentage points to the NIKE Brand revenue growth, respectively. Revenues for our Other Businesses grew 11% during fiscal 2012, contributing 1 percentage point of our consolidated revenue growth.
Excluding the effects of changes in currency exchange rates, NIKE Brand footwear and apparel revenue increased 15% and 13%, respectively, while NIKE Brand equipment revenues increased 16% during fiscal 2012. Continuing to fuel the growth of our NIKE Brand footwear business was the increased demand for performance products, including the NIKE Lunar and FREE technologies. The increase in NIKE Brand footwear revenue for fiscal 2012 was attributable to double-digit percentage growth in unit sales along with a low-single-digit percentage increase in average selling price per pair, primarily reflecting the favorable impact from product price increases, partially offset by higher discounts on close-out sales. The overall increase in footwear sales was driven by growth across all key categories, notably Running, Sportswear and Basketball. For NIKE Brand apparel, the increase in revenue for fiscal 2012 was driven by mid-single-digit percentage increases in both unit sales and average selling prices. The increase in average selling prices was primarily driven by product price increases, partially offset by a higher mix of close-out sales. The overall increase in apparel sales was reflective of increased demand across most key categories.
While wholesale revenues remain the largest component of overall NIKE Brand revenues, we continue to see growth in revenue through our Direct to Consumer channels. Our NIKE Brand Direct to Consumer operations include NIKE owned in-line and factory stores, as well as online sales through NIKE owned websites. For fiscal 2012, Direct to Consumer channels represented approximately 17% of our total NIKE Brand revenues compared to 16% in fiscal 2011. On a currency neutral basis, Direct to Consumer revenues grew 21% for fiscal 2012, as comparable store sales grew 13% and we continue to expand our store network and e-commerce business. Comparable store sales include revenues from NIKE owned in-line and factory stores for which all three of the following requirements have been met: the store has been open at least one year, square footage has not changed by more than 15% within the past year, and the store has not been permanently repositioned within the past year.
Revenues for our Other Businesses consist of results from our affiliate brands; Cole Haan, Converse, Hurley and Umbro; and NIKE Golf. Excluding the impact of currency changes, revenues for these businesses increased by 11% in fiscal 2012, reflecting growth across all businesses except Hurley, which was slightly down for the fiscal year.
Fiscal 2011 Compared to Fiscal 2010
On both a reported and currency neutral basis, revenues for NIKE, Inc. grew 10% for fiscal 2011, driven by increases in revenues for both the NIKE Brand and our Other Businesses. On a currency neutral basis, revenues for the NIKE Brand increased 10% for fiscal 2011, while revenues for our Other Businesses increased 8%. Excluding the effects of changes in currency exchange rates, every NIKE Brand geography except Japan delivered higher revenues for fiscal 2011, led by North America, which contributed approximately 5 percentage points to the NIKE Brand revenue increase. The Emerging Markets and Greater China contributed approximately 3 and 2 percentage points to the NIKE Brand revenue growth, respectively.
By product group, NIKE Brand footwear and apparel revenue increased 12% and 10%, respectively, while NIKE Brand equipment revenues declined 2% during fiscal 2011. Fueling the growth of our NIKE Brand footwear business was the increased demand in our performance products, including the NIKE Lunar and Free technologies. The increase in NIKE Brand footwear revenue for fiscal 2011 was attributable to a high-single-digit percentage increase in unit sales along with a low single-digit percentage increase in the average selling price per pair. The increase in unit sales was primarily driven by double-digit percentage growth in Running, Men's Training, Action Sports and Women's Training products, while the increase in average selling price per pair was primarily driven by price increases on selected products and fewer close-outs as a percentage of total sales. For NIKE Brand apparel, the increase in revenue for fiscal 2011 was primarily driven by a low-double-digit percentage increase in unit sales attributable to strong category presentations and improved product lines, while the average selling price per unit was relatively flat. The increase in unit sales was driven by increased demand in all key categories.
For fiscal 2011, Direct to Consumer channels represented approximately 16% of our total NIKE Brand revenues compared to 15% in fiscal 2010. On a currency neutral basis, Direct to Consumer revenues grew 16% for fiscal 2011 as we continue to expand our store network, increase comparable store sales and build our e-commerce business. Comparable store sales grew 11% for fiscal 2011.
Excluding the impact of currency changes, revenues for Other Businesses increased by 8% in fiscal 2011, reflecting double-digit percentage revenue growth at Converse, Cole Haan and Hurley, and a low-single-digit growth at Umbro, which more than offset a mid-single-digit revenue decline at NIKE Golf.
Futures Orders
Futures orders for NIKE Brand footwear and apparel scheduled for delivery from June through November 2012 were 7% higher than the orders reported for the comparable prior year period. The U.S. Dollar futures order amount is calculated based upon our internal forecast of the currency exchange rates under which our revenues will be translated during this period. Excluding the impact of currency changes, futures orders increased 12%, as unit orders and average selling price per unit each contributed approximately 6 percentage points of growth.
By geography, futures orders growth was as follows:
Reported Futures Futures Orders Excluding
Orders Growth Currency Changes (1)
North America 15 % 15 %
Western Europe -2 % 8 %
Central & Eastern Europe 5 % 11 %
Greater China 5 % 2 %
Japan -6 % 1 %
Emerging Markets 10 % 20 %
Total NIKE Brand Futures Orders 7 % 12 %
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(1) Growth rates have been restated using constant exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rate fluctuations.
The reported futures orders growth is not necessarily indicative of our expectation of revenue growth during this period. This is due to year-over-year changes in shipment timing and because the mix of orders can shift between futures and at-once orders, and the fulfillment of certain orders may fall outside of the schedule noted above. In addition, exchange rate fluctuations as well as differing levels of order cancellations and discounts can cause differences in the comparisons between futures orders and actual revenues. Moreover, a significant portion of our revenue is not derived from futures orders, including at-once and close-out sales of NIKE Brand footwear and apparel, sales of NIKE Brand equipment, sales from our Direct to Consumer operations, and sales from our Other Businesses.
Gross Margin
FY12 vs. FY11 FY11 vs. FY10
(Dollars in millions) Fiscal 2012 Fiscal 2011 % Change Fiscal 2010 % Change
Gross Profit $ 10,471 $ 9,508 10 % $ 8,800 8 %
Gross Margin % 43.4 % 45.6 % (220 ) bps 46.3 % (70 ) bps
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Fiscal 2012 Compared to Fiscal 2011
For fiscal 2012, our consolidated gross margin was 220 basis points lower than the prior year period, primarily driven by higher product input costs, including materials and labor, across most businesses. Also contributing to the decrease in gross margin were higher customs duty charges, discounts on close-out sales and an increase in investments in our digital business and infrastructure. Together, these factors decreased consolidated gross margin by approximately 390 basis points. Partially offsetting this decrease were positive impacts from product price increases, lower air freight costs, the growth of our NIKE Brand Direct to Consumer business, and benefits from our ongoing product cost reduction initiatives.
Fiscal 2011 Compared to Fiscal 2010
For fiscal 2011, our consolidated gross margin percentage was 70 basis points lower than the prior year, primarily driven by higher input costs, transportation costs, including additional air freight incurred to meet strong demand for NIKE Brand products across most businesses, and a lower mix of licensee revenue as distribution for certain markets within our Other Businesses transitioned from licensees to operating units of NIKE, Inc. Together, these factors decreased consolidated gross margins by approximately 130 basis points for fiscal 2011, with the most significant erosion in the second half of the fiscal year. These decreases were partially offset by the positive impact from the growth and expanding profitability of our NIKE Brand Direct to Consumer business, a higher mix of full-price sales and favorable impacts from our ongoing product cost efficiency initiatives.
Selling and Administrative Expense
FY12 vs. FY11 FY11 vs. FY10
(Dollars in millions) Fiscal 2012 Fiscal 2011 % Change Fiscal 2010 % Change
Demand creation expense(1) $ 2,711 $ 2,448 11 % $ 2,356 4 %
Operating overhead expense 4,720 4,245 11 % 3,970 7 %
Selling and administrative expense $ 7,431 $ 6,693 11 % $ 6,326 6 %
% of Revenues 30.8 % 32.1 % (130 ) bps 33.3 % (120 ) bps
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(1) Demand creation consists of advertising and promotion expenses, including costs of endorsement contracts.
Fiscal 2012 Compared to Fiscal 2011
Overall, selling and administrative expense grew at a slower rate than revenues for fiscal 2012.
Demand creation expense increased 11% compared to the prior year, mainly driven by an increase in sports marketing expense, marketing support for key product initiatives, including the NIKE Fuelband and NFL uniforms, as well as an increased level of brand event spending around the European Football Championships and London Summer Olympics. For fiscal 2012, changes in currency exchange rates increased the growth of demand creation expense by 1 percentage point.
Compared to the prior year, operating overhead expense increased 11%, primarily attributable to increased investments in our Direct to Consumer operations, higher personnel costs as well as travel expenses to support the growth of our overall business. For fiscal 2012, changes in currency exchange rates increased the growth of operating overhead expense by 1 percentage point.
Fiscal 2011 Compared to Fiscal 2010
In fiscal 2011, the effect of changes in foreign currency exchange rates did not have a significant impact on selling and administrative expense.
Demand creation expense increased 4% compared to the prior year, primarily . . .
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