Market Overview

NIKE, Inc. Reports Fiscal 2020 Third Quarter Results

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NIKE, Inc. (NYSE:NKE) today reported fiscal 2020 financial results for its third quarter ended February 29, 2020.

  • Revenues rose 5 percent on a reported basis and 7 percent on a currency-neutral basis*; Digital sales up 36 percent versus prior year
  • Diluted earnings per share was $0.53, including a $0.25 non-recurring, non-cash charge associated with the transition to a strategic distributor model in South America
  • Inventory increased 7 percent to $5.8 billion; closeout inventory units declined versus prior year

Revenues increased to $10.1 billion in the third quarter, up 5 percent on a reported basis and up 7 percent on a currency-neutral basis, driven by 13 percent currency-neutral growth in NIKE Direct with digital growth of 36 percent and strong growth across EMEA, APLA and North America, offset by the impact of COVID-19 on our business in Greater China. Digital sales in Greater China increased more than 30 percent while brick and mortar retail sales were impacted by temporary store closures related to COVID-19.

"In an extraordinarily dynamic time, NIKE's strong results are testament to our deep consumer connections, compelling product innovation and agile teams around the world. We know it's in times like these that strong brands get even stronger," said John Donahoe, President and CEO, NIKE, Inc. "As we start to see recovery in China, no one is better equipped than NIKE to navigate the current climate."**

Diluted earnings per share for the quarter was $0.53, including a $0.25 non-recurring, non-cash charge related to our entry into definitive agreements to transition our Brazil, Argentina, Chile and Uruguay businesses to a strategic distributor model. Diluted earnings per share was also adversely impacted by COVID-19.

"As we close Q3, NIKE's Brand leadership and business momentum have been stronger than ever and unrivaled around the world," said Andy Campion, Executive Vice President and Chief Financial Officer, NIKE, Inc. "Amidst the dynamics that we are facing, we are executing against an operational playbook that will expedite NIKE's return to profitable, capital efficient growth leveraging our strong financial position, the strongest partnerships across the value chain in our industry, and our leading digital capabilities."**

COVID-19 Update

As discussed in our press release issued on February 4, 2020, operations in Greater China were materially impacted as a result of COVID-19. In the third quarter, on a currency-neutral basis, Greater China revenues were down 4 percent following 22 consecutive quarters of double-digit growth. However, during the first two months of the third quarter, Greater China's revenue grew strong double digits, offset by the impacts of COVID-19 beginning in late January. At the peak in February, roughly 75 percent of NIKE-owned and partner doors in Greater China were closed with others operating on reduced hours. Currently, nearly 80 percent of doors are open in Greater China with an even higher rate in key cities. Beginning March 16th, all NIKE-owned stores, outside of Greater China, Japan and Korea were closed to help curb the spread of COVID-19.

NIKE, Inc. management will provide more detail on the financial and operational impacts of COVID-19 during the conference call later today.

Non-recurring Items Impacting Comparability in the Third Quarter

Third quarter results contain several non-comparable transactions. In February, we announced the execution of agreements to transition our NIKE Brand businesses in Brazil, Argentina, Chile and Uruguay to strategic distributor partnerships. As a result, we classified the assets and liabilities of the entities to be sold as held-for-sale on our Unaudited Consolidated Balance Sheets and recognized a non-recurring, non-cash charge of $400 million. This charge primarily reflects the anticipated release of associated cumulative foreign currency translation losses and could fluctuate due to changes in exchange rates up to the date of close. Additionally, we completed the sale of the Hurley brand and recognized an immaterial gain on sale. Both the Hurley gain on sale and the charge associated with the transition in South America were recognized in Other (income) expense, net on our Unaudited Consolidated Statements of Income. As a result of the sale of the Hurley business, the Company estimates that revenue growth in North America was adversely impacted by approximately 1-2 percentage points during the third quarter.

Third Quarter Income Statement Review

  • Revenues for NIKE, Inc. increased 5 percent to $10.1 billion, up 7 percent on a currency-neutral basis.
    • Revenues for the NIKE Brand were $9.6 billion, up 6 percent on a currency-neutral basis driven by double-digit growth in NIKE Direct and growth in wholesale; key categories including Sportswear and the Jordan Brand, and continued growth across footwear and apparel.
    • Revenues for Converse were $506 million, up 11 percent on a currency-neutral basis, mainly driven by double-digit growth in Europe and in digital, globally.
  • Gross margin decreased 80 basis points to 44.3 percent primarily as a result of impacts from COVID-19, including a lower mix of sales in Greater China which is our highest margin geography, as well as increased rebates to wholesale partners and higher costs related to factory cancellations to manage future inventory. Gross margin also declined due to changes in foreign exchange rates and incremental tariffs in North America.
  • Selling and administrative expense increased 6 percent to $3.3 billion. Demand creation expense was $870 million, up 1 percent due primarily to investments in key brand moments. Operating overhead expense increased 8 percent to $2.4 billion driven by wage-related expenses, which reflect investments in data and analytics and other transformational initiatives to accelerate our end-to-end digital transformation.
  • Other (income) expense, net was $297 million comprised primarily of a non-recurring, non-cash charge of $400 million related to the execution of agreements to transition the Company's operating models in Brazil, Argentina, Chile and Uruguay. This charge largely reflects the anticipated release of associated cumulative foreign currency translation losses.
  • The effective tax rate was 3.9 percent compared to 14.7 percent for the same period last year due to a shift in the proportion of earnings taxed in the U.S., and increased benefits from discrete items.
  • Net income decreased 23 percent to $847 million and diluted earnings per share decreased 22 percent to $0.53 as strong revenue growth in NIKE Direct and across EMEA, APLA and North America was offset primarily by the aforementioned non-recurring charge and the impacts to Greater China from COVID-19.

February 29, 2020 Balance Sheet Review

  • Inventories for NIKE, Inc. were $5.8 billion, up 7 percent compared to the prior year period, reflecting anticipated strong demand across all geographies as well as higher inventories in Greater China due to COVID-19. APLA inventory declined due to the reclassification of inventory in Brazil, Argentina, Chile and Uruguay into Prepaid expenses and other current assets as a result of the aforementioned transaction.
  • Cash and equivalents and short-term investments were $3.2 billion, $864 million lower than last year as share repurchases, dividends, and investments in infrastructure more than offset proceeds from net income.

Share Repurchases

During the third quarter, NIKE, Inc. repurchased 9.6 million shares for approximately $957 million as part of the four-year, $15 billion program approved by the Board of Directors in June 2018. As of February 29, 2020, a total of 43.3 million shares had been repurchased under this program for approximately $3.9 billion.

Conference Call

NIKE, Inc. management will host a conference call beginning at approximately 2:00 p.m. PT on March 24, 2020, to review fiscal third quarter results. The conference call will be broadcast live via the Internet and can be accessed at http://investors.nike.com. For those unable to listen to the live broadcast, an archived version will be available at the same location through 9:00 p.m. PT, April 7, 2020.

About NIKE, Inc.

NIKE, Inc., based near Beaverton, Oregon, is the world's leading designer, marketer and distributor of authentic athletic footwear, apparel, equipment and accessories for a wide variety of sports and fitness activities. Converse, a wholly-owned NIKE, Inc. subsidiary brand, designs, markets and distributes athletic lifestyle footwear, apparel and accessories. For more information, NIKE, Inc.'s earnings releases and other financial information are available on the Internet at http://investors.nike.com. Individuals can also visit http://news.nike.com and follow @NIKE.

* See additional information in the accompanying Divisional Revenues table regarding this non-GAAP financial measure.

** The marked paragraphs contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed from time to time in reports filed by NIKE with the U.S. Securities and Exchange Commission (SEC), including Forms 8-K, 10-Q and 10-K.

(Tables Follow)

NIKE, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
THREE MONTHS ENDED % NINE MONTHS ENDED %
(In millions, except per share data) 2/29/2020 2/28/2019 Change 2/29/2020 2/28/2019 Change
Revenues

$ 10,104

$ 9,611

5%

$ 31,090

$ 28,933

7%

Cost of sales

5,631

5,272

7%

17,202

16,092

7%

Gross profit

4,473

4,339

3%

13,888

12,841

8%

Gross margin

44.3%

45.1%

44.7%

44.4%

 
Demand creation expense

870

865

1%

2,769

2,739

1%

Operating overhead expense

2,413

2,226

8%

7,166

6,557

9%

Total selling and administrative expense

3,283

3,091

6%

9,935

9,296

7%

% of revenues

32.5%

32.2%

32.0%

32.1%

 
Interest expense (income), net

12

12

39

37

Other expense (income), net

297

(55)

223

(50)

Income before income taxes

881

1,291

-32%

3,691

3,558

4%

Income tax (benefit) expense

34

190

-82%

362

518

-30%

Effective tax rate

3.9%

14.7%

9.8%

14.6%

 
NET INCOME

$ 847

$ 1,101

-23%

$ 3,329

$ 3,040

10%

 
Earnings per common share:
Basic

$ 0.54

$ 0.70

-23%

$ 2.13

$ 1.92

11%

Diluted

$ 0.53

$ 0.68

-22%

$ 2.09

$ 1.87

12%

 
Weighted average common shares outstanding:
Basic

1,556.3

1,572.8

1,559.8

1,582.8

Diluted

1,591.6

1,609.6

1,594.6

1,621.5

 
Dividends declared per common share

$ 0.245

$ 0.22

$ 0.71

$ 0.64

NIKE, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

February 29,

February 28,

% Change

(Dollars in millions)

 

2020

 

2019

ASSETS
Current assets:
Cash and equivalents

$

2,863

$

3,695

-23 %

Short-term investments

 

319

 

351

-9 %

Accounts receivable, net

 

4,473

 

4,549

-2 %

Inventories

 

5,807

 

5,415

7 %

Prepaid expenses and other current assets

 

2,282

 

1,786

28 %

Total current assets

 

15,744

 

15,796

0 %

Property, plant and equipment, net

 

4,783

 

4,688

2 %

Operating lease right-of-use assets, net

 

2,907

Identifiable intangible assets, net

 

275

 

283

-3 %

Goodwill

 

223

 

154

45 %

Deferred income taxes and other assets

 

2,288

 

2,000

14 %

TOTAL ASSETS

$

26,220

$

22,921

14 %

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt

$

4

$

6

-33 %

Notes payable

 

9

 

16

-44 %

Accounts payable

 

2,221

 

2,307

-4 %

Current portion of operating lease liabilities

 

422

Accrued liabilities

 

5,356

 

4,738

13 %

Income taxes payable

 

268

 

214

25 %

Total current liabilities

 

8,280

 

7,281

14 %

Long-term debt

 

3,463

 

3,465

0 %

Operating lease liabilities

 

2,758

Deferred income taxes and other liabilities

 

2,674

 

3,214

-17 %

Redeemable preferred stock

Shareholders' equity

 

9,045

 

8,961

1 %

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$

26,220

$

22,921

14 %

NIKE, Inc.
DIVISIONAL REVENUES
(Unaudited)
% Change
Excluding
Currency
Changes1
% Change
Excluding
Currency
Changes1
 
THREE MONTHS ENDED % NINE MONTHS ENDED %
(Dollars in millions) 2/29/2020 2/28/2019 Change 2/29/2020 2/28/2019 Change
North America
Footwear

$

2,628

$

2,509

5%

5%

$

7,723

$

7,309

6%

6%

Apparel

 

1,228

 

1,173

5%

5%

 

4,076

 

3,985

2%

2%

Equipment

 

123

 

128

-4%

-4%

 

455

 

443

3%

3%

Total

 

3,979

 

3,810

4%

4%

 

12,254

 

11,737

4%

4%

Europe, Middle East & Africa
Footwear

 

1,711

 

1,589

8%

9%

 

5,005

 

4,650

8%

11%

Apparel

 

889

 

750

19%

20%

 

2,655

 

2,374

12%

15%

Equipment

 

109

 

96

14%

14%

 

359

 

331

8%

12%

Total

 

2,709

 

2,435

11%

13%

 

8,019

 

7,355

9%

13%

Greater China
Footwear

 

1,075

 

1,115

-4%

-3%

 

3,486

 

3,095

13%

16%

Apparel

 

400

 

444

-10%

-9%

 

1,428

 

1,314

9%

12%

Equipment

 

31

 

29

7%

3%

 

118

 

102

16%

18%

Total

 

1,506

 

1,588

-5%

-4%

 

5,032

 

4,511

12%

15%

Asia Pacific & Latin America
Footwear

 

963

 

909

6%

11%

 

2,890

 

2,669

8%

14%

Apparel

 

388

 

340

14%

20%

 

1,154

 

1,032

12%

18%

Equipment

 

63

 

58

9%

15%

 

183

 

174

5%

11%

Total

 

1,414

 

1,307

8%

13%

 

4,227

 

3,875

9%

15%

Global Brand Divisions2

 

8

 

8

0%

2%

 

24

 

33

-27%

-26%

TOTAL NIKE BRAND

 

9,616

 

9,148

5%

6%

 

29,556

 

27,511

7%

10%

Converse

 

506

 

463

9%

11%

 

1,541

 

1,415

9%

11%

Corporate3

 

(18)

 

(7)

 

7

TOTAL NIKE, INC. REVENUES

$

10,104

$

9,611

5%

7%

$

31,090

$

28,933

7%

10%

 
TOTAL NIKE BRAND
Footwear

$

6,377

$

6,122

4%

5%

$

19,104

$

17,723

8%

10%

Apparel

 

2,905

 

2,707

7%

9%

 

9,313

 

8,705

7%

9%

Equipment

 

326

 

311

5%

6%

 

1,115

 

1,050

6%

9%

Global Brand Divisions2

 

8

 

8

0%

2%

 

24

 

33

-27%

-26%

TOTAL NIKE BRAND REVENUES

$

9,616

$

9,148

5%

6%

$

29,556

$

27,511

7%

10%

1 The percent change has been calculated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends by excluding the impact of translation arising from foreign currency exchange rate fluctuations, which is considered a non-GAAP financial measure.
2 Global Brand Divisions revenues are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment.
3 Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse but managed through the Company's central foreign exchange risk management program.

NIKE, Inc.

EARNINGS BEFORE INTEREST AND TAXES1

(Unaudited)

THREE MONTHS ENDED % NINE MONTHS ENDED %
(Dollars in millions) 2/29/2020 2/28/2019 Change 2/29/2020 2/28/2019 Change
North America

$

937

$

916

2 %

$

2,912

$

2,877

1 %

Europe, Middle East & Africa

 

575

 

538

7 %

 

1,694

 

1,489

14 %

Greater China

 

556

 

639

-13 %

 

1,919

 

1,702

13 %

Asia Pacific & Latin America

 

387

 

339

14 %

 

1,105

 

983

12 %

Global Brand Divisions2

 

(895)

 

(788)

-14 %

 

(2,624)

 

(2,432)

-8 %

TOTAL NIKE BRAND1

 

1,560

 

1,644

-5 %

 

5,006

 

4,619

8 %

Converse

 

96

 

79

22 %

 

324

 

221

47 %

Corporate3

 

(763)

 

(420)

-82 %

 

(1,600)

 

(1,245)

-29 %

TOTAL NIKE, INC. EARNINGS BEFORE INTEREST AND TAXES1

 

893

 

1,303

-31 %

 

3,730

 

3,595

4 %

Interest expense (income), net

 

12

 

12

 

39

 

37

TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES

$

881

$

1,291

-32 %

$

3,691

$

3,558

4 %

1 The Company evaluates the performance of individual operating segments based on earnings before interest and taxes (commonly referred to as "EBIT"), which represents net income before interest expense (income), net and income tax expense. Total NIKE Brand EBIT and Total NIKE, Inc. EBIT are considered non-GAAP financial measures and are being provided as management believes this additional information should be considered when assessing the Company's underlying business performance and trends. References to EBIT should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance with U.S. GAAP and may not be comparable to similarly titled non-GAAP measures used by other companies.
2 Global Brand Divisions primarily represent demand creation, operating overhead and product creation and design expenses that are centrally managed for the NIKE Brand. Revenues for Global Brand Divisions are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment.
3 Corporate consists primarily of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to the Company's corporate headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses, including certain hedge gains and losses. For the three and nine months ended February 29, 2020, Corporate includes the one-time, non-recurring charge, recognized as a result of the Company's decision to transition its operations in Brazil, Argentina, Chile and Uruguay to third-party distributors. This charge primarily reflects the anticipated release of associated non-cash cumulative foreign currency translation losses.

 

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