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| NKE > SEC Filings for NKE > Form 10-Q on 9-Oct-2012 | All Recent SEC Filings |
9-Oct-2012
Quarterly Report
In the first quarter of fiscal 2013, our revenues increased 10% to $6.7 billion; excluding the impact of exchange rate changes, revenues would have grown 15%. We delivered net income of $567 million and diluted earnings per share of $1.23, 12% and 10% below the first quarter of fiscal 2012, respectively.
Income before income taxes decreased 8% compared to the first quarter of the prior year due to planned increases in selling and administrative expense and a lower gross margin, which more than offset the increase in revenues. The increase in selling and administrative expense was driven by higher demand creation spending around the Olympics and European Football Championships, as well as marketing support for key product initiatives, such as our digital and NFL products. The decline in gross margin was primarily driven by higher product input costs, including materials and labor, as well as a shift in mix to businesses with lower gross margins, more than offsetting the positive impact of higher product selling prices. On a currency neutral basis, we delivered revenue growth in all NIKE Brand geographies except Japan and across all product types and categories. Brand strength, innovative products and strong category retail presentations continue to fuel the demand for our NIKE Brand products. Revenue from our Other Businesses also grew, reflecting growth in every business, led by Converse.
Our first quarter net income and diluted earnings per share were impacted by a year-on-year increase in our effective tax rate, but diluted earnings per share benefited from a decline in the weighted average number of diluted common shares outstanding, primarily driven by our share repurchase program.
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 greatest potential to deliver profitable growth and high returns on capital. During the fourth quarter of fiscal 2012, we announced our intention to divest the Cole Haan and Umbro businesses, allowing us to focus our resources on driving growth in the NIKE, Jordan, Converse and Hurley brands. Excluding the results of the Cole Haan and Umbro businesses, our net income would have been $586 million and diluted earnings per share would have been $1.27, 11% and 9% below the first quarter of fiscal 2012, respectively (See Reconciliation of Net Income and Diluted Earnings Per Share Excluding Businesses to be Divested below).
Results of Operations
Three Months Ended
August 31,
(Dollars in millions, except per share data) 2012 2011 % Change
Revenues $ 6,669 $ 6,081 10 %
Cost of sales 3,766 3,388 11 %
Gross profit 2,903 2,693 8 %
Gross margin % 43.5 % 44.3 %
Demand creation expense 891 692 29 %
Operating overhead expense 1,262 1,131 12 %
Total selling and administrative expense 2,153 1,823 18 %
% of Revenues 32.3 % 30.0 %
Income before income taxes 782 852 -8 %
Net income 567 645 -12 %
Diluted earnings per share 1.23 1.36 -10 %
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Reconciliation of Net Income and Diluted Earnings Per Share Excluding Businesses to be Divested (1)
Three Months Ended
August 31,
(Dollars in millions, except per share data) 2012 2011 % Change
Net income, as reported $ 567 $ 645 -12 %
Subtract: Net Loss from Businesses to be Divested2 (19 ) (15 ) 27 %
Net income, excluding Businesses to be Divested $ 586 $ 660 -11 %
Diluted EPS, as reported $ 1.23 $ 1.36 -10 %
Subtract: Net Loss from Businesses to be Divested2 (0.04 ) (0.03 ) 33 %
Diluted EPS, excluding Businesses to be Divested $ 1.27 $ 1.39 -9 %
Diluted weighted average common shares outstanding 461.4 474.3
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(1) This schedule is intended to satisfy the quantitative reconciliation for non-GAAP financial measures in accordance with Regulation G of the Securities and Exchange Commission. In addition, this information is provided to enhance the visibility of the underlying business trends relating to the Company's on-going operations by excluding the results relating to the businesses the Company intends to divest.
(2) Net loss from Businesses to be Divested represent the operating results for Cole Haan and Umbro, along with the costs for executing these divestitures.
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Consolidated Operating Results
Revenues
Three Months Ended
August 31,
% Change
Excluding
Currency
(Dollars in millions) 2012 2011 % Change Changes (1)
NIKE Brand Revenues by:
Footwear $ 3,690 $ 3,339 11 % 16 %
Apparel 1,761 1,602 10 % 15 %
Equipment 386 343 13 % 17 %
Global Brand Divisions 27 32 -16 % -7 %
Total NIKE Brand $ 5,864 $ 5,316 10 % 16 %
Other Businesses 635 585 9 % 9 %
Businesses to be Divested 195 188 4 % 6 %
Corporate(2) (25 ) (8 ) - -
TOTAL NIKE, INC. REVENUES $ 6,669 $ 6,081 10 % 15 %
Supplemental NIKE Brand Revenues
Details by:
Sales to Wholesale Customers $ 4,740 $ 4,375 8 % 14 %
Sales Direct to Consumer 1,097 909 21 % 24 %
Global Brand Divisions 27 32 -16 % -7 %
TOTAL NIKE BRAND REVENUES $ 5,864 $ 5,316 10 % 16 %
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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.
On a currency neutral basis, revenues for NIKE, Inc. grew 15% for the first quarter of fiscal 2013, driven by increases in revenues for the NIKE Brand, our Other Businesses and Businesses to be Divested. Excluding the effects of changes in currency exchange rates, revenues for the NIKE Brand increased 16%, as every NIKE Brand geography except Japan delivered higher revenues for the first quarter. North America contributed approximately 10 percentage points to the NIKE Brand revenue increase, while the Emerging Markets and Western Europe geographies contributed approximately 3 and 1 percentage points, respectively. Revenues for our Other Businesses grew 9% during the first quarter, while revenues for our Businesses to be Divested grew 6%.
Excluding the effects of changes in currency exchange rates, NIKE Brand footwear and apparel revenue increased 16% and 15%, respectively, while NIKE Brand equipment revenues increased 17% during the first quarter of fiscal 2013. Continuing to fuel the growth of our NIKE Brand footwear business was the increased demand for performance products, notably those utilizing our NIKE Lunar and FREE technologies. The increase in NIKE Brand footwear revenue for the first quarter was the result of high-single-digit percentage growth in unit sales and mid-single-digit percentage growth in average selling price per pair, reflecting the impact of product price increases, partially offset by a shift in product mix and geographical mix of sales. The overall increase in footwear revenues was driven by growth across all key categories, notably Running, Basketball and Sportswear. For NIKE Brand apparel, the increase in revenue for the first quarter was driven by double-digit percentage growth in average selling prices along with mid-single-digit percentage growth in unit sales. The increase in average selling prices was primarily driven by product price increases and more favorable sales mix of higher price point products. The overall increase in apparel revenues 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, which include NIKE owned in-line and factory stores, as well as online sales through NIKE owned websites. For the first quarter of 2013, Direct to Consumer channels represented approximately 19% of our total NIKE Brand revenues compared to 17% in fiscal 2012. On a currency neutral basis, Direct to Consumer revenues grew 24% for the first quarter, as comparable store sales grew 15% 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 Converse, Hurley and NIKE Golf. Excluding the impact of currency changes, revenues for these businesses increased by 9% in the first quarter of fiscal 2013, reflecting growth across all businesses.
Revenues for Businesses to be Divested consist of results from Cole Haan and Umbro. Revenues for these businesses grew 6% for the first quarter, as revenue growth at Cole Haan more than offset lower revenues at Umbro.
Futures Orders
Futures orders for NIKE Brand footwear and apparel scheduled for delivery from September 2012 through January 2013 were 6% 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 8%, as unit orders contributed approximately 5 percentage points of the growth and average selling price per unit contributed approximately 3 percentage points.
By geography, futures orders growth was as follows:
Reported Futures Orders Futures Orders Excluding
Growth Currency Changes(1)
North America 13 % 13 %
Western Europe -1 % 6 %
Central & Eastern Europe 4 % 7 %
Greater China -5 % -6 %
Japan 5 % 7 %
Emerging Markets 9 % 14 %
TOTAL NIKE BRAND FUTURES ORDERS 6 % 8 %
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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, the mix of orders which 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 and Businesses to be Divested.
Gross Margin
Three Months Ended
August 31,
(Dollars in millions) 2012 2011 % Change
Gross Profit $ 2,903 $ 2,693 8 %
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For the first quarter of fiscal 2013, our consolidated gross margin was 80 basis points lower than the prior year period, primarily driven by higher product input costs, including materials and labor, as well as a shift in the geographical mix of our business, as a larger percentage of our sales were generated in North America where products generally carry a lower gross margin. Also contributing to the decrease in gross margin were higher royalties paid to third parties and a lower mix of licensee revenues within the Converse business. Together, these factors decreased consolidated gross margin by more than 400 basis points. Largely offsetting this decrease were positive impacts from product price increases, favorable impacts from fewer close-out sales, the growth of our NIKE Brand Direct to Consumer business, and benefits from our ongoing product cost reduction initiatives.
Selling and Administrative Expense
Three Months Ended
August 31,
(Dollars in millions) 2012 2011 % Change
Demand creation expense (1) $ 891 $ 692 29 %
Operating overhead expense 1,262 1,131 12 %
Selling and administrative expense $ 2,153 $ 1,823 18 %
% of Revenues 32.3 % 30.0 % 230 bps
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(1) Demand creation consists of advertising and promotion expenses, including costs of endorsement contracts.
Demand creation expense increased 29% compared to the first quarter of the prior year, driven by a higher level of brand event spending around the Olympics and European Football Championships, as well as an increase in marketing support for key product initiatives, including our digital sport and NFL products. For the first quarter of fiscal 2013, changes in currency exchange rates decreased the growth of demand creation expense by approximately 5 percentage points.
For the first quarter of fiscal 2013, operating overhead expense increased 12%, primarily attributable to higher personnel costs to support the growth of our overall business as well as increased investments in our Direct to Consumer operations. For the first quarter, changes in currency exchange rates decreased the growth of operating overhead expense by approximately 3 percentage points.
Other (Income) Expense, net
Other (income) expense, net is comprised of foreign currency conversion gains and losses from the re-measurement of monetary assets and liabilities denominated in non-functional currencies, the impact of certain foreign currency derivative instruments, as well as unusual or non-operating transactions that are outside the normal course of business.
Other (income) expense, net for the first quarter of fiscal 2013 increased $47 million compared to the prior year. This change was primarily driven by a $36 million change in foreign currency net losses in the prior year to net gains in the current year. Also contributing to the increase in other (income) expense, net were certain net gains related to non-operating items.
For the first quarter of fiscal 2013, we estimate that the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in other (income) expense, net decreased the year-over-year growth of our income before income taxes by approximately $28 million.
Income Taxes
Three Months Ended
August 31,
2012 2011 % Change
Effective tax rate 27.5 % 24.3 % 320bps
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Our effective tax rate for the first quarter of fiscal 2013 was 320 basis points higher than the effective tax rate for the first quarter of fiscal 2012. The increase in our effective tax rate was primarily driven by an increase in earnings from countries with higher effective tax rates, particularly the United States, as well as a higher effective rate on international operations. The effective tax rate was also impacted by changes in uncertain tax positions.
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Operating Segments
Reportable operating segments are based on our internal geographic organization. Each of the NIKE Brand geographies operate predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel, and equipment. Our reportable operating segments for the NIKE Brand are: North America, Western Europe, Central & Eastern Europe, Greater China, Japan, and Emerging Markets. Our NIKE Brand Direct to Consumer operations are managed within each geographic segment.
As part of our centrally managed foreign exchange risk management program, standard foreign currency rates are assigned twice per year to each NIKE Brand entity in our geographic operating segments and certain Other Businesses. These rates are set approximately nine months in advance of the future selling season based on average market spot rates in the calendar month preceding the date they are established. Inventories and cost of sales for geographic operating segments and certain Other Businesses reflect use of these standard rates to record non-functional currency product purchases into the entity's functional currency. Differences between assigned standard foreign currency rates and actual market rates are included in Corporate together with foreign currency hedge gains and losses generated from our centrally managed foreign exchange risk management program.
The breakdown of revenues follows:
Three Months Ended
August 31,
% Change
Excluding
Currency
(Dollars in millions) 2012 2011(1) % Change Changes (2)
North America $ 2,706 $ 2,200 23 % 23 %
Western Europe 1,167 1,228 -5 % 6 %
Central & Eastern Europe 342 334 2 % 16 %
Greater China 572 528 8 % 7 %
Japan 183 194 -6 % -7 %
Emerging Markets 867 800 8 % 22 %
Global Brand Divisions 27 32 -16 % -7 %
Total NIKE Brand Revenues 5,864 5,316 10 % 16 %
Other Businesses 635 585 9 % 9 %
Businesses to be Divested 195 188 4 % 6 %
Corporate (3) (25 ) (8 ) - -
TOTAL NIKE, INC. REVENUES $ 6,669 $ 6,081 10 % 15 %
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(1) Certain prior year amounts have been reclassified to conform to fiscal 2013 presentation. These changes had no impact on previously reported results of operations or shareholders' equity.
(2) 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.
(3) Corporate revenues primarily consist of certain intercompany revenue eliminations and foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and certain Other Businesses but managed through our central foreign exchange risk management program.
The primary financial measure used by the Company to evaluate performance of individual operating segments is earnings before interest and taxes (commonly referred to as "EBIT") which represents net income before interest (income) expense, net and income taxes in the consolidated statements of income. As discussed in Note 10 - Operating Segments in the accompanying Notes to the Consolidated Financial Statements, certain corporate costs are not included in EBIT of our operating segments.
The breakdown of earnings before interest and taxes is as follows:
Three Months Ended
August 31,
(Dollars in millions) 2012 2011(1) % Change
North America $ 630 $ 539 17 %
Western Europe 214 223 -4 %
Central & Eastern Europe 61 70 -13 %
Greater China 164 171 -4 %
Japan 24 34 -29 %
Emerging Markets 223 190 17 %
Global Brand Divisions (375 ) (266 ) -41 %
Total NIKE Brand 941 961 -2 %
Other Businesses 121 104 16 %
Businesses to be Divested (18 ) (18 ) 0 %
Corporate (265 ) (195 ) -36 %
TOTAL CONSOLIDATED EARNINGS BEFORE INTEREST AND TAXES $ 779 $ 852 -9 %
Interest (income) expense, net (3 ) - -
TOTAL CONSOLIDATED INCOME BEFORE INCOME TAXES $ 782 $ 852 -8 %
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(1) Certain prior year amounts have been reclassified to conform to fiscal 2013 presentation. These changes had no impact on previously reported results of operations or shareholders' equity.
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North America
Three Months Ended
August 31,
% Change
Excluding
Currency
(Dollars in millions) 2012 2011 % Change Changes
Revenues by:
Footwear $ 1,732 $ 1,444 20 % 20 %
Apparel 795 632 26 % 26 %
Equipment 179 124 44 % 44 %
TOTAL REVENUES $ 2,706 $ 2,200 23 % 23 %
Revenues by:
Sales to Wholesale Customers $ 2,012 $ 1,636 23 % 23 %
Sales Direct to Consumer 694 564 23 % 23 %
TOTAL REVENUES $ 2,706 $ 2,200 23 % 23 %
EARNINGS BEFORE INTEREST AND TAXES $ 630 $ 539 17 %
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For the first quarter of fiscal 2013, revenues for North America grew 23% on both a reported and constant currency basis, driven by growth in both wholesale and Direct to Consumer revenues. Our category offense continued to deliver innovative products, deep brand connections and compelling retail experiences to consumers, driving demand for NIKE Brand products across all seven key categories. North America's Direct to Consumer revenues grew 23% for the first quarter, fueled by 18% growth in comparable store sales.
For the first quarter, footwear revenue in North America grew 20%, driven by an increase in both unit sales and average selling prices. Unit sales rose at a double-digit rate while average selling price per pair grew at a high-single-digit rate, reflective of product price increases and more favorable . . .
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