filings.toolsNIKE 10-Q 2022-08-31
Filed 2022-10-06. 7 sections, 164K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
Commission File No. 1-10635
NIKE, Inc.
(Exact name of Registrant as specified in its charter)
| Oregon | 93-0584541 | ||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
One Bowerman Drive, Beaverton, Oregon 97005-6453
(Address of principal executive offices and zip code)
(503) 671-6453
(Registrant's telephone number, including area code)
| SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: | |||||||||||
| Class B Common Stock | NKE | New York Stock Exchange | |||||||||
| (Title of each class) | (Trading symbol) | (Name of each exchange on which registered) |
| Indicate by check mark: | YES | NO | ||||||||||||||||||||||||||||||||||||
| • | whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | þ | ☐ | |||||||||||||||||||||||||||||||||||
| • | whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | þ | ☐ | |||||||||||||||||||||||||||||||||||
| • | whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | |||||||||||||||||||||||||||||||||||||
| Large accelerated filer | þ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ | |||||||||||||||||||||||||||||
| • | if an emerging growth company, if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ | ||||||||||||||||||||||||||||||||||||
| • | whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). | ☐ | þ |
| As of September 29, 2022, the number of shares of the Registrant's Common Stock outstanding were: | |||||
| Class A | 304,903,252 | ||||
| Class B | 1,259,687,689 | ||||
| 1,564,590,941 |
NIKE, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NIKE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
| THREE MONTHS ENDED AUGUST 31, | ||||||||||||||
| (In millions, except per share data) | 2022 | 2021 | ||||||||||||
| Revenues | $ | 12,687 | $ | 12,248 | ||||||||||
| Cost of sales | 7,072 | 6,552 | ||||||||||||
| Gross profit | 5,615 | 5,696 | ||||||||||||
| Demand creation expense | 943 | 918 | ||||||||||||
| Operating overhead expense | 2,977 | 2,654 | ||||||||||||
| Total selling and administrative expense | 3,920 | 3,572 | ||||||||||||
| Interest expense (income), net | 13 | 57 | ||||||||||||
| Other (income) expense, net | (146) | (39) | ||||||||||||
| Income before income taxes | 1,828 | 2,106 | ||||||||||||
| Income tax expense | 360 | 232 | ||||||||||||
| NET INCOME | $ | 1,468 | $ | 1,874 | ||||||||||
| Earnings per common share: | ||||||||||||||
| Basic | $ | 0.94 | $ | 1.18 | ||||||||||
| Diluted | $ | 0.93 | $ | 1.16 | ||||||||||
| Weighted average common shares outstanding: | ||||||||||||||
| Basic | 1,567.1 | 1,581.9 | ||||||||||||
| Diluted | 1,585.8 | 1,619.6 |
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.
NIKE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| THREE MONTHS ENDED AUGUST 31, | ||||||||
| (Dollars in millions) | 2022 | 2021 | ||||||
| Net income | $ | 1,468 | $ | 1,874 | ||||
| Other comprehensive income (loss), net of tax: | ||||||||
| Change in net foreign currency translation adjustment | (226) | (128) | ||||||
| Change in net gains (losses) on cash flow hedges | 555 | 438 | ||||||
| Change in net gains (losses) on other | (11) | 3 | ||||||
| Total other comprehensive income (loss), net of tax | 318 | 313 | ||||||
| TOTAL COMPREHENSIVE INCOME | $ | 1,786 | $ | 2,187 |
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.
NIKE, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| AUGUST 31, | MAY 31, | ||||||||||
| (In millions) | 2022 | 2022 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and equivalents | $ | 7,226 | $ | 8,574 | |||||||
| Short-term investments | 4,650 | 4,423 | |||||||||
| Accounts receivable, net | 4,960 | 4,667 | |||||||||
| Inventories | 9,662 | 8,420 | |||||||||
| Prepaid expenses and other current assets | 2,379 | 2,129 | |||||||||
| Total current assets | 28,877 | 28,213 | |||||||||
| Property, plant and equipment, net | 4,778 | 4,791 | |||||||||
| Operating lease right-of-use assets, net | 2,880 | 2,926 | |||||||||
| Identifiable intangible assets, net | 283 | 286 | |||||||||
| Goodwill | 282 | 284 | |||||||||
| Deferred income taxes and other assets | 3,988 | 3,821 | |||||||||
| TOTAL ASSETS | $ | 41,088 | $ | 40,321 | |||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | 500 | $ | 500 | |||||||
| Notes payable | 9 | 10 | |||||||||
| Accounts payable | 3,371 | 3,358 | |||||||||
| Current portion of operating lease liabilities | 424 | 420 | |||||||||
| Accrued liabilities | 6,277 | 6,220 | |||||||||
| Income taxes payable | 338 | 222 | |||||||||
| Total current liabilities | 10,919 | 10,730 | |||||||||
| Long-term debt | 8,922 | 8,920 | |||||||||
| Operating lease liabilities | 2,736 | 2,777 | |||||||||
| Deferred income taxes and other liabilities | 2,689 | 2,613 | |||||||||
| Commitments and contingencies (Note 12) | |||||||||||
| Redeemable preferred stock | — | — | |||||||||
| Shareholders' equity: | |||||||||||
| Common stock at stated value: | |||||||||||
| Class A convertible — 305 and 305 shares outstanding | — | — | |||||||||
| Class B — 1,259 and 1,266 shares outstanding | 3 | 3 | |||||||||
| Capital in excess of stated value | 11,648 | 11,484 | |||||||||
| Accumulated other comprehensive income (loss) | 636 | 318 | |||||||||
| Retained earnings | 3,535 | 3,476 | |||||||||
| Total shareholders' equity | 15,822 | 15,281 | |||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 41,088 | $ | 40,321 |
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of this statement.
NIKE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| THREE MONTHS ENDED AUGUST 31, | ||||||||
| (Dollars in millions) | 2022 | 2021 | ||||||
| Cash provided (used) by operations: | ||||||||
| Net income | $ | 1,468 | $ | 1,874 | ||||
| Adjustments to reconcile net income to net cash provided (used) by operations: | ||||||||
| Depreciation | 169 | 177 | ||||||
| Deferred income taxes | (43) | (145) | ||||||
| Stock-based compensation | 170 | 136 | ||||||
| Amortization, impairment and other | (9) | (9) | ||||||
| Net foreign currency adjustments | 16 | 43 | ||||||
| Changes in certain working capital components and other assets and liabilities: | ||||||||
| (Increase) decrease in accounts receivable | (415) | 36 | ||||||
| (Increase) decrease in inventories | (1,363) | 101 | ||||||
| (Increase) decrease in prepaid expenses, operating lease right-of-use assets and other current and non-current assets | (128) | (242) | ||||||
| Increase (decrease) in accounts payable, accrued liabilities, operating lease liabilities and other current and non-current liabilities | 492 | (860) | ||||||
| Cash provided (used) by operations | 357 | 1,111 | ||||||
| Cash provided (used) by investing activities: | ||||||||
| Purchases of short-term investments | (2,469) | (2,550) | ||||||
| Maturities of short-term investments | 1,432 | 2,096 | ||||||
| Sales of short-term investments | 948 | 1,037 | ||||||
| Additions to property, plant and equipment | (264) | (184) | ||||||
| Other investing activities | 139 | 102 | ||||||
| Cash provided (used) by investing activities | (214) | 501 | ||||||
| **Cash provided (used) by financi |
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
NIKE designs, develops, markets and sells athletic footwear, apparel, equipment, accessories and services worldwide. We are the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE Direct operations, which is comprised of both NIKE-owned retail stores and sales through our digital platforms (also referred to as "NIKE Brand Digital"), to retail accounts and to a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. Our goal is to deliver value to our shareholders by building a profitable global portfolio of branded footwear, apparel, equipment and accessories 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 through digital platforms and at retail.
Through the Consumer Direct Acceleration, we are focusing on creating the marketplace of the future through more premium, consistent and seamless consumer experiences, leading with digital and our owned stores, as well as select wholesale partners that share our marketplace vision. Over the last several years, as we have executed against the Consumer Direct Acceleration, we have grown our NIKE Direct business to be approximately 42% of total NIKE Brand revenues for the first quarter of fiscal 2023, and we have reduced the number of wholesale accounts globally. Additionally, we have aligned our product creation and category organizations around a new consumer construct focused on Men’s, Women’s and Kids’ and continue to invest in data and analytics, demand sensing, insight gathering, inventory management and other areas to create an end-to-end technology foundation, which we expect will further accelerate our digital transformation. We believe this unified approach will accelerate growth and unlock more efficiency for our business, while driving speed and responsiveness as we serve consumers globally.
CURRENT ECONOMIC CONDITIONS AND MARKET DYNAMICS
Ongoing supply chain challenges, macroeconomic conditions and the COVID-19 pandemic continue to create volatility in our business results and operations globally. Despite these challenges, our first quarter Revenues increased 4% and 10% on a reported and currency-neutral basis, respectively, led by North America, EMEA and APLA, partially offset by declines in Greater China due to COVID-19 disruptions. However, gross margin decreased by 220 basis points in the first quarter of fiscal 2023 with elevated freight and logistics costs and higher promotional activity, among other items, contributing to this decrease.
During fiscal 2022, we experienced elevated inventory transit times due to port congestion, transportation delays, and labor and container shortages which caused seasonally late product to arrive in the first quarter of fiscal 2023. As a result, we planned our fiscal 2023 product purchases based on elevated inventory transit times continuing. However, during the first quarter of fiscal 2023, inventory transit times improved ahead of plan, particularly in North America, resulting in challenges managing the timing of seasonal inventory flow. This disruption in the flow of product caused inventories in North America to grow to $4.7 billion, an increase of 15% compared to the fourth quarter of fiscal 2022. At the same time, there is increased promotional activity across the retail industry. We increased promotional activity in the first quarter of fiscal 2023, primarily in North America, and expect to increase promotional activity in the second quarter of fiscal 2023, to sell excess inventory and create capacity in the marketplace for new seasonally relevant product.
Most of our geographies are currently operating with little to no COVID-19 related restrictions, but revenues in Greater China for the first quarter of fiscal 2023 were impacted by lower retail traffic as a result of COVID-19 related disruptions.
Fluctuations in currency exchange rates also create volatility in our reported results as we translate the balance sheets, operational results and cash flows of our subsidiaries into U.S. Dollars for consolidated reporting. During the first quarter of fiscal 2023, foreign currency headwinds increased significantly as the U.S. Dollar strengthened in relation to most foreign currencies, reducing reported Revenues by $823 million.
We expect unfavorable changes in foreign currency exchange rates, net of hedges, will have a material negative impact on reported Revenues and Income before income taxes for the second quarter of fiscal 2023. Additionally, we expect the continued combination of elevated freight and logistics costs and increased promotional activity will have a negative impact on gross margin for the second quarter of fiscal 2023.
We also continue to closely monitor macroeconomic conditions, including consumer behavior and the potential impacts inflation could have on consumer demand for our product. While we believe our Consumer Direct Acceleration Strategy continues to drive our business toward our long-term financial goals, worsening macroeconomic conditions could affect our business, including, among other things, higher inventory levels in various markets, higher inventory obsolescence reserves, higher promotional activity, reduced demand for our products, reduced orders from our wholesale customers for our products and order cancellations. There could also be new COVID-19 related restrictions or disruptions across our geographies. Any of these factors, among others, could have material adverse impacts on our revenue growth as well as overall profitability in future periods.
FIRST QUARTER OVERVIEW
For the first quarter of fiscal 2023, NIKE, Inc. Revenues increased 4% to $12.7 billion compared to the first quarter of fiscal 2022 and increased 10% on a currency-neutral basis. Net income was $1,468 million and diluted earnings per common share was $0.93 for the first quarter of fiscal 2023, compared to Net income of $1,874 million and diluted earnings per common share of $1.16 for the first quarter of fiscal 2022.
Income before income taxes decreased 13% compared to the first quarter of fiscal 2022, due to higher Selling and administrative expense and gross margin contraction, partially offset by higher Revenues. NIKE Brand revenues, which represent over 90% of NIKE, Inc. Revenues, increased 4% compared to the first quarter of fiscal 2022. On a currency-neutral basis, NIKE Brand revenues increased 10%, driven by higher revenues in North America, EMEA and APLA, partially offset by declines in Greater China. Additionally, NIKE Brand currency-neutral revenues were higher across footwear and apparel, as well as Men's, the Jordan Brand, Kids' and Women's. Revenues for Converse increased 2% and 8% compared to the first quarter of fiscal 2022, on a reported and currency-neutral basis, respectively, led by strong performance in North America and Western Europe, partially offset by declines in Asia.
Our effective tax rate was 19.7% for the first quarter of fiscal 2023, compared to 11.0% for the first quarter of fiscal 2022, primarily due to decreased benefits from stock-based compensation.
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 that includes, among other provisions, changes to the U.S. corporate income tax system, including a fifteen percent minimum tax based on "adjusted financial statement income," which is effective for NIKE beginning June 1, 2023, and a one percent excise tax on net repurchases of stock after December 31, 2022. We are continuing to evaluate the Inflation Reduction Act and its requirements, as well as the application to our business.
During the first quarter of fiscal 2023, we completed the sale of our entity in Chile to a third party distributor and the impacts of completing this transaction
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information previously reported under Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended May 31, 2022.
Item 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Securities Exchange Act of 1934, as amended ("the Exchange Act") reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of August 31, 2022.
We are continuing several transformation initiatives to centralize and simplify our business processes and systems. These are long-term initiatives, which we believe will enhance our internal control over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout these transformation initiatives.
There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND ANALYST REPORTS
Certain written and oral statements, other than purely historic information, including estimates, projections, statements relating to NIKE’s business plans, objectives and expected operating or financial results and the assumptions upon which those statements are based, made or incorporated by reference from time to time by NIKE or its representatives in this report, other reports, filings with the SEC, press releases, conferences or otherwise, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “will be,” “will continue,” “will likely result” or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by NIKE with the SEC, including reports filed on Forms 8-K, 10-Q and 10-K, and include, among others, the following: health epidemics, pandemics and similar outbreaks, including the COVID-19 pandemic; international, national and local political, civil, economic and market conditions; the size and growth of the overall athletic or leisure footwear, apparel and equipment markets; intense competition among designers, marketers, distributors and sellers of athletic or leisure footwear, apparel and equipment for consumers and endorsers; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products and sports; seasonal and geographic demand for NIKE products; difficulties in anticipating or forecasting changes in consumer preferences, consumer demand for NIKE products and the various market factors described above; our ability to execute on our sustainability strategy and achieve our sustainability-related goals and targets, including sustainable product offerings; difficulties in implementing, operating and maintaining NIKE’s increasingly complex information technology systems and controls, including, without limitation, the systems related to demand and supply planning and inventory control; interruptions in data and information technology systems; consumer data security; fluctuations and difficulty in forecasting operating results, including, without limitation, the fact that advance orders may not be indicative of future revenues due to changes in shipment timing, the changing mix of orders with shorter lead times, and discounts, order cancellations and returns; the ability of NIKE to sustain, manage or forecast its growth and inventories; the size, timing and mix of purchases of NIKE’s products; increases in the cost of materials, labor and energy used to manufacture products; new product development and introduction; the ability to secure and protect trademarks, patents and other intellectual property; product performance and quality; customer service; adverse publicity and an inability to maintain NIKE's reputation and brand image, including without limitation, through social media or in connection with brand damaging events; the loss of significant customers or suppliers; dependence on distributors and licensees; business disruptions; increased costs of freight and transportation to meet delivery deadlines; increases in borrowing costs due to any decline in NIKE’s debt ratings; changes in business strategy or development plans; general risks associated with doing business outside of the United States, including, without limitation, exchange rate fluctuations, inflation, import duties, tariffs, quotas, sanctions, political and economic instability, conflicts and terrorism; the potential impact of new and existing laws, regulations or policy, including, without limitation, tariffs, import/export, trade, wage and hour or labor and immigration regulations or policies; changes in government regulations; the impact of, including business and legal developments relating to, climate change, extreme weather conditions and natural disasters; litigation, regulatory proceedings, sanctions or any other claims asserted against NIKE; the ability to attract and retain qualified employees, and any negative public perception with respect to key personnel or our corporate culture, values or purpose; the effects of NIKE’s decision to invest in or divest of businesses or capabilities and other factors referenced or incorporated by reference in this report and other reports.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments with respect to the information previously reported under Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended May 31, 2022.
Item 1A. RISK FACTORS
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended May 31, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In August 2022, the Company terminated the previous four-year, $15 billion share repurchase program approved by the Board of Directors in June 2018. Prior to the program's termination, the Company purchased 6.5 million shares at an average price of $109.85 per share for a total approximate cost of $710.0 million during the first quarter of fiscal 2023 and 83.8 million shares at an average price of $111.82 per share for a total approximate cost of $9.4 billion during the term of this program.
Upon termination of the $15 billion program, the Company began purchasing shares under a new four-year, $18 billion share repurchase program authorized by the Board of Directors in June 2022. As of August 31, 2022, the Company had repurchased 2.5 million shares at an average price of $112.48 per share for a total approximate cost of $281.1 million under the new program.
All share repurchases were made under NIKE's publicly announced programs, and there are no other programs under which the Company repurchases shares. The following table presents a summary of share repurchases made during the quarter ended August 31, 2022:
| PERIOD | TOTAL NUMBER OF SHARES PURCHASED | AVERAGE PRICE PAID PER SHARE | APPROXIMATE DOLLAR VALUE OF SHARES THAT MAY YET BE PURCHASED UNDER THE PLANS OR PROGRAMS (IN MILLIONS) | ||||||||
| June 1 - June 30, 2022 | 2,947,270 | $ | 112.23 | $ | 6,006 | ||||||
| July 1 - July 31, 2022 | 2,961,287 | $ | 106.71 | $ | 5,690 | ||||||
| August 1 - August 31, 2022 | 3,053,679 | $ | 112.75 | $ | 17,719 | ||||||
| 8,962,236 | $ | 110.58 |
Item 6. EXHIBITS
(a) EXHIBITS:
† Furnished herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NIKE, INC. an Oregon Corporation | ||||||||
| By: | /s/ MATTHEW FRIEND Matthew Friend Chief Financial Officer and Authorized Officer | |||||||
| Date: | October 6, 2022 |