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NIKE, Inc. Reports Fiscal 2015 Third Quarter Results

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NIKE, Inc. (NYSE:NKE) today reported financial results for its fiscal 2015 third quarter ended February 28, 2015. Diluted earnings per share for the quarter were up 19 percent due to higher revenues as a result of continued strong demand for NIKE, Inc. brands and gross margin expansion, partially offset by higher SG&A investments and a higher effective tax rate.

“Our strong third quarter results show that our growth strategies are working, even under challenging macroeconomic conditions,” said Mark Parker, President and CEO, NIKE, Inc. “NIKE has the ability to deliver consistent shareholder value due to the strength of our brand, our relentless commitment to innovation and our powerful portfolio that allows us to invest in the opportunities with the highest potential for growth as well as manage risk.”*

Third Quarter Income Statement Review

  • Revenues for NIKE, Inc. rose 7 percent to $7.5 billion, up 13 percent on a currency neutral basis.
    • Revenues for the NIKE Brand were $6.9 billion, up 11 percent on a currency neutral basis driven by growth in every geography and in most key categories.
    • Revenues for Converse were $538 million, up 33 percent on a currency neutral basis, mainly driven by continued growth and timing of shipments in North America, the transition to direct distribution in AGS (Austria, Germany, Switzerland) and growth in the Direct to Consumer (DTC) business.
  • Gross margin expanded 140 basis points to 45.9 percent. Gross margin benefitted from a continued shift in mix to higher margin products, partially offset by higher product input and warehousing costs.
  • Selling and administrative expense increased 10 percent to $2.4 billion. Demand creation expense was $731 million, flat to the prior year as increased investments in digital brand marketing and sports marketing were offset by lower advertising expense due to product launch timing. Operating overhead expense increased 15 percent to $1.6 billion, reflecting growth in the DTC business and targeted investments in infrastructure and consumer-focused digital capabilities.
  • Other income, net was $5 million, comprised primarily of net foreign exchange gains. For the quarter, the Company estimates the year-over-year change in foreign currency related gains and losses included in other income, net, combined with the impact of changes in exchange rates on the translation of foreign currency-denominated profits, decreased pretax income by approximately $20 million.
  • The effective tax rate was 24.4 percent, compared to 22.5 percent for the same period last year, primarily due to the impact of tax expense on intercompany transactions, partially offset by the retroactive reinstatement of the U.S. research and development tax credit.
  • Net income increased 16 percent to $791 million, driven by strong revenue growth and gross margin expansion, while diluted earnings per share increased 19 percent to $0.89, reflecting a 2 percent decline in the weighted average diluted common shares outstanding.

February 28, 2015 Balance Sheet Review

  • Inventories for NIKE, Inc. were $4.2 billion, up 12 percent from February 28, 2014, driven by a 12 percent increase in NIKE Brand wholesale inventories as well as higher inventories associated with growth in DTC. NIKE Brand wholesale inventories were higher due to a 17 percent increase in units, while changes in the average product cost per unit, combined with the impact of changes in foreign currency exchange rates, decreased growth by approximately 5 percentage points.
  • Cash and short-term investments were $5.4 billion, $332 million higher than last year as growth in net income and collateral received from counterparties as a result of hedging activities more than offset share repurchases, higher dividends and investments in working capital.

Share Repurchases

During the third quarter, NIKE, Inc. repurchased a total of 6.5 million shares for approximately $612 million as part of the four-year, $8 billion program approved by the Board of Directors in September 2012. As of the end of the third quarter, a total of 74.1 million shares had been repurchased under this program for approximately $5.3 billion, an average cost of $71.13 per share.

Futures Orders

As of the end of the quarter, worldwide futures orders for NIKE Brand athletic footwear and apparel scheduled for delivery from March 2015 through July 2015 were 2 percent higher than orders reported for the same period last year. Excluding currency changes, reported orders would have increased 11 percent.*

Conference Call

NIKE management will host a conference call beginning at approximately 2:00 p.m. PT on March 19, 2015, to review third quarter results. The conference call will be broadcast live over 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, March 26, 2015.

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. Wholly-owned NIKE, Inc. subsidiaries include Converse Inc., which designs, markets and distributes athletic lifestyle footwear, apparel and accessories, and Hurley International LLC, which designs, markets and distributes surf and youth lifestyle footwear, apparel and accessories. For more information, NIKE’s earnings releases and other financial information are available on the Internet at http://investors.nike.com and individuals can follow @Nike.

* 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 S.E.C., including Forms 8-K, 10-Q, and 10-K. Some forward-looking statements in this release concern changes in futures orders that are not necessarily indicative of changes in total revenues for subsequent periods due to the mix of futures and “at once” orders, exchange rate fluctuations, order cancellations, discounts and returns, which may vary significantly from quarter to quarter, and because a portion of the business does not report futures orders.

NIKE, Inc.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED % NINE MONTHS ENDED %
(Dollars in millions, except per share data) 2/28/2015 2/28/20141

Change

2/28/2015 2/28/20141 Change
Revenues $ 7,460 $ 6,972 7% $ 22,822 $ 20,374 12%
Cost of sales 4,034 3,869 4% 12,348 11,313 9%
Gross profit 3,426 3,103 10% 10,474 9,061 16%
Gross margin 45.9% 44.5% 45.9% 44.5%
Demand creation expense 731 733 0% 2,394 2,155 11%
Operating overhead expense 1,648 1,436 15% 4,903 4,163 18%
Total selling and administrative expense 2,379 2,169 10% 7,297 6,318 15%
% of revenue 31.9% 31.1% 32.0% 31.0%
Interest expense (income), net 6 9 - 24 25 -
Other (income) expense, net (5) 45 - 86 -
Income before income taxes 1,046 880 19% 3,153 2,632 20%
Income taxes 255 198 29% 745 637 17%
Effective tax rate 24.4% 22.5% 23.6% 24.2%
NET INCOME $ 791 $ 682 16% $ 2,408 $ 1,995 21%
Earnings per common share:
Basic $ 0.92 $ 0.77 19% $ 2.79 $ 2.25 24%
Diluted $ 0.89 $ 0.75 19% $ 2.72 $ 2.19 24%
Weighted average common shares outstanding:
Basic 861.4 882.3 863.2 886.6
Diluted 883.8 904.8 885.5 909.1
Dividends declared per common share $ 0.28 $ 0.24 $ 0.80 $ 0.69
1 Prior year amounts have been revised to correctly expense internally developed patent and trademark costs as incurred.
NIKE, Inc.
CONSOLIDATED BALANCE SHEETS
February 28, February 28,
(Dollars in millions) 2015 20141 % Change
ASSETS
Current assets:
Cash and equivalents $ 3,015 $ 1,864 62%
Short-term investments 2,346 3,165 -26%
Accounts receivable, net 3,294 3,355 -2%
Inventories 4,246 3,785 12%
Deferred income taxes 328 319 3%
Prepaid expenses and other current assets 1,978 821 141%
Total current assets 15,207 13,309 14%
Property, plant and equipment 6,401 6,073 5%
Less accumulated depreciation 3,539 3,337 6%
Property, plant and equipment, net 2,862 2,736 5%
Identifiable intangible assets, net 281 285 -1%
Goodwill 131 131 0%
Deferred income taxes and other assets 2,060 1,202 71%
TOTAL ASSETS $ 20,541 $ 17,663 16%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt $ 108 $ 7 1443%
Notes payable 61 119 -49%
Accounts payable 1,821 1,480 23%
Accrued liabilities 3,563 2,263 57%
Income taxes payable 33 27 22%
Total current liabilities 5,586 3,896 43%
Long-term debt 1,082 1,201 -10%
Deferred income taxes and other liabilities 1,505 1,515 -1%
Redeemable preferred stock
Shareholders’ equity 12,368 11,051 12%
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 20,541 $ 17,663 16%
1 Prior year amounts have been revised to correct immaterial misstatements.
NIKE, Inc.
DIVISIONAL REVENUES

% Change

% Change

Excluding

Excluding

THREE MONTHS ENDED %

Currency

NINE MONTHS ENDED %

Currency

(Dollars in millions) 2/28/2015 2/28/2014 Change

Changes1

2/28/2015 2/28/2014 Change

Changes1

North America
Footwear $ 2,081 $ 1,928 8% 8% $ 6,189 $ 5,459 13% 14%
Apparel 987 925 7% 7% 3,223 2,920 10% 11%
Equipment 186 216 -14% -14% 596 626 -5% -5%
Total 3,254 3,069 6% 6% 10,008 9,005 11% 11%
Western Europe
Footwear 986 891 11% 22% 2,976 2,415 23% 26%
Apparel 363 338 7% 18% 1,245 1,061 17% 19%
Equipment 67 63 6% 16% 221 191 16% 17%
Total 1,416 1,292 10% 21% 4,442 3,667 21% 23%
Central & Eastern Europe
Footwear 187 207 -10% 8% 590 544 8% 18%
Apparel 111 129 -14% 4% 394 403 -2% 7%
Equipment 21 20 5% 19% 73 70 4% 13%
Total 319 356 -10% 7% 1,057 1,017 4% 13%
Greater China
Footwear 562 467 20% 22% 1,465 1,166 26% 27%
Apparel 212 199 7% 8% 680 641 6% 7%
Equipment 27 31 -13% -4% 93 93 0% 3%
Total 801 697 15% 17% 2,238 1,900 18% 19%
Japan
Footwear 99 92 8% 23% 307 281 9% 18%
Apparel 46 59 -22% -12% 167 201 -17% -10%
Equipment 21 26 -19% -2% 51 63 -19% -10%
Total 166 177 -6% 8% 525 545 -4% 5%
Emerging Markets
Footwear 655 631 4% 14% 2,010 1,941 4% 12%
Apparel 240 243 -1% 10% 772 748 3% 12%
Equipment 60 63 -5% 7% 182 180 1% 10%
Total 955 937 2% 12% 2,964 2,869 3% 12%
Global Brand Divisions2 28 26 8% 13% 85 89 -4% -5%
Total NIKE Brand 6,939 6,554 6% 11% 21,319 19,092 12% 14%
Converse 538 420 28% 33% 1,547 1,274 21% 24%
Corporate3 (17) (2) (44) 8
Total NIKE, Inc. Revenues $ 7,460 $ 6,972 7% 13% $ 22,822 $ 20,374 12% 15%
Total NIKE Brand
Footwear $ 4,570 $ 4,216 8% 14% $ 13,537 $ 11,806 15% 17%
Apparel 1,959 1,893 3% 9% 6,481 5,974 8% 11%
Equipment 382 419 -9% -3% 1,216 1,223 -1% 2%
Global Brand Divisions2 28 26 8% 13% 85 89 -4% -5%

1 Fiscal 2015 results have been restated using fiscal 2014 exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of translation arising from foreign currency exchange rate fluctuations.

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 revenue-related hedge gains and losses generated by entities within the NIKE Brand geographic operating segments and Converse through our centrally managed foreign exchange risk management program.

NIKE, Inc.
EARNINGS BEFORE INTEREST AND TAXES1,2
THREE MONTHS ENDED % NINE MONTHS ENDED %
(Dollars in millions) 2/28/2015 2/28/20143 Change 2/28/2015 2/28/20143 Change
North America $ 830 $ 729 14% $ 2,585 $ 2,189 18%
Western Europe 335 275 22% 1,000 663 51%
Central & Eastern Europe 51 79 -35% 176 208 -15%
Greater China 251 234 7% 727 601 21%
Japan 22 21 5% 62 92 -33%
Emerging Markets 234 228 3% 626 681 -8%
Global Brand Divisions4 (552) (528) -5% (1,637) (1,444) -13%
TOTAL NIKE BRAND 1,171 1,038 13% 3,539 2,990 18%
Converse 163 133 23% 437 402 9%
Corporate5 (282) (282) 0% (799) (735) -9%
TOTAL EARNINGS BEFORE INTEREST AND TAXES $ 1,052 $ 889 18% $ 3,177 $ 2,657 20%
1 The Company evaluates 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 taxes.

2 Certain prior year amounts have been reclassified to conform to fiscal 2015 presentation. These changes had no impact on previously reported results of operations or shareholders’ equity.

3 Prior year amounts have been revised to correctly expense internally developed patent and trademark costs as incurred.

4 Global Brand Divisions primarily represent demand creation, operating overhead, information technology, 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.

5 Corporate consists of unallocated general and administrative expenses, which includes expenses associated with centrally managed departments, depreciation and amortization related to the Company’s corporate headquarters, unallocated insurance and benefit programs, certain foreign currency gains and losses, including certain hedge gains and losses, corporate eliminations and other items.

NIKE, Inc.
NIKE BRAND REPORTED FUTURES GROWTH BY GEOGRAPHY1
As of February 28, 2015
Reported Futures Excluding Currency
Orders

Changes2

North America 15% 15%
Western Europe -14% 7%
Central & Eastern Europe -1% 21%
Greater China 22% 23%
Japan -4% 13%
Emerging Markets -17% -6%
Total NIKE Brand Reported Futures 2% 11%
1 Futures orders for NIKE Brand footwear and apparel scheduled for delivery from March 2015 through July 2015. The U.S. Dollar futures orders amount is calculated based upon our internal forecast of the currency exchange rates under which our revenues will be translated during this period.
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, changes in the mix of orders between futures and at-once orders and because 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, discounts and returns can cause differences in the comparisons between futures orders and actual revenues. Moreover, a portion of our revenue is not derived from futures orders, including at-once and closeout sales of NIKE Brand footwear and apparel, sales of NIKE Brand equipment, sales from our DTC operations and sales from Converse, NIKE Golf and Hurley.
2 Reported futures have been restated using prior year exchange rates to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rate fluctuations.

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