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| NKE > SEC Filings for NKE > Form 10-Q on 8-Oct-2009 | All Recent SEC Filings |
8-Oct-2009
Quarterly Report
Overview
In the first quarter of fiscal 2010, our revenues declined 12% to $4.8 billion, net income increased slightly to $513.0 million and we delivered diluted earnings per share of $1.04, a 1% increase compared to the first quarter of fiscal 2009.
Income before income taxes decreased 5% for the first quarter as a result of the decline in revenues and a 1 percentage point decline in gross margin, partially offset by a 17% decrease in selling and administrative expenses. Revenues decreased as a result of both a continued slowdown in global consumer spending and comparison to record revenues achieved in the first quarter of fiscal 2009, driven by the 2008 Beijing Olympics and European Football Championships. The decline in selling and administrative expenses was primarily due to a comparison to high levels of demand creation spending in the first quarter of fiscal 2009 around these events and lower wholesale operating overhead, partially offset by higher spending on NIKE-owned retail stores and infrastructure.
Net income and diluted earnings per share for the first quarter of fiscal 2010 were positively affected by a year-over-year decrease in our effective tax rate from 28.5% to 24.7%.
Results of Operations
Three Months Ended
August 31,
2009 2008 % Change
(dollars in millions, except per share data)
Revenues $ 4,798.5 $ 5,432.2 -12 %
Cost of sales 2,583.0 2,870.1 -10 %
Gross margin 2,215.5 2,562.1 -14 %
Gross margin % 46.2 % 47.2 %
Selling and administrative 1,546.1 1,856.4 -17 %
% of revenue 32.2 % 34.2 %
Income before income taxes 681.2 714.2 -5 %
Net income 513.0 510.5 0 %
Diluted earnings per share 1.04 1.03 1 %
Consolidated Operating Results
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Revenues
Three Months Ended
August 31,
2009 2008 % Change
(dollars in millions)
Revenues $ 4,798.5 $ 5,432.2 -12 %
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Excluding changes in currency exchange rates, revenue for NIKE, Inc. declined 7% for the first quarter of fiscal 2010. The decline in revenues was primarily driven by our NIKE brand business. Our Other Businesses had a minimal impact on the overall decline in revenues.
Excluding the effects of changes in currency exchange rates, revenues for our NIKE brand business declined 7% for the first quarter of 2010. All of our NIKE brand product groups and geographies delivered lower revenues with the exception of the Emerging Markets geography, reflecting both a challenging economic environment across most markets and a comparison to record revenues achieved in the first quarter of fiscal 2009, driven by the 2008 Beijing Olympics and European Football Championships. Our North America geography contributed 2 percentage points to the revenue decline while the remaining international geographies contributed 5 percentage points to the decline.
By product group, our worldwide NIKE brand footwear business declined 10% and decreased revenues by $294.3 million, while both our worldwide NIKE brand apparel and equipment businesses declined 16% and, combined, decreased revenues by $307.8 million.
Our Other Businesses were comprised primarily of results from Cole Haan, Converse Inc., Hurley International LLC, NIKE Golf and Umbro Ltd. Revenues for these businesses declined 5%, driven primarily by decreases for NIKE Golf and Cole Haan due to reductions in consumer discretionary spending in their respective markets.
Gross Margin
Three Months Ended
August 31,
2009 2008 % Change
(dollars in millions)
Gross margin $ 2,215.5 $ 2,562.1 -14 %
Gross margin % 46.2 % 47.2 % (100) bps
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For the first quarter of fiscal 2010, the primary factors contributing to the 100 basis point decline in consolidated gross margin percentage versus the prior year period were increased discounts and unfavorable foreign exchange impacts relative to the prior year. Higher levels of discounts were provided across most businesses in the first quarter of fiscal 2010 to manage inventory levels under current market conditions. The unfavorable foreign exchange rates were a result of less favorable year-over-year currency rates, most notably within our Emerging Markets and Central and Eastern Europe geographies. Combined, these factors decreased consolidated gross margins by approximately 110 basis points, and were partially offset by the effect of an increase in NIKE-owned retail sales as a percentage of total product sales.
Selling and Administrative Expense
Three Months Ended
August 31,
2009 2008 % Change
(dollars in millions)
Operating overhead expense $ 992.5 $ 1,042.3 -5 %
Demand creation expense(1) 553.6 814.1 -32 %
Selling and administrative expense $ 1,546.1 $ 1,856.4 -17 %
% of revenues 32.2 % 34.2 % (200) bps
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(1) Demand creation consists of advertising and promotion expenses, including costs of endorsement contracts.
In the first quarter of fiscal 2010, currency exchange rates decreased selling and administrative expense by 4 percentage points versus the prior year's first quarter.
Excluding changes in exchange rates, operating overhead decreased 1% during the first quarter of fiscal 2010 versus the comparable prior year period. This decrease was primarily attributable to reductions in spending on travel and meetings as well as reductions in wage related spending as a result of restructuring activities that occurred in the fourth quarter of fiscal 2009, mostly offset by investments in NIKE-owned retail.
On a constant-currency basis, demand creation expense decreased 28% during the first quarter of fiscal 2010 compared to the same period in the prior year. The decline in demand creation spending was due primarily to a comparison to high levels of demand creation investment in the first quarter of fiscal 2009 around the 2008 Beijing Olympics and European Football Championships.
Other Income (Expense), net
Other income (expense), net is primarily comprised of foreign currency conversion gains and losses from the remeasurement of monetary assets and liabilities in non-functional currencies and the impact of foreign currency derivative instruments, as well as disposals of fixed assets and other unusual or non-recurring transactions that are outside the normal course of business. For the first quarter of fiscal 2010, other income (expense), net was primarily comprised of foreign currency conversion gains and the recognition of licensing income related to our fiscal 2008 sale of NIKE Bauer Hockey. For the first quarter of fiscal 2009, other income (expense), net was primarily comprised of foreign currency conversion losses, offset by the recognition of licensing income related to our fiscal 2008 sale of NIKE Bauer Hockey and other non-recurring gains.
In the first quarter of fiscal 2010, we estimate the combination of foreign currency hedge gains in Other income (expense), net and the unfavorable translation of foreign currency-denominated profits from our international businesses resulted in a year-over-year decrease in consolidated income before income taxes of approximately $28 million.
Income Taxes
Our effective tax rate for the first quarter of fiscal 2010 was 380 basis points lower than the prior year period due primarily to the reduction in our on-going effective tax rate resulting from operations outside of the United States; our tax rates on those operations are generally lower than the U.S. statutory rate. We estimate our effective tax rate for fiscal year 2010 will be approximately 25.5%.
Futures Orders
Worldwide futures and advance orders for our footwear and apparel, scheduled for delivery from September 2009 through January 2010, were 6% lower than such orders reported for the comparable period of fiscal 2009. This futures growth rate is calculated based upon our forecasts of the actual exchange rates under which our revenues will be translated during this period, which approximate current spot rates. The net effect of changes in foreign currency exchange rates contributed approximately 2 percentage points to the futures decline versus the same period in the prior year. Excluding this currency impact, decreases in unit sales volume, partially offset by growth in average unit price for both footwear and apparel drove the decrease in overall futures and advance orders.
The reported futures and advance 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 advance/futures and at-once orders. In addition, exchange rate fluctuations as well as differing levels of order cancellations and discounts can cause differences in the comparisons between advance/futures orders and actual revenues. Moreover, a significant portion of our revenue is not derived from futures and advance orders, including at-once and closeout sales of NIKE footwear and apparel, wholesale sales of equipment, Cole Haan, Converse, Hurley, Umbro, NIKE Golf and retail sales across all brands.
Operating Segments
As previously announced, in the third quarter of fiscal 2009 the Company
initiated a reorganization of the NIKE brand into a new model consisting of six
geographies. Effective June 1, 2009, the Company's new reportable operating
segments for the NIKE brand are: North America, Western Europe, Central and
Eastern Europe, Greater China, Japan, and Emerging Markets. Previously, NIKE
brand operations were organized into the following four geographic regions:
U.S., Europe, Middle East and Africa (collectively, "EMEA"), Asia Pacific, and
Americas.
As part of our centrally managed foreign exchange risk management program, standard foreign currency rates are assigned to each NIKE brand entity in our geographic operating segments and are used to record any non-functional currency revenues or product purchases into the entity's functional currency. Geographic operating segment revenues and cost of sales reflect use of these standard rates. For all NIKE brand operating segments, 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 is as follows:
Three Months Ended
August 31,
% Change
Excluding
Currency
2009 2008 % Change Changes (1)
(dollars in millions)
North America $ 1,760.1 $ 1,857.5 -5 % -5 %
Western Europe 1,105.2 1,349.0 -18 % -8 %
Central and Eastern Europe 286.2 429.8 -33 % -23 %
Greater China 415.5 496.4 -16 % -17 %
Japan 186.0 186.4 0 % -10 %
Emerging Markets 421.8 457.8 -8 % 9 %
Global Brand Divisions 30.7 22.2 38 % 57 %
Total NIKE Brand 4,205.5 4,799.1 -12 % -7 %
Other Businesses 603.9 633.1 -5 % -3 %
Corporate(2) (10.9 ) - - -
Total NIKE Consolidated Net Revenues $ 4,798.5 $ 5,432.2 -12 % -7 %
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(1) Fiscal 2010 results have been restated using fiscal 2009 exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rate fluctuations.
(2) Corporate primarily consists of results from our centrally managed foreign exchange risk management program and foreign currency gains and losses resulting from the difference between actual foreign currency rates and standard rates assigned to our geographic operating segments.
The breakdown of earnings before interest and taxes is as follows:
Three Months Ended
August 31,
2009 2008 % Change
(dollars in millions)
North America $ 410.6 $ 373.6 10 %
Western Europe 288.6 323.0 -11 %
Central and Eastern Europe 82.2 126.8 -35 %
Greater China 148.8 138.8 7 %
Japan 35.1 37.9 -7 %
Emerging Markets 101.0 72.9 39 %
Global Brand Divisions (180.5 ) (198.7 ) 9 %
Total NIKE Brand 885.8 874.3 1 %
Other Businesses 86.6 86.6 0 %
Corporate (289.9 ) (256.8 ) -13 %
Total NIKE Consolidated Earnings Before
Interest and Taxes 682.5 704.1 -3 %
Interest (expense) income, net (1.3 ) 10.1
Total NIKE Consolidated Income Before Income
Taxes $ 681.2 $ 714.2
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Effective June 1, 2009, 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 (expense) income, net and income taxes in the Unaudited Condensed Consolidated Statements of Income. Previously, the Company evaluated performance of individual operating segments based on income before income taxes. Financial information has been reclassified to conform to the new primary financial measure used by the Company. We have reported earnings before interest and taxes for each of our operating segments in accordance with Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information." As discussed in Note 12 - Operating Segments in the accompanying Notes to Unaudited Condensed Consolidated Financial Statements, certain corporate costs are not included in earnings before interest and income taxes of our operating segments.
North America
Three Months Ended
August 31,
% Change
Excluding
Currency
2009 2008 % Change Changes
(dollars in millions)
Revenues
Footwear $ 1,218.6 $ 1,267.8 -4 % -3 %
Apparel 443.9 486.9 -9 % -8 %
Equipment 97.6 102.8 -5 % -5 %
Total revenues $ 1,760.1 $ 1,857.5 -5 % -5 %
Earnings Before Interest and Taxes $ 410.6 $ 373.6 10 %
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For the first quarter of fiscal 2010, the decrease in North America footwear revenue was attributable to a low single-digit percentage decline in unit sales driven by lower sales of NIKE brand running, kids, and athletic training products, partially offset by higher sales of NIKE brand basketball and Brand Jordan products. Average selling price per pair was essentially flat compared to the prior year.
The year-over-year decrease in North America apparel revenues during the first quarter of fiscal 2010 reflected a double-digit percentage decrease in unit sales partially offset by a mid-single digit percentage increase in average selling price. The decrease in unit sales was primarily driven by lower sales of NIKE brand sportswear products and a decrease in close-out sales. Average selling prices increased primarily as a result of fewer close-out sales.
The increase in North America's earnings before interest and taxes in the first quarter of fiscal 2010 was a result of lower demand creation and operating overhead expenses as well as higher gross margin percentage in our apparel and NIKE-owned retail businesses. The decrease in demand creation was due to reduced spending on brand events and advertising compared to the prior year spending around the 2008 Beijing Olympics. The decrease in operating overhead was primarily attributable to the reduction in workforce as a result of the restructuring activities that occurred in the fourth quarter of fiscal 2009 as well as reductions in spending around travel and meetings.
Western Europe
Three Months Ended
August 31,
% Change
Excluding
Currency
2009 2008 % Change Changes
(dollars in millions)
Revenues
Footwear $ 635.4 $ 749.5 -15 % -5 %
Apparel 392.6 494.8 -21 % -11 %
Equipment 77.2 104.7 -26 % -17 %
Total revenues $ 1,105.2 $ 1,349.0 -18 % -8 %
Earnings Before Interest and Taxes $ 288.6 $ 323.0 -11 %
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Most markets in Western Europe experienced lower revenues during the first quarter of fiscal 2010, reflecting the overall difficult retail environment in the geography as well as comparisons against record revenue in the prior year, driven by the European Football Championships. Over half of the currency neutral revenue decline for the geography was attributable to lower revenue in the U.K. and Ireland.
The decrease in footwear revenue in the first quarter of fiscal 2010 compared to the same prior year period was attributable to a low single-digit percentage decline in both average selling price per pair and unit sales driven by lower sales of football and running products. The slight decrease in average selling price per pair was mainly attributable to higher customer discounts provided to manage inventory levels.
The decrease in apparel revenue for the first quarter of fiscal 2010 compared to the same prior year period was mainly driven by both declines in unit sales as well as average selling prices due to lower sales in most NIKE brand apparel product categories.
In the first quarter of fiscal 2010, earnings before interest and taxes for Western Europe decreased at a slower rate than revenue as result of lower demand creation expenses compared to prior year spending around the European Football Championships, and reduced operating overhead expense as a result of the fiscal 2009 restructuring.
Central and Eastern Europe
Three Months Ended
August 31,
% Change
Excluding
Currency
2009 2008 % Change Changes
(dollars in millions)
Revenues
Footwear $ 158.9 $ 233.0 -32 % -21 %
Apparel 97.4 154.9 -37 % -28 %
Equipment 29.9 41.9 -29 % -16 %
Total revenues $ 286.2 $ 429.8 -33 % -23 %
Earnings Before Interest and Taxes $ 82.2 $ 126.8 -35 %
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Most markets within Central and Eastern Europe experienced lower revenues during the first quarter of fiscal 2010 as a result of difficult economic conditions and significant currency devaluations.
The decrease in footwear revenue was mainly attributable to double-digit percentage declines in unit sales, driven primarily by lower sales of NIKE brand sportswear, football and running products. Average selling price per pair was essentially flat compared to the prior year period.
In the first quarter of fiscal 2010, earnings before interest and taxes for Central and Eastern Europe decreased at a faster rate than revenue. This is mainly the result of higher selling and administrative expenses related to new NIKE-owned retail stores, partially offset by wage related savings from the fiscal 2009 restructuring.
Greater China
Three Months Ended
August 31,
% Change
Excluding
Currency
2009 2008 % Change Changes
(dollars in millions)
Revenues
Footwear $ 218.4 $ 262.2 -17 % -17 %
Apparel 168.1 199.8 -16 % -16 %
Equipment 29.0 34.4 -16 % -16 %
Total revenues $ 415.5 $ 496.4 -16 % -17 %
Earnings Before Interest and Taxes $ 148.8 $ 138.8 7 %
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The decrease in revenue for Greater China for the first quarter of fiscal 2010 was attributable to the difficult economic and retail environment as well as comparisons against over 50% growth in the prior year period, driven by the 2008 Beijing Olympics.
The decline in footwear revenues was attributable to a high single-digit percentage decrease in average selling price and a low double-digit percentage decrease in unit sales primarily driven by lower sales of NIKE brand sportswear and running products. The decrease in average selling price per pair was mainly due to higher customer discounts and an increased level of close-out sales. The decrease in apparel revenue is mainly attributable to a decline in unit sales.
The increase in China's earnings before interest and taxes during the first quarter of fiscal 2010 was the result of lower demand creation spending, which more than offset the decline in revenue and lower gross margins. The decrease in demand creation spending was primarily attributable to comparisons against the prior year spending around the 2008 Beijing Olympics. The decrease in gross margins for the quarter was primarily driven by the increase in discounts provided to manage inventory levels.
Japan
Three Months Ended
August 31,
% Change
Excluding
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