UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED May 31, 2018
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) | (IRS Employer Identification No.) |
One Bowerman Drive, Beaverton, Oregon | 97005-6453 |
(Address of principal executive offices) | (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 | New York Stock Exchange |
(Title of each class) | (Name of each exchange on which registered) |
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: | ||
NONE | ||
Indicate by check mark: | YES | NO | ||||
• | if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. | þ | ¨ | |||
• | if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. | ¨ | þ | |||
• | 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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). | þ | ¨ | |||
• | if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. | þ | ||||
• | whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 November 30, 2017, the aggregate market values of the Registrant’s Common Stock held by non-affiliates were: | ||||
Class A | $ | 4,475,052,736 | ||
Class B | 78,093,099,655 | |||
$ | 82,568,152,391 | |||
As of July 20, 2018, the number of shares of the Registrant’s Common Stock outstanding were: | |||
Class A | 320,065,752 | ||
Class B | 1,280,488,786 | ||
1,600,554,538 | |||
DOCUMENTS INCORPORATED BY REFERENCE:
Parts of Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on September 20, 2018 are incorporated by reference into Part III of this Report.
NIKE, INC.
ANNUAL REPORT ON FORM 10-K
Table of Contents
Page | ||
ITEM 1. | ||
ITEM 1A. | ||
ITEM 1B. | ||
ITEM 2. | ||
ITEM 3. | ||
ITEM 4. | ||
ITEM 5. | ||
ITEM 6. | ||
ITEM 7. | ||
ITEM 7A. | ||
ITEM 8. | ||
ITEM 9. | ||
ITEM 9A. | ||
ITEM 9B. | ||
(Except for the information set forth under “Executive Officers of the Registrant” in Item 1 above, Part III is incorporated by reference from the Proxy Statement for the NIKE, Inc. 2018 Annual Meeting of Shareholders.) | ||
ITEM 10. | ||
ITEM 11. | ||
ITEM 12. | ||
ITEM 13. | ||
ITEM 14. | ||
ITEM 15. | ||
ITEM 16. | ||
PART I
ITEM 1. Business
General |
NIKE, Inc. was incorporated in 1967 under the laws of the State of Oregon. As used in this report, the terms “we,” “us,” “NIKE” and the “Company” refer to NIKE, Inc. and its predecessors, subsidiaries and affiliates, collectively, unless the context indicates otherwise. Our NIKE digital commerce website is located at www.nike.com. On our NIKE corporate website, located at investors.nike.com, we post the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the United States Securities and Exchange Commission (the “SEC”): our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended. Our definitive Proxy Statements are also posted on our corporate website. All such filings on our corporate website are available free of charge. Copies of these filings may also be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330 and are available on the SEC’s website (www.sec.gov). Also available on our corporate website are the charters of the committees of our Board of Directors, as well as our corporate governance guidelines and code of ethics; copies of any of these documents will be provided in print to any shareholder who submits a request in writing to NIKE Investor Relations, One Bowerman Drive, Beaverton, Oregon 97005-6453.
Our principal business activity is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. We sell our products through NIKE-owned retail stores and through digital platforms (which we refer to collectively as our “NIKE Direct” operations), to retail accounts and a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. Virtually all of our products are manufactured by independent contractors. Nearly all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad.
Products |
We focus our NIKE Brand product offerings in six key categories: Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Training and Sportswear (our sports-inspired lifestyle products). We also market products designed for kids, as well as for other athletic and recreational uses such as American football, baseball, cricket, lacrosse, skateboarding, tennis, volleyball, wrestling, walking and outdoor activities.
NIKE’s athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. We place considerable emphasis on innovation and high-quality construction in the development and manufacturing of our products. Sportswear, Running and the Jordan Brand are currently our top-selling footwear categories and we expect them to continue to lead in footwear sales.
We also sell sports apparel covering the above-mentioned categories, which feature the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Our sports apparel, similar to our athletic footwear products, is designed primarily for athletic use and exemplifies our commitment to innovation and high-quality construction. Sportswear, Training and Running are currently our top-selling apparel categories and we expect them to continue to lead in apparel sales. We often market footwear, apparel and accessories in “collections” of similar use or by category. We also market apparel with licensed college and professional team and league logos.
We sell a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment designed for sports activities. We also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc., doing business as Air Manufacturing Innovation.
Our Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on basketball using the Jumpman trademark. Sales and operating results for Jordan Brand products are reported within the respective NIKE Brand geographic operating segments.
One of our wholly-owned subsidiary brands, Converse, headquartered in Boston, Massachusetts, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks. Operating results of the Converse brand are reported on a stand-alone basis.
Another of our wholly-owned subsidiary brands, Hurley, headquartered in Costa Mesa, California, designs and distributes a line of action sports and youth lifestyle apparel and accessories under the Hurley trademark. Sales and operating results for Hurley products are included within the NIKE Brand’s North America geographic operating segment.
In addition to the products we sell to our wholesale customers and directly to consumers through our NIKE Direct operations, we have also entered into license agreements that permit unaffiliated parties to manufacture and sell, using NIKE-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities.
1
Sales and Marketing |
Financial information about geographic and segment operations appears in Note 17 — Operating Segments and Related Information of the accompanying Notes to the Consolidated Financial Statements.
We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third quarters. However, the mix of product sales may vary considerably as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment, as well as other macroeconomic, operating and logistics-related factors.
Because NIKE is a consumer products company, the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. We must, therefore, respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, styles and categories and influencing sports and fitness preferences through extensive marketing. Failure to respond in a timely and adequate manner could have a material adverse effect on our sales and profitability. This is a continuing risk. Refer to Item 1A. Risk Factors.
We report our NIKE Brand operations based on our internal geographic organization. Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. In June 2017, we announced a new company alignment designed to allow NIKE to better serve the consumer personally, at scale. As a result of this organizational realignment, the Company’s reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE, Jordan and Hurley brands. Sales through our NIKE Direct operations are managed within each geographic operating segment.
Converse is also a reportable segment and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories. Converse direct to consumer operations, including digital commerce, are reported within the Converse operating segment results.
United States Market |
For fiscal 2018, NIKE Brand and Converse sales in the United States accounted for approximately 42% of total revenues, compared to 46% and 47% for fiscal 2017 and fiscal 2016, respectively. We sell our NIKE Brand, Jordan Brand, Hurley and Converse products to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. In the United States, we utilize NIKE sales offices to solicit such sales. During fiscal 2018, our three largest customers accounted for approximately 21% of sales in the United States.
Our NIKE Direct and Converse direct to consumer operations sell NIKE Brand, Jordan Brand, Hurley and Converse products to consumers through various digital platforms. In addition, our NIKE Direct and Converse direct to consumer operations sell through the following number of retail stores in the United States:
U.S. Retail Stores | Number | |
NIKE Brand factory stores | 220 | |
NIKE Brand in-line stores (including employee-only stores) | 31 | |
Converse stores (including factory stores) | 112 | |
Hurley stores (including factory and employee stores) | 29 | |
TOTAL | 392 | |
In the United States, NIKE has seven significant distribution centers. Five are located in Memphis, Tennessee, two of which are owned and three of which are leased. Two other distribution centers, one located in Indianapolis, Indiana, and one located in Dayton, Tennessee, are leased and operated by third-party logistics providers. NIKE Brand apparel and equipment are also shipped from our Foothill Ranch, California distribution center, which we lease. Smaller leased, and third-party leased and operated, distribution facilities are located in various parts of the United States.
International Markets |
For fiscal 2018, non-U.S. NIKE Brand and Converse sales accounted for approximately 58% of total revenues, compared to 54% and 53% for fiscal 2017 and fiscal 2016, respectively. We sell our products to retail accounts, through our own NIKE Direct operations and through a mix of independent distributors, licensees and sales representatives around the world. We sell to thousands of retail accounts and ship products from 62 distribution centers outside of the United States. During fiscal 2018, NIKE’s three largest customers outside of the United States accounted for approximately 13% of total non-U.S. sales.
In addition to NIKE and Converse owned digital commerce platforms in over 45 countries, our NIKE Direct and Converse direct to consumer businesses operate the following number of retail stores outside the United States:
Non-U.S. Retail Stores | Number | |
NIKE Brand factory stores | 664 | |
NIKE Brand in-line stores (including employee-only stores) | 65 | |
Converse stores (including factory stores) | 61 | |
TOTAL | 790 | |
2
International branch offices and subsidiaries of NIKE are located in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Croatia, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Macau, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Panama, the Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay and Vietnam.
Significant Customer |
No customer accounted for 10% or more of our worldwide net revenues during fiscal 2018.
Product Research, Design and Development |
We believe our research, design and development efforts are key factors in our success. Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment receives continued emphasis as we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, while reducing waste.
In addition to our own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability and related fields, we also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts who consult with us and review designs, materials, concepts for product and manufacturing process improvements and compliance with product safety regulations around the world. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process.
As we continue to develop new technologies, we are simultaneously focused on the design of innovative products incorporating such technologies throughout our product categories. Using market intelligence and research, our various design teams identify opportunities to leverage new technologies in existing categories responding to consumer preferences. The proliferation of NIKE Air, Lunar, Zoom, Free, Flywire, Dri-Fit, Flyknit, Flyweave, ZoomX, React and NIKE+ technologies throughout our Running, NIKE Basketball, Jordan Brand, Football (Soccer), Training and Sportswear categories, among others, typifies our dedication to designing innovative products.
Manufacturing |
We are supplied by 124 footwear factories located in 13 countries. The largest single footwear factory accounted for approximately 9% of total fiscal 2018 NIKE Brand footwear production. Virtually all of our footwear is manufactured outside of the United States by independent contract manufacturers which often operate multiple factories. For fiscal 2018, contract factories in Vietnam, China and Indonesia manufactured approximately 47%, 26% and 21% of total NIKE Brand footwear, respectively. We also have manufacturing agreements with independent contract manufacturers in Argentina, India, Brazil, Mexico and Italy to manufacture footwear for sale primarily within those countries. For fiscal 2018, five footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 69% of NIKE Brand footwear production.
We are supplied by 328 apparel factories located in 37 countries. The largest single apparel factory accounted for approximately 13% of total fiscal 2018 NIKE Brand apparel production. Virtually all of our apparel is manufactured outside of the United States by independent contract manufacturers which often operate multiple factories. For fiscal 2018, contract factories in China, Vietnam and Thailand produced approximately 26%, 18% and 10% of total NIKE Brand apparel, respectively. For fiscal 2018, one apparel contract manufacturer accounted for more than 10% of apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 47% of NIKE Brand apparel production.
The principal materials used in our footwear products are natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, nylon, polyester and canvas, as well as polyurethane films used to make NIKE Air-Sole cushioning components. During fiscal 2018, Air Manufacturing Innovation, with facilities near Beaverton, Oregon and in St. Charles, Missouri, as well as independent contractors in China and Vietnam, were our suppliers of the Air-Sole cushioning components used in footwear. The principal materials used in our apparel products are natural and synthetic fabrics and threads (both virgin and recycled); specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat and repel rain and/or snow; and plastic and metal hardware. NIKE’s independent contractors and suppliers buy raw materials for the manufacturing of our footwear, apparel and equipment products. Most raw materials are available and purchased by those independent contractors and suppliers in the countries where manufacturing takes place. NIKE’s independent contract manufacturers and suppliers have thus far experienced little difficulty in satisfying raw material requirements for the production of our products.
Since 1972, Sojitz Corporation of America (“Sojitz America”), a large Japanese trading company and the sole owner of our redeemable preferred stock, has performed significant import-export financing services for us. During fiscal 2018, Sojitz America provided financing and purchasing services for NIKE Brand products sold in certain NIKE markets including Argentina, Brazil, Canada, India, South Africa and Uruguay, excluding products produced and sold in the same country. Approximately 6% of NIKE Brand sales occurred in those countries. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in those markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability. However, we believe that any such disruption would be short-term in duration due to the ready availability of alternative sources of financing at competitive rates. Our current agreements with Sojitz America expire on May 31, 2019.
International Operations and Trade |
Our international operations and sources of supply are subject to the usual risks of doing business abroad, such as the implementation of, or potential changes in, foreign and domestic trade policies, increases in import duties, anti-dumping measures, quotas, safeguard measures, trade restrictions, restrictions on the transfer of funds and, in certain parts of the world, political instability and terrorism. We have not, to date, been materially affected by any such risk, but cannot predict the likelihood of such material effects occurring in the future.
3
In recent years, uncertain global and regional economic and political conditions have affected international trade and increased protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionism in many different regions, and in nearly all cases we are working together with industry groups to address trade issues and reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, protectionist measures have resulted in increases in the cost of our products, and additional measures, if implemented, could adversely affect sales and/or profitability for NIKE, as well as the imported footwear and apparel industry as a whole.
We monitor protectionist trends and developments throughout the world that may materially impact our industry, and we engage in administrative and judicial processes to mitigate trade restrictions. We are actively monitoring actions that may result in additional anti-dumping measures and could affect our industry. We are also monitoring for and advocating against other impediments that may limit or delay customs clearance for imports of footwear, apparel and equipment. Changes in U.S. trade policies, including new and potential tariffs or penalties on imported goods, may negatively affect U.S. corporations with production activities outside the U.S., including NIKE. There have also been discussions and commentary regarding retaliatory actions by countries affected by the new tariffs and other changes in U.S. trade policy, and certain foreign governments have instituted or are considering imposing trade sanctions on certain U.S. goods, which could negatively affect U.S. corporations with business operations and/or consumer markets in those countries. Depending on the extent that certain new or proposed reforms are implemented by the U.S. government and the manner in which foreign governments respond to such reforms, it may become necessary for us to change the way we conduct business, which may adversely affect our results of operations. In addition, with respect to proposed trade restrictions targeting China, which represents an important sourcing country and consumer market for us, we are working with a broad coalition of global businesses and trade associations representing a wide variety of sectors to help ensure that any legislation enacted and implemented (i) addresses legitimate and core concerns, (ii) is consistent with international trade rules and (iii) reflects and considers China’s domestic economy and the important role it has in the global economic community.
Where trade protection measures are implemented, we believe that we have the ability to develop, over a period of time, adequate alternative sources of supply for the products obtained from our present suppliers. If events prevented us from acquiring products from our suppliers in a particular country, our operations could be temporarily disrupted and we could experience an adverse financial impact. However, we believe we could abate any such disruption, and that much of the adverse impact on supply would, therefore, be of a short-term nature, although alternate sources of supply might not be as cost-effective and could have an ongoing adverse impact on profitability.
NIKE advocates for trade liberalization for footwear and apparel in a number of regional and bilateral free trade agreements.
Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act, or FCPA, and other anti-bribery laws applicable to our operations. We source a significant portion of our products from, and have important consumer markets, outside of the United States, and we have policies and procedures to address compliance with the FCPA and similar laws by us, our employees, agents, suppliers and other partners.
Competition |
The athletic footwear, apparel and equipment industry is highly competitive on a worldwide basis. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment, including adidas, Anta, ASICS, Li Ning, lululemon athletica, Puma, Under Armour and V.F. Corporation, among others. The intense competition and the rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment, constitute significant risk factors in our operations.
NIKE is the largest seller of athletic footwear and apparel in the world. Important aspects of competition in this industry are:
• | Product attributes such as quality; performance and reliability; new product innovation and development and consumer price/value. |
• | Consumer connection and affinity for brands and products, developed through marketing and promotion; social media interaction; customer support and service; identification with prominent and influential athletes, public figures, coaches, teams, colleges and sports leagues who endorse our brands and use our products and active engagement through sponsored sporting events and clinics. |
• | Effective sourcing and distribution of products, with attractive merchandising and presentation at retail, both in-store and online. |
We believe that we are competitive in all of these areas.
Trademarks and Patents |
We believe that our intellectual property rights are important to our brand, our success and our competitive position. We pursue available protections of these rights and vigorously protect them against third-party theft and infringement.
We utilize trademarks on nearly all of our products and believe having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying our brands and the Company, and in distinguishing our goods from the goods of others. We consider our NIKE and Swoosh trademarks to be among our most valuable assets and we have registered these trademarks in almost 170 jurisdictions worldwide. In addition, we own many other trademarks that we utilize in marketing our products. We own common law rights in the trade dress of several significant shoe designs and elements. For certain trade dress, we have sought and obtained trademark registrations.
We have copyright protection in our design, graphics and other original works. In some instances, we also obtain registered copyrights.
We own patents and have a license under other patents, which facilitate our use of “Air” technologies.
We file for, own and maintain many U.S. and foreign utility patents, as well as many U.S. and foreign design patents protecting components, technologies, materials, manufacturing techniques, features, functionality, and industrial and aesthetic designs used in and for the manufacture of various athletic and leisure footwear and apparel, athletic equipment and digital devices and related software applications. These patents expire at various times.
4
We believe our success depends upon our capabilities in areas such as design, research and development, production and marketing rather than exclusively upon our patent and trade secret positions.
However, we have followed a policy of filing patent applications in the United States and select foreign countries on inventions, designs and improvements that we deem valuable. We also continue to vigorously protect our trademarks and patents against third-party infringement.
Employees |
As of May 31, 2018, we had approximately 73,100 employees worldwide, including retail and part-time employees. Management is committed to maintaining an environment where all NIKE employees have the opportunity to reach their full potential. None of our employees are represented by a union, except for certain employees in the Asia Pacific & Latin America geography, where local law requires those employees to be represented by a trade union. Also, in some countries outside of the United States, local laws require employee representation by works councils (which may be entitled to information and consultation on certain Company decisions) or by organizations similar to a union. In certain European countries, we are required by local law to enter into and/or comply with industry-wide or national collective bargaining agreements. NIKE has never experienced a material interruption of operations due to labor disagreements.
Executive Officers of the Registrant |
The executive officers of NIKE, Inc. as of July 24, 2018 are as follows:
Mark G. Parker, Chairman, President and Chief Executive Officer — Mr. Parker, 62, was appointed President and Chief Executive Officer in January 2006 and named Chairman of the Board in June 2016. He has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing and brand management. Mr. Parker was appointed divisional Vice President in charge of product development in 1987, corporate Vice President in 1989, General Manager in 1993, Vice President of Global Footwear in 1998 and President of the NIKE Brand in 2001.
Chris L. Abston, Vice President and Corporate Controller — Mr. Abston, 55, joined NIKE in 2015 from Wal-Mart Stores, Inc., where he served as Vice President, Global Controls and Governance since February 2015. Prior to that he was Vice President and Controller of Walmart International from February 2013 to January 2015, responsible for the oversight of international accounting and reporting, and Vice President and Assistant Controller of Wal-Mart Stores, Inc. from May 2011 to January 2013. Before joining Wal-Mart, Mr. Abston spent 25 years in public accounting with Ernst & Young LLP, most recently leading its Strategic Growth Markets practice as a Partner in the Dallas office.
Andrew Campion, Executive Vice President and Chief Financial Officer — Mr. Campion, 46, joined NIKE in 2007 as Vice President of Global Planning and Development, leading strategic and financial planning. He was appointed Chief Financial Officer of the NIKE Brand in 2010, responsible for leading all aspects of financial management for the Company’s flagship brand. In 2014, he was appointed Senior Vice President, Strategy, Finance and Investor Relations in addition to his role as Chief Financial Officer of NIKE Brand. Mr. Campion assumed the role of Executive Vice President and Chief Financial Officer in August 2015. Prior to joining NIKE, he held leadership roles in strategic planning, mergers and acquisitions, financial planning and analysis, operations and planning, investor relations and tax at The Walt Disney Company from 1996 to 2007.
Elliott Hill, President, Consumer and Marketplace — Mr. Hill, 54, joined NIKE in 1988, with primary responsibilities in sales and retail. He has served as Apparel Sales Director in Europe, Retail Development Director in Europe, Vice President of Sales and Retail in EMEA, General Manager of US Retail, Vice President of US Sales, Retail and NIKE.com, and Vice President of Global Retail. Most recently, Mr. Hill served as President of Geographies and Sales and Vice President and General Manager of North America. Mr. Hill was appointed President, Consumer and Marketplace in March 2018.
Hilary K. Krane, Executive Vice President, Chief Administrative Officer and General Counsel — Ms. Krane, 54, joined NIKE as Vice President and General Counsel in April 2010. In 2011, her responsibilities expanded, and she became Vice President, General Counsel and Corporate Affairs. Ms. Krane was appointed Executive Vice President, Chief Administrative Officer and General Counsel in 2013. Prior to joining NIKE, Ms. Krane was General Counsel and Senior Vice President for Corporate Affairs at Levi Strauss & Co. from 2006 to 2010. From 1996 to 2006, she was a Partner and Assistant General Counsel at PricewaterhouseCoopers LLP.
Monique S. Matheson, Executive Vice President, Global Human Resources — Ms. Matheson, 51, joined NIKE in 1998, with primary responsibilities in the human resources function. She was appointed as Vice President and Senior Business Partner in 2011 and Vice President, Chief Talent and Diversity Officer in 2012. Ms. Matheson was appointed Executive Vice President, Global Human Resources in July 2017.
John F. Slusher, Executive Vice President, Global Sports Marketing — Mr. Slusher, 49, joined NIKE in 1998, with primary responsibilities in global sports marketing. Mr. Slusher was appointed Director of Sports Marketing for Asia Pacific and Americas in 2006, divisional Vice President of Asia Pacific & Americas Sports Marketing in September 2007 and Vice President, Global Sports Marketing in November 2007. Prior to joining NIKE, Mr. Slusher was an attorney at the law firm of O’Melveny & Myers from 1995 to 1998.
Eric D. Sprunk, Chief Operating Officer — Mr. Sprunk, 54, joined NIKE in 1993. He was appointed Finance Director and General Manager of the Americas in 1994, Finance Director for NIKE Europe in 1995, Regional General Manager of NIKE Europe Footwear in 1998 and Vice President & General Manager of the Americas in 2000. Mr. Sprunk was appointed Vice President of Global Footwear in 2001, Vice President of Merchandising and Product in 2009 and Chief Operating Officer in 2013. Prior to joining NIKE, Mr. Sprunk was a certified public accountant with Price Waterhouse from 1987 to 1993.
5
ITEM 1A. Risk Factors
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 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: international, national and local general economic and market conditions; the size and growth of the overall athletic footwear, apparel and equipment markets; intense competition among designers, marketers, distributors and sellers of athletic 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; 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, 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, political and economic instability and terrorism; the impact of recent U.S. tax reform legislation on our results of operations; the potential impact of new laws, regulations or policy, including, without limitation, tariffs, import/export, trade and immigration regulations or policies; changes in government regulations; the impact of, including business and legal developments relating to, climate change and natural disasters; litigation, regulatory proceedings and other claims asserted against NIKE; the ability to attract and retain qualified employees, and any negative public perception with respect to key personnel; the effects of NIKE’s decision to invest in or divest of businesses and other factors referenced or incorporated by reference in this report and other reports.
The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely affect NIKE’s business and financial performance. Moreover, NIKE operates in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for management to predict all such risks, nor can it assess the impact of all such risks on NIKE’s business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Investors should also be aware that while NIKE does, from time to time, communicate with securities analysts, it is against NIKE’s policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that NIKE agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, NIKE has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of NIKE.
Our products face intense competition.
NIKE is a consumer products company and the relative popularity of various sports and fitness activities and changing design trends affect the demand for our products. The athletic footwear, apparel and equipment industry is highly competitive both in the United States and worldwide. We compete internationally with a significant number of athletic and leisure footwear companies, athletic and leisure apparel companies, sports equipment companies and large companies having diversified lines of athletic and leisure footwear, apparel and equipment. We also compete with other companies for the production capacity of independent manufacturers that produce our products. Our NIKE Direct operations, both through our digital commerce operations and retail stores, also compete with multi-brand retailers selling our products.
Product offerings, technologies, marketing expenditures (including expenditures for advertising and endorsements), pricing, costs of production, customer service, digital commerce platforms and social media presence are areas of intense competition. This, in addition to rapid changes in technology and consumer preferences in the markets for athletic and leisure footwear and apparel and athletic equipment, constitute significant risk factors in our operations. In addition, the competitive nature of retail including shifts in the ways in which consumers are shopping, and the rising trend of digital commerce, constitutes a risk factor implicating our NIKE Direct and wholesale operations. If we do not adequately and timely anticipate and respond to our competitors, our costs may increase or the consumer demand for our products may decline significantly.
Failure to maintain our reputation and brand image could negatively impact our business.
Our iconic brands have worldwide recognition, and our success depends on our ability to maintain and enhance our brand image and reputation. Maintaining, promoting and growing our brands will depend on our design and marketing efforts, including advertising and consumer campaigns, product innovation and product quality. Our commitment to product innovation and quality and our continuing investment in design (including materials) and marketing may not have the desired impact on our brand image and reputation. In addition, our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing media environment, including our increasing reliance on social media and digital dissemination of advertising campaigns. We could be adversely impacted if we fail to achieve any of these objectives.
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Our brand value also depends on our ability to maintain a positive consumer perception of our corporate integrity and brand culture. Negative claims or publicity involving us, our products or any of our key employees, endorsers, sponsors or suppliers could seriously damage our reputation and brand image, regardless of whether such claims are accurate. Social media, which accelerates and potentially amplifies the scope of negative publicity, can increase the challenges of responding to negative claims. Adverse publicity about regulatory or legal action against us, or by us, could also damage our reputation and brand image, undermine consumer confidence in us and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. If the reputation or image of any of our brands is tarnished or if we receive negative publicity, then our product sales, financial condition and results of operations could be materially and adversely affected.
If we are unable to anticipate consumer preferences and develop new products, we may not be able to maintain or increase our revenues and profits.
Our success depends on our ability to identify, originate and define product trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. However, lead times for many of our products may make it more difficult for us to respond rapidly to new or changing product trends or consumer preferences. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of performance products or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. If we fail to anticipate accurately and respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, designs, styles and categories, and influencing sports and fitness preferences through extensive marketing, we could experience lower sales, excess inventories or lower profit margins, any of which could have an adverse effect on our results of operations and financial condition. In addition, we market our products globally through a diverse spectrum of advertising and promotional programs and campaigns, including social media, mobile applications and online advertising. If we do not successfully market our products or if advertising and promotional costs increase, these factors could have an adverse effect on our business, financial condition and results of operations.
We rely on technical innovation and high-quality products to compete in the market for our products.
Technical innovation and quality control in the design and manufacturing process of footwear, apparel and athletic equipment is essential to the commercial success of our products. Research and development play a key role in technical innovation. We rely upon specialists in the fields of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability and related fields, as well as research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts to develop and test cutting-edge performance products. While we strive to produce products that help to enhance athletic performance, reduce injury and maximize comfort, if we fail to introduce technical innovation in our products, consumer demand for our products could decline, and if we experience problems with the quality of our products, we may incur substantial expense to remedy the problems.
Failure to continue to obtain or maintain high-quality endorsers of our products could harm our business.
We establish relationships with professional athletes, sports teams and leagues, as well as other public figures, to develop, evaluate and promote our products, as well as establish product authenticity with consumers. However, as competition in our industry has increased, the costs associated with establishing and retaining such sponsorships and other relationships have increased. If we are unable to maintain our current associations with professional athletes, sports teams and leagues, or other public figures, or to do so at a reasonable cost, we could lose the high visibility or on-field authenticity associated with our products, and we may be required to modify and substantially increase our marketing investments. As a result, our brands, net revenues, expenses and profitability could be harmed.
Furthermore, if certain endorsers were to stop using our products contrary to their endorsement agreements, our business could be adversely affected. In addition, actions taken by athletes, teams or leagues, or other endorsers, associated with our products that harm the reputations of those athletes, teams or leagues, or endorsers, could also seriously harm our brand image with consumers and, as a result, could have an adverse effect on our sales and financial condition. In addition, poor performance by our endorsers, a failure to continue to correctly identify promising athletes, or public figures, to use and endorse our products or a failure to enter into cost-effective endorsement arrangements with prominent athletes, public figures, and sports organizations could adversely affect our brand, sales and profitability.
General economic factors beyond our control, and changes in the global economic environment, including fluctuations in inflation and currency exchange rates, could result in lower revenues, higher costs and decreased margins and earnings.
A majority of our products are manufactured and sold outside of the United States, and we conduct purchase and sale transactions in various currencies, which increases our exposure to the volatility of global economic conditions, including fluctuations in inflation and foreign currency exchange rates. Additionally, there has been, and may continue to be, volatility in currency exchange rates as a result of the United Kingdom’s impending exit from the European Union, commonly referred to as “Brexit” and new or proposed U.S. policy changes. Our international revenues and expenses generally are derived from sales and operations in foreign currencies, and these revenues and expenses could be affected by currency fluctuations, specifically amounts recorded in foreign currencies and translated into U.S. Dollars for consolidated financial reporting, as weakening of foreign currencies relative to the U.S. Dollar adversely affects the U.S. Dollar value of the Company’s foreign currency-denominated sales and earnings. Currency exchange rate fluctuations could also disrupt the business of the independent manufacturers that produce our products by making their purchases of raw materials more expensive and more difficult to finance. Foreign currency fluctuations have adversely affected and could continue to have an adverse effect on our results of operations and financial condition.
We may hedge certain foreign currency exposures to lessen and delay, but not to completely eliminate, the effects of foreign currency fluctuations on our financial results. Since the hedging activities are designed to lessen volatility, they not only reduce the negative impact of a stronger U.S. Dollar or other trading currency, but they also reduce the positive impact of a weaker U.S. Dollar or other trading currency. Our future financial results could be significantly affected by the value of the U.S. Dollar in relation to the foreign currencies in which we conduct business. The degree to which our financial results are affected for any given time period will depend in part upon our hedging activities.
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Global economic conditions could have a material adverse effect on our business, operating results and financial condition.
The uncertain state of the global economy continues to impact businesses around the world, most acutely in emerging markets and developing economies. If global economic and financial market conditions do not improve or deteriorate, the following factors could have a material adverse effect on our business, operating results and financial condition:
• | Slower consumer spending may result in reduced demand for our products, reduced orders from retailers for our products, order cancellations, lower revenues, higher discounts, increased inventories and lower gross margins. |
• | In the future, we may be unable to access financing in the credit and capital markets at reasonable rates in the event we find it desirable to do so. |
• | We conduct transactions in various currencies, which increases our exposure to fluctuations in foreign currency exchange rates relative to the U.S. Dollar. Continued volatility in the markets and exchange rates for foreign currencies and contracts in foreign currencies, including in response to certain policies advocated or implemented by the U.S. presidential administration, could have a significant impact on our reported operating results and financial condition. |
• | Continued volatility in the availability and prices for commodities and raw materials we use in our products and in our supply chain (such as cotton or petroleum derivatives) could have a material adverse effect on our costs, gross margins and profitability. |
• | If retailers of our products experience declining revenues or experience difficulty obtaining financing in the capital and credit markets to purchase our products, this could result in reduced orders for our products, order cancellations, late retailer payments, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts and increased bad debt expense. |
• | If retailers of our products experience severe financial difficulty, some may become insolvent and cease business operations, which could negatively impact the sale of our products to consumers. |
• | If contract manufacturers of our products or other participants in our supply chain experience difficulty obtaining financing in the capital and credit markets to purchase raw materials or to finance capital equipment and other general working capital needs, it may result in delays or non-delivery of shipments of our products. |
Our business is affected by seasonality, which could result in fluctuations in our operating results.
We experience moderate fluctuations in aggregate sales volume during the year. Historically, revenues in the first and fourth fiscal quarters have slightly exceeded those in the second and third fiscal quarters. However, the mix of product sales may vary considerably from time to time as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and equipment and in connection with the timing of significant sporting events, such as the NBA Finals, Olympics or the World Cup, among others. In addition, our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice. As a result, we may not be able to accurately predict our quarterly sales. Accordingly, our results of operations are likely to fluctuate significantly from period to period. This seasonality, along with other factors that are beyond our control, including general economic conditions, changes in consumer preferences, weather conditions, availability of import quotas, transportation disruptions and currency exchange rate fluctuations, could adversely affect our business and cause our results of operations to fluctuate. Our operating margins are also sensitive to a number of additional factors that are beyond our control, including manufacturing and transportation costs, shifts in product sales mix and geographic sales trends, all of which we expect to continue. Results of operations in any period should not be considered indicative of the results to be expected for any future period.
We may be adversely affected by the financial health of our customers.
We extend credit to our customers based on an assessment of a customer’s financial condition, generally without requiring collateral. To assist in the scheduling of production and the shipping of our products, we offer certain customers the opportunity to place orders five to six months ahead of delivery under our futures ordering program. These advance orders may be canceled under certain conditions, and the risk of cancellation may increase when dealing with financially unstable retailers or retailers struggling with economic uncertainty. In the past, some customers have experienced financial difficulties up to and including bankruptcies, which have had an adverse effect on our sales, our ability to collect on receivables and our financial condition. When the retail economy weakens or as consumer behavior shifts, retailers may be more cautious with orders. A slowing or changing economy in our key markets could adversely affect the financial health of our customers, which in turn could have an adverse effect on our results of operations and financial condition. In addition, product sales are dependent in part on high quality merchandising and an appealing retail environment to attract consumers, which requires continuing investments by retailers. Retailers that experience financial difficulties may fail to make such investments or delay them, resulting in lower sales and orders for our products.
Failure to accurately forecast consumer demand could lead to excess inventories or inventory shortages, which could result in decreased operating margins, reduced cash flows and harm to our business.
To meet anticipated demand for our products, we purchase products from manufacturers outside of our futures ordering program and in advance of customer orders, which we hold in inventory and resell to customers. There is a risk we may be unable to sell excess products ordered from manufacturers. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have an adverse effect on our operating results, financial condition and cash flows. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply products we require at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to customers, negatively impact retailer, distributor and consumer relationships and diminish brand loyalty. The difficulty in forecasting demand also makes it difficult to estimate our future results of operations, financial condition and cash flows from period to period. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income, and we are unlikely to forecast such effects with any certainty in advance.
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Consolidation of retailers or concentration of retail market share among a few retailers may increase and concentrate our credit risk and impair our ability to sell products.
The athletic footwear, apparel and equipment retail markets in some countries are dominated by a few large athletic footwear, apparel and equipment retailers with many stores. These retailers have in the past increased their market share by expanding through acquisitions and construction of additional stores. These situations concentrate our credit risk with a relatively small number of retailers, and, if any of these retailers were to experience a shortage of liquidity or consumer behavior shifts away from traditional retail, it would increase the risk that their outstanding payables to us may not be paid. In addition, increasing market share concentration among one or a few retailers in a particular country or region increases the risk that if any one of them substantially reduces their purchases of our products, we may be unable to find a sufficient number of other retail outlets for our products to sustain the same level of sales and revenues.
Our NIKE Direct operations have required and will continue to require a substantial investment and commitment of resources and are subject to numerous risks and uncertainties.
Our NIKE Direct stores have required substantial fixed investment in equipment and leasehold improvements, information systems and personnel. We have entered into substantial operating lease commitments for retail space. Certain stores have been designed and built to serve as high-profile venues to promote brand awareness and marketing activities. Because of their unique design elements, locations and size, these stores require substantially more investment than other stores. Due to the high fixed-cost structure associated with our NIKE Direct operations, a decline in sales, a shift in consumer behavior away from brick-and-mortar retail, or the closure or poor performance of individual or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements and employee-related costs.
Many factors unique to retail operations, some of which are beyond the Company’s control, pose risks and uncertainties. Risks include, but are not limited to: credit card fraud; mismanagement of existing retail channel partners; and inability to manage costs associated with store construction and operation. In addition, extreme weather conditions in the areas in which our stores are located could adversely affect our business.
If the technology-based systems that give our customers the ability to shop with us online do not function effectively, our operating results, as well as our ability to grow our digital commerce business globally, could be materially adversely affected.
Many of our customers shop with us through our digital platforms. Increasingly, customers are using mobile-based devices and applications to shop online with us and with our competitors, and to do comparison shopping. We are increasingly using social media and proprietary mobile applications to interact with our customers and as a means to enhance their shopping experience. Any failure on our part to provide attractive, effective, reliable, user-friendly digital commerce platforms that offer a wide assortment of merchandise with rapid delivery options and that continually meet the changing expectations of online shoppers could place us at a competitive disadvantage, result in the loss of digital commerce and other sales, harm our reputation with customers, have a material adverse impact on the growth of our digital commerce business globally and could have a material adverse impact on our business and results of operations.
Risks specific to our digital commerce business also include diversion of sales from our and our retailers’ brick and mortar stores, difficulty in recreating the in-store experience through direct channels and liability for online content. Our failure to successfully respond to these risks might adversely affect sales in our digital commerce business, as well as damage our reputation and brands.
Failure to adequately protect or enforce our intellectual property rights could adversely affect our business.
We periodically discover counterfeit reproductions of our products or products that otherwise infringe our intellectual property rights. If we are unsuccessful in enforcing our intellectual property rights, continued sales of these products could adversely affect our sales and our brand and could result in a shift of consumer preference away from our products.
The actions we take to establish and protect our intellectual property rights may not be adequate to prevent imitation of our products by others. We also may be unable to prevent others from seeking to block sales of our products as violations of proprietary rights.
We may be subject to liability if third parties successfully claim we infringe on their intellectual property rights. Defending infringement claims could be expensive and time-consuming and might result in our entering into costly license agreements. We also may be subject to significant damages or injunctions against development, use, importation and/or sale of certain products.
We take various actions to prevent the unauthorized use and/or disclosure of our confidential information and intellectual property rights. These actions include contractual measures such as entering into non-disclosure and non-compete agreements and agreements relating to our collaborations with third parties and providing confidential information awareness training. Our controls and efforts to prevent unauthorized use and/or disclosure of confidential information and intellectual property rights might not always be effective. For example, confidential information related to business strategy, new technologies, mergers and acquisitions, unpublished financial results or personal data could be prematurely or inadvertently used and/or disclosed, resulting in a loss of reputation, a decline in our stock price and/or a negative impact on our market position, and could lead to damages, fines, penalties or injunctions.
In addition, the laws of certain countries may not protect or allow enforcement of intellectual property rights to the same extent as the laws of the United States. We may face significant expenses and liability in connection with the protection of our intellectual property rights, including outside the United States, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition may be adversely affected.
We are subject to the risk our licensees may not generate expected sales or maintain the value of our brands.
We currently license, and expect to continue licensing, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. If our licensees fail to successfully market and sell licensed products, or fail to obtain sufficient capital or effectively manage their business operations, customer relationships, labor relationships, supplier relationships or credit risks, it could adversely affect our revenues, both directly from reduced royalties received and indirectly from reduced sales of our other products.
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We also rely on our licensees to help preserve the value of our brands. Although we attempt to protect our brands through approval rights over the design, production processes, quality, packaging, merchandising, distribution, advertising and promotion of our licensed products, we cannot completely control the use of our licensed brands by our licensees. The misuse of a brand by or negative publicity involving a licensee could have a material adverse effect on that brand and on us.
We are subject to data security and privacy risks that could negatively affect our results, operations or reputation.
In addition to our own sensitive and proprietary business information, we collect transactional and personal information about our customers and users of our digital experiences, which include online distribution channels and product engagement and personal fitness applications. Hackers and data thieves are increasingly sophisticated and operate large-scale and complex automated attacks. Any breach of our or our service providers’ network, or other vendor systems, may result in the loss of confidential business and financial data, misappropriation of our consumers’, users’ or employees’ personal information or a disruption of our business. Any of these outcomes could have a material adverse effect on our business, including unwanted media attention, impairment of our consumer and customer relationships, damage to our reputation; resulting in lost sales and consumers, fines, lawsuits, or significant legal and remediation expenses. We also may need to expend significant resources to protect against, respond to and/or redress problems caused by any breach.
In addition, we must comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data in the U.S., Europe and elsewhere. For example, the European Union adopted the General Data Protection Regulation (the “GDPR”), which became effective on May 25, 2018. The GDPR imposes additional obligations on companies regarding the handling of personal data and provides certain individual privacy rights to persons whose data is stored. Compliance with existing, proposed and recently enacted laws (including implementation of the privacy and process enhancements called for under GDPR) and regulations can be costly; any failure to comply with these regulatory standards could subject us to legal and reputational risks. Misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against the Company by governmental entities or others, damage to our reputation and credibility and could have a negative impact on revenues and profits.
Failure of our contractors or our licensees’ contractors to comply with our code of conduct, local laws and other standards could harm our business.
We work with hundreds of contractors outside of the United States to manufacture our products, and we also have license agreements that permit unaffiliated parties to manufacture or contract for the manufacture of products using our intellectual property. We require the contractors that directly manufacture our products and our licensees that make products using our intellectual property (including, indirectly, their contract manufacturers) to comply with a code of conduct and other environmental, health and safety standards for the benefit of workers. We also require these contractors to comply with applicable standards for product safety. Notwithstanding their contractual obligations, from time to time contractors may not comply with such standards or applicable local law or our licensees may fail to enforce such standards or applicable local law on their contractors. Significant or continuing noncompliance with such standards and laws by one or more contractors could harm our reputation or result in a product recall and, as a result, could have an adverse effect on our sales and financial condition. Negative publicity regarding production methods, alleged practices or workplace or related conditions of any of our suppliers, manufacturers or licensees could adversely affect our brand image and sales and force us to locate alternative suppliers, manufacturers or licenses.
Our international operations involve inherent risks which could result in harm to our business.
Virtually all of our athletic footwear and apparel is manufactured outside of the United States, and the majority of our products are sold outside of the United States. Accordingly, we are subject to the risks generally associated with global trade and doing business abroad, which include foreign laws and regulations, varying consumer preferences across geographic regions, political unrest, disruptions or delays in cross-border shipments and changes in economic conditions in countries in which our products are manufactured or where we sell products. This includes, for example, the uncertainty surrounding the effect of Brexit, including changes to the legal and regulatory framework that apply to the United Kingdom and its relationship with the European Union, as well as new and proposed changes affecting tax laws and trade policy in the U.S. and elsewhere as further described below under “We could be subject to changes in tax rates, adoption of new tax laws, additional tax liabilities or increased volatility in our effective tax rate” and “Changes to U.S. trade policy, tariff and import/export regulations may have a material adverse effect on our business, financial condition and results of operations.” The U.S. presidential administration has indicated a focus on policy reforms that discourage U.S. corporations from outsourcing manufacturing and production activities to foreign jurisdictions, including through tariffs or penalties on goods manufactured outside the U.S., which may require us to change the way we conduct business and adversely affect our results of operations. The administration has also targeted the specific practices of certain U.S. multinational corporations in public statements which, if directed at us, could harm our reputation or otherwise negatively impact our business.
In addition, disease outbreaks, terrorist acts and military conflict have increased the risks of doing business abroad. These factors, among others, could affect our ability to manufacture products or procure materials, our ability to import products, our ability to sell products in international markets and our cost of doing business. If any of these or other factors make the conduct of business in a particular country undesirable or impractical, our business could be adversely affected. In addition, many of our imported products are subject to duties, tariffs or quotas that affect the cost and quantity of various types of goods imported into the United States and other countries. Any country in which our products are produced or sold may eliminate, adjust or impose new quotas, duties, tariffs, safeguard measures, anti-dumping duties, cargo restrictions to prevent terrorism, restrictions on the transfer of currency, climate change legislation, product safety regulations or other charges or restrictions, any of which could have an adverse effect on our results of operations and financial condition.
We could be subject to changes in tax rates, adoption of new tax laws, additional tax liabilities or increased volatility in our effective tax rate.
We are subject to the tax laws in the United States and numerous foreign jurisdictions. Current economic and political conditions make tax laws and regulations, or their interpretation and application, in any jurisdiction subject to significant change. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Act”), which includes a number of significant changes to previous U.S. tax laws that impact us, including provisions for a one-time transition tax on deemed repatriation of undistributed foreign earnings, and a reduction in the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, among other changes. The Tax Act also transitions U.S. international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures on non-U.S. earnings, which has the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation.
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Implementation of the Tax Act required us to record incremental provisional tax expense in fiscal 2018, which increased our effective tax rate in fiscal 2018. Adjustments to the incremental provisional tax expense may be made in future periods as actual amounts may differ due to, among other factors, a change in interpretation of the applicable revisions to the U.S. tax code and related tax accounting guidance, changes in assumptions made in developing these estimates, regulatory guidance that may be issued with respect to the applicable revisions to the U.S. tax code, and state tax implications. As we complete our analysis of the Tax Act, we may make adjustments to provisional amounts we have recorded, which could negatively impact our business, results of operations or financial condition. Changes or challenges to or the repeal of the Tax Act cannot be predicted with certainty and could have a material impact on our future tax expense.
We earn a substantial portion of our income in foreign countries and are subject to the tax laws of those jurisdictions. There have been proposals to reform foreign tax laws that could significantly impact how U.S. multinational corporations are taxed on foreign earnings. Although we cannot predict whether or in what form these proposals will pass, several of the proposals considered, if enacted into law, could have an adverse impact on our income tax expense and cash flows.
Portions of our operations are subject to a reduced tax rate or are free of tax under various tax holidays and rulings that expire in whole or in part from time to time. These tax holidays and rulings may be extended when certain conditions are met, or terminated if certain conditions are not met. If the tax holidays and rulings are not extended, or if we fail to satisfy the conditions of the reduced tax rate, our effective income tax rate would increase in the future.
We are also subject to the examination of our tax returns by the United States Internal Revenue Service (“IRS”) and other tax authorities. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for income taxes. Although we believe our tax provisions are adequate, the final determination of tax audits and any related disputes could be materially different from our historical income tax provisions and accruals, particularly in light of the enactment of the Tax Act. The results of audits or related disputes could have an adverse effect on our financial statements for the period or periods for which the applicable final determinations are made. For example, we and our subsidiaries are engaged in a number of intercompany transactions across multiple tax jurisdictions. Although we believe we have clearly reflected the economics of these transactions and the proper local transfer pricing documentation is in place, tax authorities may propose and sustain adjustments that could result in changes that may impact our mix of earnings in countries with differing statutory tax rates.
Changes to U.S. trade policy, tariff and import/export regulations may have a material adverse effect on our business, financial condition and results of operations.
Changes in U.S. or international social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories or countries where we currently sell our products or conduct our business, as well as any negative sentiment toward the U.S. as a result of such changes, could adversely affect our business. The U.S. presidential administration has instituted or proposed changes in trade policies that include the negotiation or termination of trade agreements, the imposition of higher tariffs on imports into the U.S., economic sanctions on individuals, corporations or countries, and other government regulations affecting trade between the U.S. and other countries where we conduct our business. It may be time-consuming and expensive for us to alter our business operations in order to adapt to or comply with any such changes.
As a result of recent policy changes of the U.S. presidential administration and recent U.S. government proposals, there may be greater restrictions and economic disincentives on international trade. The new tariffs and other changes in U.S. trade policy could trigger retaliatory actions by affected countries, and certain foreign governments have instituted or are considering imposing trade sanctions on certain U.S. goods. The Company, similar to many other multinational corporations, does a significant amount of business that would be impacted by changes to the trade policies of the U.S. and foreign countries (including governmental action related to tariffs, international trade agreements, or economic sanctions). Such changes have the potential to adversely impact the U.S. economy or certain sectors thereof, our industry and the global demand for our products, and as a result, could have a material adverse effect on our business, financial condition and results of operations.
If one or more of our counterparty financial institutions default on their obligations to us or fail, we may incur significant losses.
As part of our hedging activities, we enter into transactions involving derivative financial instruments, which may include forward contracts, commodity futures contracts, option contracts, collars and swaps with various financial institutions. In addition, we have significant amounts of cash, cash equivalents and other investments on deposit or in accounts with banks or other financial institutions in the United States and abroad. As a result, we are exposed to the risk of default by or failure of counterparty financial institutions. The risk of counterparty default or failure may be heightened during economic downturns and periods of uncertainty in the financial markets. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default, or our assets deposited or held in accounts with such counterparty, may be limited by the counterparty’s liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. In the event of default or failure of one or more of our counterparties, we could incur significant losses, which could negatively impact our results of operations and financial condition.
We rely on a concentrated source base of contract manufacturers to supply a significant portion of our footwear products.
NIKE is supplied by 124 footwear factories located in 13 countries. We do not own or operate any of the footwear manufacturing facilities and depend upon independent contract manufacturers to manufacture all of the footwear products we sell. In fiscal 2018, five footwear contract manufacturers each accounted for greater than 10% of fiscal 2018 footwear production and in aggregate accounted for approximately 69% of NIKE Brand footwear production in fiscal 2018. Our ability to meet our customers’ needs depends on our ability to maintain a steady supply of products from our independent contract manufacturers. If one or more of our significant suppliers were to sever their relationship with us or significantly alter the terms of our relationship, including due to changes in applicable trade policies, we may not be able to obtain replacement products in a timely manner, which could have a material adverse effect on our sales, financial condition or results of operations. Additionally, if any of our primary contract manufacturers fail to make timely shipments, do not meet our quality standards or otherwise fail to deliver us product in accordance with our plans, there could be a material adverse effect on our results of operations.
11
Our products are subject to risks associated with overseas sourcing, manufacturing and financing.
The principal materials used in our apparel products — natural and synthetic fabrics and threads, specialized performance fabrics designed to efficiently wick moisture away from the body, retain heat or repel rain and/or snow as well as plastic and metal hardware — are available in countries where our manufacturing takes place. The principal materials used in our footwear products — natural and synthetic rubber, plastic compounds, foam cushioning materials, natural and synthetic leather, natural and synthetic fabrics and threads, nylon, canvas and polyurethane films — are also locally available to manufacturers. Both our apparel and footwear products are dependent upon the ability of our unaffiliated contract manufacturers to locate, train, employ and retain adequate personnel. NIKE contractors and suppliers buy raw materials and are subject to wage rates that are oftentimes regulated by the governments of the countries in which our products are manufactured.
There could be a significant disruption in the supply of fabrics or raw materials from current sources or, in the event of a disruption, our contract manufacturers might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price or at all. Further, our unaffiliated contract manufacturers have experienced and may continue to experience in the future, unexpected increases in work wages, whether government mandated or otherwise and increases in compliance costs due to governmental regulation concerning certain metals used in the manufacturing of our products. In addition, we cannot be certain that our unaffiliated manufacturers will be able to fill our orders in a timely manner. If we experience significant increases in demand, or reductions in the availability of materials, or need to replace an existing manufacturer, there can be no assurance additional supplies of fabrics or raw materials or additional manufacturing capacity will be available when required on terms acceptable to us, or at all, or that any supplier or manufacturer would allocate sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or find new manufacturing or sources of materials, we may encounter delays in production and added costs as a result of the time it takes to train suppliers and manufacturers in our methods, products, quality control standards and labor, health and safety standards. Any delays, interruption or increased costs in labor or wages, or the supply of materials or manufacture of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short- and long-term.
Because independent manufacturers make a majority of our products outside of our principal sales markets, our products must be transported by third parties over large geographic distances. Delays in the shipment or delivery of our products due to the availability of transportation, work stoppages, port strikes, infrastructure congestion or other factors, and costs and delays associated with consolidating or transitioning between manufacturers, could adversely impact our financial performance. In addition, manufacturing delays or unexpected demand for our products may require us to use faster, but more expensive, transportation methods such as air freight, which could adversely affect our profit margins. The cost of oil is a significant component in manufacturing and transportation costs, so increases in the price of petroleum products can adversely affect our profit margins. Changes in U.S. trade policies, including new and potential changes to import tariffs and existing trade policies and agreements, could also have a significant impact on our activities in foreign jurisdictions, and could adversely affect our results of operations.
In addition, Sojitz America performs significant import-export financing services for the Company. During fiscal 2018, Sojitz America provided financing and purchasing services for NIKE Brand products sold in certain NIKE markets including Argentina, Brazil, Canada, India, South Africa and Uruguay (collectively the “Sojitz Markets”), excluding products produced and sold in the same country. Any failure of Sojitz America to provide these services or any failure of Sojitz America’s banks could disrupt our ability to acquire products from our suppliers and to deliver products to our customers in the Sojitz Markets. Such a disruption could result in canceled orders that would adversely affect sales and profitability.
Our success depends on our global distribution facilities.
We distribute our products to customers directly from the factory and through distribution centers located throughout the world. Our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies and growth, particularly in emerging markets, depends on the proper operation of our distribution facilities, the development or expansion of additional distribution capabilities and the timely performance of services by third parties (including those involved in shipping product to and from our distribution facilities). Our distribution facilities could be interrupted by information technology problems and disasters such as earthquakes or fires. Any significant failure in our distribution facilities could result in an adverse effect on our business. We maintain business interruption insurance, but it may not adequately protect us from adverse effects caused by significant disruptions in our distribution facilities.
We rely significantly on information technology to operate our business, including our supply chain and retail operations, and any failure, inadequacy or interruption of that technology could harm our ability to effectively operate our business.
We are heavily dependent on information technology systems and networks, including the Internet and third-party services (“Information Technology Systems”), across our supply chain, including product design, production, forecasting, ordering, manufacturing, transportation, sales and distribution, as well as for processing financial information for external and internal reporting purposes, retail operations and other business activities. Information Technology Systems are critical to many of our operating activities and our business processes and may be negatively impacted by any service interruption or shutdown. For example, our ability to effectively manage and maintain our inventory and to ship products to customers on a timely basis depends significantly on the reliability of these Information Technology Systems. Over a number of years, we have implemented Information Technology Systems in all of the geographical regions in which we operate. Our work to integrate, secure and enhance these systems and related processes in our global operations is ongoing and NIKE will continue to invest in these efforts. The failure of these systems to operate effectively, including as a result of security breaches, viruses, hackers, malware, natural disasters, vendor business interruptions or other causes, or failure to properly maintain, protect, repair or upgrade systems, or problems with transitioning to upgraded or replacement systems could cause delays in product fulfillment and reduced efficiency of our operations, could require significant capital investments to remediate the problem, and may have an adverse effect on our reputation, results of operations and financial condition.
We also use Information Technology Systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. If Information Technology Systems suffer severe damage, disruption or shutdown and our business continuity plans, or those of our vendors, do not effectively resolve the issues in a timely manner, we could experience delays in reporting our financial results, which could result in lost revenues and profits, as well as reputational damage. Furthermore, we depend on Information Technology Systems and personal data collection for digital marketing, digital commerce, consumer engagement and the marketing and use of our digital products and services. We also rely on our ability to engage in electronic communications throughout the world between and among our employees as well as with other third parties, including customers, suppliers, vendors and consumers. Any interruption in Information Technology Systems may impede our ability to engage in the digital space and result in lost revenues, damage to our reputation, and loss of users.
12
The market for prime real estate is competitive.
Our ability to effectively obtain real estate to open new retail stores and otherwise conduct our operations, both domestically and internationally, depends on the availability of real estate that meets our criteria for traffic, square footage, co-tenancies, lease economics, demographics and other factors. We also must be able to effectively renew our existing real estate leases. In addition, from time to time, we seek to downsize, consolidate, reposition or close some of our real estate locations, which may require modification of an existing lease. Failure to secure adequate new locations or successfully modify leases for existing locations, or failure to effectively manage the profitability of our existing fleet of retail stores, could have an adverse effect on our operating results and financial condition.
Additionally, the economic environment may make it difficult to determine the fair market rent of real estate properties domestically and internationally. This could impact the quality of our decisions to exercise lease options at previously negotiated rents and to renew expiring leases at negotiated rents. Any adverse effect on the quality of these decisions could impact our ability to retain real estate locations adequate to meet our targets or efficiently manage the profitability of our existing fleet of stores, which could have an adverse effect on our operating results and financial condition.
Extreme weather conditions and natural disasters could negatively impact our operating results and financial condition.
Extreme weather conditions in the areas in which our retail stores, suppliers, customers, distribution centers and vendors are located could adversely affect our operating results and financial condition. Moreover, natural disasters such as earthquakes, hurricanes and tsunamis, whether occurring in the United States or abroad, and their related consequences and effects, including energy shortages and public health issues, could disrupt our operations, the operations of our vendors and other suppliers or result in economic instability that may negatively impact our operating results and financial condition.
Our financial results may be adversely affected if substantial investments in businesses and operations fail to produce expected returns.
From time to time, we may invest in technology, business infrastructure, new businesses, product offering and manufacturing innovation and expansion of existing businesses, such as our digital commerce operations, which require substantial cash investments and management attention. We believe cost-effective investments are essential to business growth and profitability; however, significant investments are subject to typical risks and uncertainties inherent in developing a new business or expanding an existing business. The failure of any significant investment to provide expected returns or profitability could have a material adverse effect on our financial results and divert management attention from more profitable business operations.
We are subject to litigation and other legal and regulatory proceedings, which could have an adverse effect on our business, financial condition and results of operations.
As a multinational corporation with operations and distribution channels throughout the world, we are subject to extensive laws and regulations in the U.S. and other jurisdictions in which we have operations and distribution channels. We are involved in various types of claims, lawsuits, regulatory proceedings and government investigations relating to our business, our products and the actions of our employees and representatives, including contractual and employment relationships, product liability, antitrust, trademark rights and a variety of other matters. It is not possible to predict with certainty the outcome of any such legal or regulatory proceedings or investigations, and we could in the future incur judgments, fines or penalties, or enter into settlements of lawsuits and claims that could have a material adverse effect on our business, financial condition and results of operations and negatively impact our reputation. The global nature of our business means legal and compliance risks will continue to exist and additional legal proceedings and other contingencies will arise from time to time, which could adversely affect us. In addition, the adoption of new laws or regulations, or changes in the interpretation of existing laws or regulations, may result in significant unanticipated legal and reputational risks. Any current or future legal or regulatory proceedings could divert management’s attention from our operations and result in substantial legal fees.
The success of our business depends, in part, on high-quality employees, including key personnel.
Our success depends in part on the continued service of high-quality employees, including key executive officers and personnel. The loss of the services of key individuals, or any negative perception with respect to these individuals, could harm our business. Our success also depends on our ability to recruit, retain and engage our personnel sufficiently, both to maintain our current business and to execute our strategic initiatives. Competition for employees in our industry is intense and we may not be successful in attracting and retaining such personnel. In addition, shifts in U.S. immigration policy could negatively impact our ability to attract, hire and retain highly skilled employees who are from outside the U.S.
The sale of a large number of shares of common stock by our principal stockholder could depress the market price of our common stock.
As of June 30, 2018, Swoosh, LLC beneficially owned more than 77% of our Class A Common Stock. If, on June 30, 2018, all of these shares were converted into Class B Common Stock, the commensurate ownership percentage of our Class B Common Stock would be approximately 17%. The shares are available for resale, subject to the requirements of the U.S. securities laws and the terms of the limited liability company agreement governing Swoosh, LLC. The sale or prospect of a sale of a substantial number of these shares could have an adverse effect on the market price of our common stock. Swoosh, LLC was formed by Philip H. Knight, our Chairman Emeritus, to hold the majority of his shares of Class A Common Stock. Swoosh, LLC is controlled by Mr. Knight's son and NIKE director, Travis Knight.
Changes in our credit ratings or macroeconomic conditions may affect our liquidity, increasing borrowing costs and limiting our financing options.
Our long-term debt is currently rated Investment Grade by Standard & Poor’s and Moody’s Investors Service. If our credit ratings are lowered, borrowing costs for future long-term debt or short-term credit facilities may increase and our financing options, including our access to the unsecured credit market, could be limited. We may also be subject to restrictive covenants that would reduce our flexibility to, among other things, incur additional indebtedness, make restricted payments, pledge assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Failure to comply with such covenants could result in a default, and as a result, the commitments of our lenders under our credit agreements may be terminated and the maturity of amounts owed may be accelerated. In addition, macroeconomic conditions, such as increased volatility or disruption in the credit markets, could adversely affect our ability to refinance existing debt.
13
If our internal controls are ineffective, our operating results could be adversely affected.
Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed and we could fail to meet our financial reporting obligations.
If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our operating results could be adversely affected.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, allowance for uncollectible accounts receivable, inventory reserves, contingent payments under endorsement contracts, accounting for property, plant and equipment and definite-lived assets, hedge accounting for derivatives, stock-based compensation, income taxes and other contingencies. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in the price of our Class B Common Stock.
Anti-takeover provisions may impair an acquisition of the Company or reduce the price of our common stock.
There are provisions within our articles of incorporation and Oregon law intended to protect shareholder interests by providing the Board of Directors a means to attempt to deny coercive takeover attempts or to negotiate with a potential acquirer in order to obtain more favorable terms. Such provisions include a control share acquisition statute, a freeze-out statute, two classes of stock that vote separately on certain issues, and the fact that holders of Class A Common Stock elect three-quarters of the Board of Directors rounded down to the next whole number. However, such provisions could discourage, delay or prevent an unsolicited merger, acquisition or other change in control of our company that some shareholders might believe to be in their best interests or in which shareholders might receive a premium for their common stock over the prevailing market price. These provisions could also discourage proxy contests for control of the Company.
We may fail to meet market expectations, which could cause the price of our stock to decline.
Our Class B Common Stock is traded publicly, and at any given time various securities analysts follow our financial results and issue reports on us. These reports include information about our historical financial results as well as analysts’ estimates of our future performance. Analysts’ estimates are based upon their own opinions and are often different from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline. In the past, securities class action litigation has been brought against NIKE and other companies following a decline in the market price of their securities. If our stock price is volatile for any reason, we may become involved in this type of litigation in the future. Any litigation could result in reputational damage, substantial costs and a diversion of management’s attention and resources needed to successfully run our business.
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ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
The following is a summary of principal properties owned or leased by NIKE:
The NIKE World Campus, owned by NIKE and located near Beaverton, Oregon, USA, is an approximately 400-acre site consisting of over 40 buildings which, together with adjacent leased properties, functions as our world headquarters and is occupied by approximately 11,200 employees engaged in management, research, design, development, marketing, finance and other administrative functions serving nearly all of our divisions. We also lease various office facilities in the surrounding metropolitan area. We lease a similar, but smaller, administrative facility in Hilversum, the Netherlands, which serves as the headquarters for the Europe, Middle East & Africa geography and management of certain brand functions for our non-U.S. operations. We also lease an office complex in Shanghai, China, our headquarters for Greater China, occupied by employees focused on implementing our wholesale, NIKE Direct and merchandising strategies in the region, among other functions.
In the United States, NIKE has seven significant distribution centers. Five are located in Memphis, Tennessee, two of which are owned and three of which are leased. Two other distribution centers, one located in Indianapolis, Indiana, and one located in Dayton, Tennessee, are leased and operated by third-party logistics providers. NIKE Brand apparel and equipment are also shipped from our Foothill Ranch, California distribution center, which we lease. Smaller leased, and third-party leased and operated, distribution facilities are located in various parts of the United States. NIKE has several distribution facilities outside the United States, some of which are leased and operated by third-party logistics providers. The most significant distribution facilities outside the United States are located in Laakdal, Belgium; Taicang, China; Tomisato, Japan and Incheon, Korea, all of which we own.
Air Manufacturing Innovation manufactures Air-Sole cushioning components at NIKE-owned facilities and one leased facility located near Beaverton, Oregon and in St. Charles, Missouri. Air Manufacturing Innovation also manufactures and sells small amounts of various other plastic products to other manufacturers.
Aside from the principal properties described above, we lease many offices worldwide for sales and administrative purposes. We lease 1,181 retail stores worldwide, which primarily consist of factory stores. See “United States Market” and “International Markets” in Part I of this Report. Our leases expire at various dates through the year 2035.
ITEM 3. Legal Proceedings
There are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is the subject.
ITEM 4. Mine Safety Disclosures
Not applicable.
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PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
NIKE’s Class B Common Stock is listed on the New York Stock Exchange and trades under the symbol NKE. At July 20, 2018, there were 22,271 holders of record of our Class B Common Stock and 15 holders of record of our Class A Common Stock. These figures do not include beneficial owners who hold shares in nominee name. The Class A Common Stock is not publicly traded, but each share is convertible upon request of the holder into one share of Class B Common Stock. Refer to Selected Quarterly Financial Data in Part II, Item 6 of this Report for information regarding quarterly high and low sales prices for the Class B Common Stock as reported on the New York Stock Exchange Composite Tape, and for dividends declared on the Class A and Class B Common Stock.
In November 2015, the Board of Directors approved a four-year, $12 billion share repurchase program. As of May 31, 2018, the Company had repurchased 149.4 million shares at an average price of $58.25 per share for a total approximate cost of $8.7 billion under this program. The Company intends to use excess cash, future cash from operations and/or proceeds from debt to fund repurchases.
The following table presents a summary of share repurchases made by NIKE under this program during the quarter ended May 31, 2018:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (In millions) | ||||||||||
March 1 — March 31, 2018 | 8,602,814 | $ | 65.94 | 8,602,814 | $ | 4,282 | ||||||||
April 1 — April 30, 2018 | 7,823,991 | $ | 67.08 | 7,823,991 | $ | 3,757 | ||||||||
May 1 — May 31, 2018 | 6,625,000 | $ | 69.63 | 6,625,000 | $ | 3,296 | ||||||||
23,051,805 | $ | 67.39 | 23,051,805 | |||||||||||
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Performance Graph |
The following graph demonstrates a five-year comparison of cumulative total returns for NIKE’s Class B Common Stock; the Standard & Poor’s 500 Stock Index; the Standard & Poor’s Apparel, Accessories & Luxury Goods Index; and the Dow Jones U.S. Footwear Index. The graph assumes an investment of $100 on May 31, 2013 in each of our Class B Common Stock and the stocks comprising the Standard & Poor’s 500 Stock Index; the Standard & Poor’s Apparel, Accessories & Luxury Goods Index; and the Dow Jones U.S. Footwear Index. Each of the indices assumes that all dividends were reinvested on the day of issuance.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG NIKE, INC.; S&P 500 INDEX; S&P APPAREL, ACCESSORIES & LUXURY GOODS INDEX; AND THE DOW JONES U.S. FOOTWEAR INDEX
The Dow Jones U.S. Footwear Index consists of NIKE, Deckers Outdoor Corporation, Skechers U.S.A., Inc., Steven Madden, Ltd. and Wolverine World Wide, Inc. Because NIKE is part of the Dow Jones U.S. Footwear Index, the price and returns of NIKE stock have a substantial effect on this index. The Standard & Poor’s Apparel, Accessories & Luxury Goods Index consists of Michael Kors Holdings Limited, Ralph Lauren Corporation, Tapestry, Inc., Under Armour, Inc. and V.F. Corporation, among other companies. The Dow Jones U.S. Footwear Index and the Standard & Poor’s Apparel, Accessories & Luxury Goods Index include companies in two major lines of business in which the Company competes. The indices do not encompass all of the Company’s competitors, nor all product categories and lines of business in which the Company is engaged.
The stock performance shown on the performance graph above is not necessarily indicative of future performance. The Company will not make or endorse any predictions as to future stock performance.
The performance graph above is being furnished solely to accompany this Report pursuant to Item 201(e) of Regulation S-K, is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
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ITEM 6. Selected Financial Data
All share and per share amounts are reflective of the two-for-one stock split that began trading at the split-adjusted price on December 24, 2015.
(In millions, except per share data and financial ratios) | Financial History | ||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
Year Ended May 31, | |||||||||||||||||||
Revenues | $ | 36,397 | $ | 34,350 | $ | 32,376 | $ | 30,601 | $ | 27,799 | |||||||||
Gross profit | 15,956 | 15,312 | 14,971 | 14,067 | 12,446 | ||||||||||||||
Gross margin | 43.8 | % | 44.6 | % | 46.2 | % | 46.0 | % | 44.8 | % | |||||||||
Net income | 1,933 | 4,240 | 3,760 | 3,273 | 2,693 | ||||||||||||||
Earnings per common share: | |||||||||||||||||||
Basic | 1.19 | 2.56 | 2.21 | 1.90 | 1.52 | ||||||||||||||
Diluted | 1.17 | 2.51 | 2.16 | 1.85 | 1.49 | ||||||||||||||
Weighted average common shares outstanding | 1,623.8 | 1,657.8 | 1,697.9 | 1,723.5 | 1,766.7 | ||||||||||||||
Diluted weighted average common shares outstanding | 1,659.1 | 1,692.0 | 1,742.5 | 1,768.8 | 1,811.6 | ||||||||||||||
Cash dividends declared per common share | 0.78 | 0.70 | 0.62 | 0.54 | 0.47 | ||||||||||||||
Cash flow from operations(1) | 4,955 | 3,846 | 3,399 | 4,906 | 3,158 | ||||||||||||||
Price range of common stock: | |||||||||||||||||||
High | 73.49 | 60.33 | 68.19 | 52.75 | 40.13 | ||||||||||||||
Low | 50.35 | 49.01 | 47.25 | 36.57 | 29.56 | ||||||||||||||
At May 31, | |||||||||||||||||||
Cash and equivalents | $ | 4,249 | $ | 3,808 | $ | 3,138 | $ | 3,852 | $ | 2,220 | |||||||||
Short-term investments | 996 | 2,371 | 2,319 | 2,072 | 2,922 | ||||||||||||||
Inventories | 5,261 | 5,055 | 4,838 | 4,337 | 3,947 | ||||||||||||||
Working capital | 9,094 | 10,587 | 9,667 | 9,225 | 8,319 | ||||||||||||||
Total assets | 22,536 | 23,259 | 21,379 | 21,590 | 18,579 | ||||||||||||||
Long-term debt | 3,468 | 3,471 | 1,993 | 1,072 | 1,191 | ||||||||||||||
Capital lease obligations | 75 | 27 | 15 | 5 | 74 | ||||||||||||||
Redeemable preferred stock | 0.3 | 0.3 | 0.3 | 0.3 | 0.3 | ||||||||||||||
Shareholders’ equity | 9,812 | 12,407 | 12,258 | 12,707 | 10,824 | ||||||||||||||
Year-end stock price | 71.80 | 52.99 | 55.22 | 50.84 | 38.46 | ||||||||||||||
Market capitalization | 114,983 | 87,084 | 92,867 | 87,044 | 66,921 | ||||||||||||||
Financial Ratios: | |||||||||||||||||||
Return on equity(2) | 17.4 | % | 34.4 | % | 30.1 | % | 27.8 | % | 24.6 | % | |||||||||
Return on assets(2) | 8.4 | % | 19.0 | % | 17.5 | % | 16.3 | % | 14.9 | % | |||||||||
Inventory turns | 4.0 | 3.8 | 3.8 | 4.0 | 4.1 | ||||||||||||||
Current ratio at May 31 | 2.5 | 2.9 | 2.8 | 2.5 | 2.7 | ||||||||||||||
Price/Earnings ratio at May 31(2) | 61.4 | 21.1 | 25.6 | 27.5 | 25.9 | ||||||||||||||
(1) | Prior year amounts have been updated to reflect the adoption of Accounting Standards Update No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. As a result of adoption, the Company reclassified cash inflows of $177 million, $281 million, $218 million and $132 million for the years ended May 31, 2017, 2016, 2015 and 2014, respectively, related to excess tax benefits from share-based payment awards, from Cash used by financing activities to Cash provided by operations. Additionally, the Company reclassified cash outflows of $29 million, $22 million, $8 million and $13 million for the years ended May 31, 2017, 2016, 2015 and 2014, respectively, related to tax payments for the net settlement of share-based payment awards, from Cash provided by operations to Cash used by financing activities within the Consolidated Statements of Cash Flows. Refer to Note 1 — Summary of Significant Accounting Policies for additional information. |
(2) | Certain fiscal 2018 financial ratios reflect the impact of the Tax Cuts and Jobs Act. Refer to Note 9 — Income Taxes for additional information. |
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Selected Quarterly Financial Data |
(Unaudited) (In millions, except per share data) | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018(1) | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Revenues | $ | 9,070 | $ | 9,061 | $ | 8,554 | $ | 8,180 | $ | 8,984 | $ | 8,432 | $ | 9,789 | $ | 8,677 | ||||||||||||||||
Gross profit | 3,962 | 4,123 | 3,678 | 3,616 | 3,938 | 3,750 | 4,378 | 3,823 | ||||||||||||||||||||||||
Gross margin | 43.7 | % | 45.5 | % | 43.0 | % | 44.2 | % | 43.8 | % | 44.5 | % | 44.7 | % | 44.1 | % | ||||||||||||||||
Net income (loss) | 950 | 1,249 | 767 | 842 | (921 | ) | 1,141 | 1,137 | 1,008 | |||||||||||||||||||||||
Earnings (loss) per common share: | ||||||||||||||||||||||||||||||||
Basic | 0.58 | 0.75 | 0.47 | 0.51 | (0.57 | ) | 0.69 | 0.71 | 0.61 | |||||||||||||||||||||||
Diluted | 0.57 | 0.73 | 0.46 | 0.50 | (0.57 | ) | 0.68 | 0.69 | 0.60 | |||||||||||||||||||||||
Weighted average common shares outstanding | 1,639.1 | 1,672.0 | 1,627.0 | 1,659.1 | 1,623.5 | 1,653.1 | 1,605.7 | 1,646.9 | ||||||||||||||||||||||||
Diluted weighted average common shares outstanding | 1,676.9 | 1,708.9 | 1,660.9 | 1,693.2 | 1,623.5 | 1,686.3 | 1,641.2 | 1,678.6 | ||||||||||||||||||||||||
Cash dividends declared per common share | 0.18 | 0.16 | 0.20 | 0.18 | 0.20 | 0.18 | 0.20 | 0.18 | ||||||||||||||||||||||||
Price range of common stock: | ||||||||||||||||||||||||||||||||
High | 60.53 | 60.33 | 61.21 | 59.18 | 70.25 | 58.42 | 73.49 | 59.00 | ||||||||||||||||||||||||
Low | 50.79 | 51.48 | 50.35 | 49.01 | 59.24 | 50.06 | 63.21 | 50.81 | ||||||||||||||||||||||||
(1) | The third quarter of fiscal 2018 reflects the impact from the enactment of the Tax Cuts and Jobs Act. Refer to Note 9 — Income Taxes for additional information. |
19
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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-owned retail stores and through digital platforms (which we refer to collectively as our “NIKE Direct” operations), to retail accounts and 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.
In June 2017, we announced the Consumer Direct Offense, a new company alignment designed to allow NIKE to better serve the consumer personally, at scale. Leveraging the power of digital, NIKE plans to drive growth — by accelerating innovation and product creation, moving even closer to the consumer through key cities, and deepening one-to-one connections. As a result of this organizational realignment, beginning in fiscal 2018, the Company’s reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA).
Through the Consumer Direct Offense, we are focusing on our Triple Double strategy, with the objective of doubling the impact of innovation, increasing our speed to market and growing our direct connections with consumers. As a result of the execution of this strategy, our long-term financial goals through fiscal 2023, on average, per year, are as follows:
• | High single-digit revenue growth; |
• | Gross margin expansion of as much as 50 basis points; |
• | Slight selling and administrative expense leverage; |
• | Mid-teens earnings per share growth; and |
• | Low-thirties percentage rate of return on invested capital. |
Over the past ten years, we have achieved strong growth in many of these metrics. During this time, revenues for NIKE, Inc. have grown 7% on an annual compounded basis, annual gross margin has ranged from 43.5% to 46.4%, diluted earnings per common share has grown steadily and our return on invested capital has been as high as 34.7%.
Our fiscal 2018 results demonstrated the power of the NIKE, Inc. portfolio to generate revenue growth, while investing in capabilities in support of our Triple Double strategy to fuel our next phase of long-term growth and profitability. We achieved record revenues for fiscal 2018, growing 6% to $36.4 billion. The NIKE Brand, which represents over 90% of NIKE, Inc. Revenues, delivered 7% revenue growth. On a currency-neutral basis, NIKE Brand revenues grew 5%, driven by strong revenue growth across all international geographies and NIKE Direct, as well as growth in footwear, apparel and most key categories. Revenues for Converse decreased 8% and 11% on a reported and currency-neutral basis, respectively, primarily driven by lower revenues in North America.
Income before income taxes decreased 11% for fiscal 2018, in part reflecting the negative impact of weakening foreign currency exchange rates. Revenue growth was more than offset by higher selling and administrative expense, gross margin contraction, and a shift to other expense, net from other income, net for fiscal 2017. NIKE, Inc. gross margin decreased 80 basis points primarily due to foreign currency exchange rate headwinds. Selling and administrative expense was higher as a percent of revenues, reflecting investments in digital capabilities, consumer experiences and product and brand marketing to drive long-term growth under the Consumer Direct Offense.
Diluted earnings per common share reflects a 2% decline in the weighted average diluted common shares outstanding, driven by our share repurchase program.
While foreign currency markets remain volatile, we continue to see opportunities to drive future growth and profitability, and remain committed to effectively managing our business to achieve our financial goals over the long-term by executing against the operational strategies outlined above.
Use of Non-GAAP Financial Measures
Throughout this Annual Report on Form 10-K, we discuss non-GAAP financial measures, including references to wholesale equivalent revenues and currency-neutral revenues, which should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). References to wholesale equivalent revenues are intended to provide context as to the total size of our NIKE Brand market footprint if we had no NIKE Direct operations. NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to our NIKE Direct operations, which are charged at prices comparable to those charged to external wholesale customers. Additionally, currency-neutral revenues are calculated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends excluding the impact of translation arising from foreign currency exchange rate fluctuations.
Management uses these non-GAAP financial measures when evaluating the Company’s performance, including when making financial and operating decisions. Additionally, management believes these non-GAAP financial measures provide investors with additional financial information that should be considered when assessing our underlying business performance and trends. However, references to wholesale equivalent revenues and currency-neutral revenues 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.
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Results of Operations |
(Dollars in millions, except per share data) | Fiscal 2018 | Fiscal 2017 | % Change | Fiscal 2016 | % Change | |||||||||||||
Revenues | $ | 36,397 | $ | 34,350 | 6 | % | $ | 32,376 | 6 | % | ||||||||
Cost of sales | 20,441 | 19,038 | 7 | % | 17,405 | 9 | % | |||||||||||
Gross profit | 15,956 | 15,312 | 4 | % | 14,971 | 2 | % | |||||||||||
Gross margin | 43.8 | % | 44.6 | % | 46.2 | % | ||||||||||||
Demand creation expense | 3,577 | 3,341 | 7 | % | 3,278 | 2 | % | |||||||||||
Operating overhead expense | 7,934 | 7,222 | 10 | % | 7,191 | 0 | % | |||||||||||
Total selling and administrative expense | 11,511 | 10,563 | 9 | % | 10,469 | 1 | % | |||||||||||
% of revenues | 31.6 | % | 30.8 | % | 32.3 | % | ||||||||||||
Interest expense (income), net | 54 | 59 | — | 19 | — | |||||||||||||
Other expense (income), net | 66 | (196 | ) | — | (140 | ) | — | |||||||||||
Income before income taxes | 4,325 | 4,886 | -11 | % | 4,623 | 6 | % | |||||||||||
Income tax expense | 2,392 | 646 | 270 | % | 863 | -25 | % | |||||||||||
Effective tax rate | 55.3 | % | 13.2 | % | 18.7 | % | ||||||||||||
NET INCOME | $ | 1,933 | $ | 4,240 | -54 | % | $ | 3,760 | 13 | % | ||||||||
Diluted earnings per common share | $ | 1.17 | $ | 2.51 | -53 | % | $ | 2.16 | 16 | % | ||||||||
21
Consolidated Operating Results |
Revenues
(Dollars in millions) | Fiscal 2018 | Fiscal 2017(1) | % Change | % Change Excluding Currency Changes(2) | Fiscal 2016(1) | % Change | % Change Excluding Currency Changes(2) | ||||||||||
NIKE, Inc. Revenues: | |||||||||||||||||
NIKE Brand Revenues by: | |||||||||||||||||
Footwear | $ | 22,268 | $ | 21,081 | 6 | % | 4 | % | $ | 19,871 | 6 | % | 8 | % | |||
Apparel | 10,733 | 9,654 | 11 | % | 9 | % | 9,067 | 6 | % | 9 | % | ||||||
Equipment | 1,396 | 1,425 | -2 | % | -4 | % | 1,496 | -5 | % | -3 | % | ||||||
Global Brand Divisions(3) | 88 | 73 | 21 | % | 12 | % | 73 | 0 | % | 2 | % | ||||||
Total NIKE Brand Revenues | 34,485 | 32,233 | 7 | % | 5 | % | 30,507 | 6 | % | 8 | % | ||||||
Converse | 1,886 | 2,042 | -8 | % | -11 | % | 1,955 | 4 | % | 6 | % | ||||||
Corporate(4) | 26 | 75 | — | — | (86 | ) | — | — | |||||||||
TOTAL NIKE, INC. REVENUES | $ | 36,397 | $ | 34,350 | 6 | % | 4 | % | $ | 32,376 | 6 | % | 8 | % | |||
Supplemental NIKE Brand Revenues Details: | |||||||||||||||||
NIKE Brand Revenues by: | |||||||||||||||||
Sales to Wholesale Customers | $ | 23,969 | $ | 23,078 | 4 | % | 2 | % | $ | 22,577 | 2 | % | 5 | % | |||
Sales through NIKE Direct | 10,428 | 9,082 | 15 | % | 12 | % | 7,857 | 16 | % | 18 | % | ||||||
Global Brand Divisions(3) | 88 | 73 | 21 | % | 12 | % | 73 | 0 | % | 2 | % | ||||||
TOTAL NIKE BRAND REVENUES | $ | 34,485 | $ | 32,233 | 7 | % | 5 | % | $ | 30,507 | 6 | % | 8 | % | |||
NIKE Brand Revenues on a Wholesale Equivalent Basis:(5) | |||||||||||||||||
Sales to Wholesale Customers | $ | 23,969 | $ | 23,078 | 4 | % | 2 | % | $ | 22,577 | 2 | % | 5 | % | |||
Sales from our Wholesale Operations to NIKE Direct Operations | 6,332 | 5,616 | 13 | % | 10 | % | 4,672 | 20 | % | 22 | % | ||||||
TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES | $ | 30,301 | $ | 28,694 | 6 | % | 4 | % | $ | 27,249 | 5 | % | 8 | % | |||
NIKE Brand Wholesale Equivalent Revenues by:(5) | |||||||||||||||||
Men’s | $ | 17,114 | $ | 16,041 | 7 | % | 5 | % | $ | 15,410 | 4 | % | 6 | % | |||
Women’s | 6,915 | 6,644 | 4 | % | 2 | % | 6,296 | 6 | % | 8 | % | ||||||
Young Athletes’ | 4,906 | 4,838 | 1 | % | -1 | % | 4,560 | 6 | % | 8 | % | ||||||
Others(6) | 1,366 | 1,171 | 17 | % | 13 | % | 983 | 19 | % | 21 | % | ||||||
TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES | $ | 30,301 | $ | 28,694 | 6 | % | 4 | % | $ | 27,249 | 5 | % | 8 | % | |||
NIKE Brand Wholesale Equivalent Revenues by:(5) | |||||||||||||||||
Running | $ | 5,198 | $ | 4,860 | 7 | % | 5 | % | $ | 4,401 | 10 | % | 13 | % | |||
NIKE Basketball | 1,494 | 1,292 | 16 | % | 14 | % | 1,378 | -6 | % | -5 | % | ||||||
Jordan Brand | 2,856 | 3,098 | -8 | % | -9 | % | 2,753 | 13 | % | 13 | % | ||||||
Football (Soccer) | 2,146 | 1,984 | 8 | % | 5 | % | 2,143 | -7 | % | -4 | % | ||||||
Training | 3,126 | 3,080 | 1 | % | 0 | % | 3,150 | -2 | % | -1 | % | ||||||
Sportswear | 10,018 | 8,988 | 11 | % | 8 | % | 8,129 | 11 | % | 14 | % | ||||||
Others(7) | 5,463 | 5,392 | 1 | % | 0 | % | 5,295 | 2 | % | 3 | % | ||||||
TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES | $ | 30,301 | $ | 28,694 | 6 | % | 4 | % | $ | 27,249 | 5 | % | 8 | % | |||
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(1) | Certain prior year amounts have been reclassified to conform to fiscal 2018 presentation. These changes had no impact on previously reported consolidated results of operations or shareholders’ equity. |
(2) | 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. |
(3) | Global Brand Divisions revenues are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment. |
(4) | 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 our central foreign exchange risk management program. |
(5) | References to NIKE Brand wholesale equivalent revenues, which are considered non-GAAP financial measures, are intended to provide context as to the total size of our NIKE Brand market footprint if we had no NIKE Direct operations. NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to our NIKE Direct operations, which are charged at prices comparable to those charged to external wholesale customers. |
(6) | Others include all unisex products, equipment and other products not allocated to Men’s, Women’s and Young Athletes’, as well as certain adjustments that are not allocated to products designated by gender or age. |
(7) | Others include all other categories and certain adjustments that are not allocated at the category level. |
Fiscal 2018 Compared to Fiscal 2017
On a currency-neutral basis, NIKE, Inc. Revenues grew 4% for fiscal 2018, driven by growth in the NIKE Brand. All international NIKE Brand geographies delivered higher revenues for fiscal 2018 as our Consumer Direct Offense delivered innovative products, deep brand connections and compelling retail experiences to consumers through digital platforms and at NIKE-owned and retail partner stores, driving demand for NIKE Brand products. Revenue growth was broad-based, as Greater China, EMEA and APLA each contributed approximately 2 percentage points of the increase in NIKE, Inc. Revenues. For fiscal 2018, lower revenues from North America and Converse each reduced NIKE, Inc. Revenues by approximately 1 percentage point.
On a currency-neutral basis, NIKE Brand footwear and apparel revenues increased 4% and 9%, respectively, for fiscal 2018, while NIKE Brand equipment revenues decreased 4%. On a category basis, the increase in NIKE Brand footwear revenues was due to strong growth in Sportswear and Running, which was partially offset by lower revenues in several other categories, most notably the Jordan Brand. Footwear unit sales for fiscal 2018 increased 2% and higher average selling price (ASP) per pair contributed approximately 2 percentage points of footwear revenue growth, primarily due to the favorable impact of growth in our NIKE Direct business.
The currency-neutral increase in NIKE Brand apparel revenues for fiscal 2018 was fueled by growth in nearly all key categories, most notably Sportswear, NIKE Basketball and Football (Soccer). Unit sales of apparel increased 4% and higher ASP per unit contributed approximately 5 percentage points of apparel revenue growth, primarily due to higher ASPs from full-price, off-price and NIKE Direct sales.
For fiscal 2018, NIKE Direct revenues represented approximately 30% of our total NIKE Brand revenues compared to 28% for fiscal 2017. On a currency-neutral basis, NIKE Direct revenues increased 12% for fiscal 2018, driven by strong digital commerce sales growth of 25%, the addition of new stores and 4% comparable store sales growth. Comparable store sales include revenues from NIKE-owned in-line and factory stores for which all three of the following requirements have been met: (1) the store has been open at least one year, (2) square footage has not changed by more than 15% within the past year and (3) the store has not been permanently repositioned within the past year. On a reported basis, digital commerce sales, which are not included in comparable store sales, were $2.8 billion for fiscal 2018 compared to $2.2 billion for fiscal 2017, and represented approximately 27% of our total NIKE Brand NIKE Direct revenues for fiscal 2018 compared to 24% for fiscal 2017.
On a wholesale equivalent and currency-neutral basis, fiscal 2018 NIKE Brand Men’s revenues increased 5%, as growth in Sportswear, Running and NIKE Basketball more than offset lower Football (Soccer) and Jordan Brand revenues. Women’s revenues increased 2%, led by growth in Sportswear, partially offset by a decline in Training. Revenues for our Young Athletes’ business decreased 1%, as growth in Football (Soccer), was more than offset by lower revenues in the Jordan Brand.
Fiscal 2017 Compared to Fiscal 2016
On a currency-neutral basis, NIKE, Inc. Revenues grew 8% for fiscal 2017, driven by higher revenues for all NIKE Brand geographies and Converse. Revenue growth was broad-based, as EMEA, Greater China, APLA and North America each contributed approximately 2 percentage points of the increase in NIKE, Inc. Revenues.
On a currency-neutral basis, NIKE Brand footwear and apparel revenues increased 8% and 9%, respectively, for fiscal 2017, while NIKE Brand equipment revenues decreased 3%. On a category basis, the increase in NIKE Brand footwear revenues was driven by strong growth in Sportswear, Running and the Jordan Brand. Footwear unit sales for fiscal 2017 increased 7%, with higher ASP per pair contributing approximately 1 percentage point of footwear revenue growth, primarily driven by higher full-price and off-price ASPs, partially offset by the impact of higher off-price sales.
The currency-neutral increase in NIKE Brand apparel revenues for fiscal 2017 was fueled by growth in all key categories, led by Sportswear, Running and Training. Unit sales of apparel increased 6%, while higher ASP per unit contributed approximately 3 percentage points of apparel revenue growth, primarily due to higher full-price ASP and, to a lesser extent, growth in our higher-priced NIKE Direct business.
For fiscal 2017, NIKE Direct revenues represented approximately 28% of our total NIKE Brand revenues compared to 26% for fiscal 2016. On a currency-neutral basis, NIKE Direct revenues increased 18% for fiscal 2017, driven by strong digital commerce sales growth of 30%, the addition of new stores and 7% comparable store sales growth. On a reported basis, digital commerce sales, which are not included in comparable store sales, were $2.2 billion for fiscal 2017 compared to $1.7 billion for fiscal 2016 and represented approximately 24% of our total NIKE Direct revenues for fiscal 2017 compared to 22% for fiscal 2016.
On a wholesale equivalent and currency-neutral basis, fiscal 2017 NIKE Brand Men’s revenues increased 6%, driven by significant growth in Sportswear, Running and the Jordan Brand, while Women’s revenues increased 8%, led by growth in Sportswear and Running. Revenues for our Young Athletes’ business increased 8%, with growth across multiple categories, most notably the Jordan Brand.
23
Gross Margin
(Dollars in millions) | Fiscal 2018 | Fiscal 2017 | % Change | Fiscal 2016 | % Change | |||||||||||||
Gross profit | $ | 15,956 | $ | 15,312 | 4 | % | $ | 14,971 | 2 | % | ||||||||
Gross margin | 43.8 | % | 44.6 | % | (80 | ) bps | 46.2 | % | (160 | ) bps | ||||||||
Fiscal 2018 Compared to Fiscal 2017
For fiscal 2018, our consolidated gross margin was 80 basis points lower than fiscal 2017, primarily reflecting the following factors:
• | Unfavorable changes in net foreign currency exchange rates, including hedges (decreasing gross margin approximately 90 basis points); |
• | Lower NIKE Direct margin (decreasing gross margin approximately 10 basis points) reflecting higher mix of off-price sales in the first half of fiscal 2018, which was partially offset by margin expansion in the second half of fiscal 2018; |
• | NIKE Brand full-price ASP, net of discounts, on a wholesale equivalent basis, which was flat for fiscal 2018 as higher discounts in the first half of fiscal 2018 were offset by higher full-price ASP in the second half of the year; and |
• | NIKE Brand product costs, on a wholesale equivalent basis, which were flat. |
Fiscal 2017 Compared to Fiscal 2016
For fiscal 2017, our consolidated gross margin was 160 basis points lower than fiscal 2016, primarily driven by the following factors:
• | Higher NIKE Brand full-price ASP, net of discounts, on a wholesale equivalent basis (increasing gross margin approximately 70 basis points) aligned with our strategy to deliver innovative, premium products to the consumer; |
• | Higher NIKE Brand product costs (decreasing gross margin approximately 100 basis points) as an increase in the mix of higher cost products and labor input cost inflation more than offset lower material input costs; |
• | Unfavorable changes in net foreign currency exchange rates, including hedges (decreasing gross margin approximately 90 basis points); and |
• | Lower NIKE Direct margins (decreasing gross margin approximately 20 basis points) reflecting the impact of higher off-price sales. |
Total Selling and Administrative Expense
(Dollars in millions) | Fiscal 2018 | Fiscal 2017 | % Change | Fiscal 2016 | % Change | |||||||||||||
Demand creation expense(1) | $ | 3,577 | $ | 3,341 | 7 | % | $ | 3,278 | 2 | % | ||||||||
Operating overhead expense | 7,934 | 7,222 | 10 | % | 7,191 | 0 | % | |||||||||||
Total selling and administrative expense | $ | 11,511 | $ | 10,563 | 9 | % | $ | 10,469 | 1 | % | ||||||||
% of revenues | 31.6 | % | 30.8 | % | 80 | bps | 32.3 | % | (150 | ) bps | ||||||||
(1) | Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, complimentary product, television, digital and print advertising and media costs, brand events and retail brand presentation. |
Fiscal 2018 Compared to Fiscal 2017
Demand creation expense increased 7% for fiscal 2018 compared to fiscal 2017, driven by higher sports marketing costs. Changes in foreign currency exchange rates increased Demand creation expense by approximately 3 percentage points for fiscal 2018.
Operating overhead expense increased 10% compared to fiscal 2017, due to higher administrative costs, continued investments in our growing NIKE Direct business and one-time wage-related costs associated with the Consumer Direct Offense organizational realignment. Changes in foreign currency exchange rates increased Operating overhead expense by approximately 2 percentage points for fiscal 2018.
Fiscal 2017 Compared to Fiscal 2016
Demand creation expense increased 2% for fiscal 2017 compared to fiscal 2016, driven by higher sports marketing costs, as well as higher marketing and advertising costs, primarily to support key sporting events including the Rio Olympics and European Football Championship. These increases were partially offset by lower retail brand presentation costs. Changes in foreign currency exchange rates reduced Demand creation expense by approximately 1 percentage point.
Operating overhead expense was flat compared to fiscal 2016 as continued investments in our growing NIKE Direct business were offset by administrative cost efficiencies and lower variable compensation. Changes in foreign currency exchange rates reduced Operating overhead expense by approximately 1 percentage point for fiscal 2017.
Other Expense (Income), Net
(In millions) | Fiscal 2018 | Fiscal 2017 | Fiscal 2016 | |||||||||
Other expense (income), net | $ | 66 | $ | (196 | ) | $ | (140 | ) | ||||
Other expense (income), net comprises foreign currency conversion gains and losses from the re-measurement of monetary assets and liabilities denominated in non-functional currencies, and the impact of certain foreign currency derivative instruments, as well as unusual or non-operating transactions outside the normal course of business.
24
Fiscal 2018 Compared to Fiscal 2017
Other expense (income), net changed from $196 million of other income, net for fiscal 2017 to $66 million of other expense, net for fiscal 2018, primarily due to a $287 million net detrimental change in foreign currency conversion gains and losses, including hedges.
We estimate the combination of the 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 expense (income), net had an unfavorable impact on our Income before income taxes of $110 million for fiscal 2018.
Fiscal 2017 Compared to Fiscal 2016
Other expense (income), net increased from $140 million of other income, net for fiscal 2016 to $196 million of other income, net for fiscal 2017, primarily due to a $56 million net beneficial change in foreign currency conversion gains and losses.
We estimate the combination of the 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 expense (income), net had an unfavorable impact on our Income before income taxes of $59 million for fiscal 2017.
Income Taxes
Fiscal 2018 | Fiscal 2017 | % Change | Fiscal 2016 | % Change | |||||||||||
Effective tax rate | 55.3 | % | 13.2 | % | 4,210 | bps | 18.7 | % | (550 | ) bps | |||||
Fiscal 2018 Compared to Fiscal 2017
Our effective tax rate was 55.3% for fiscal 2018, reflecting the impact of the Tax Cuts and Jobs Act (the “Tax Act”). The impact of the Tax Act primarily reflects provisional expense of $1,875 million for the one-time transition tax on the deemed repatriation of undistributed foreign earnings and $158 million resulting from the remeasurement of deferred tax assets and liabilities. The remaining provisions of the Tax Act, which were a net benefit to the effective tax rate, did not have a material impact on our Consolidated Financial Statements during fiscal 2018. The increase in the effective tax rate resulting from the Tax Act was partially offset by the tax benefit from stock-based compensation in the current period as a result of the adoption of Accounting Standards Update (ASU) 2016-09 in the first quarter of fiscal 2018.
Refer to Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements for additional information on the impact of ASU 2016-09, and Note 9 — Income Taxes for additional information on the impact of the Tax Act.
Fiscal 2017 Compared to Fiscal 2016
The 550 basis point decrease in our effective tax rate for the fiscal year was primarily due to a one-time benefit in the first quarter of the fiscal year related to the resolution with the IRS of a foreign tax credit matter and a decrease in foreign earnings taxed in the United States.
Operating Segments |
Our operating segments are evidence of the structure of the Company’s internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity.
Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company’s reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa; Greater China; and Asia Pacific & Latin America, and include results for the NIKE, Jordan and Hurley brands.
The Company’s NIKE Direct operations are managed within each geographic operating segment. Converse is also a reportable segment for the Company and operates in one industry: the design, marketing, licensing and selling of casual sneakers, apparel and accessories.
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 Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons and one standard rate applies to the spring and summer selling seasons) 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 Converse reflect the 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 and other conversion gains and losses.
25
The breakdown of revenues is as follows:
(Dollars in millions) | Fiscal 2018 | Fiscal 2017(1) | % Change | % Change Excluding Currency Changes(2) | Fiscal 2016(1) | % Change | % Change Excluding Currency Changes(2) | |||||||||||||||||
North America | $ | 14,855 | $ | 15,216 | -2 | % | -2 | % | $ | 14,764 | 3 | % | 3 | % | ||||||||||
Europe, Middle East & Africa | 9,242 | 7,970 | 16 | % | 9 | % | 7,568 | 5 | % | 10 | % | |||||||||||||
Greater China | 5,134 | 4,237 | 21 | % | 18 | % | 3,785 | 12 | % | 17 | % | |||||||||||||
Asia Pacific & Latin America | 5,166 | 4,737 | 9 | % | 10 | % | 4,317 | 10 | % | 13 | % | |||||||||||||
Global Brand Divisions(3) | 88 | 73 | 21 | % | 12 | % | 73 | 0 | % | 2 | % | |||||||||||||
TOTAL NIKE BRAND | 34,485 | 32,233 | 7 | % | 5 | % | 30,507 | 6 | % | 8 | % | |||||||||||||
Converse | 1,886 | 2,042 | -8 | % | -11 | % | 1,955 | 4 | % | 6 | % | |||||||||||||
Corporate(4) | 26 | 75 | — | — | (86 | ) | — | — | ||||||||||||||||
TOTAL NIKE, INC. REVENUES | $ | 36,397 | $ | 34,350 | 6 | % | 4 | % | $ | 32,376 | 6 | % | 8 | % | ||||||||||
(1) | Certain prior year amounts have been reclassified to conform to fiscal 2018 presentation. This includes reclassified operating segment data to reflect the changes in the Company’s operating structure, which became effective June 1, 2017. These changes had no impact on previously reported consolidated results of operations or shareholders’ equity. |
(2) | 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 excluding the impact of translation arising from foreign currency exchange rate fluctuations, which is considered a non-GAAP financial measure. |
(3) | Global Brand Divisions revenues are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment. |
(4) | 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 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 expense (income), net and Income tax expense in the Consolidated Statements of Income. As discussed in Note 17 — Operating Segments and Related Information 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:
(Dollars in millions) | Fiscal 2018 | Fiscal 2017(1) | % Change | Fiscal 2016(1) | % Change | |||||||||||||
North America | $ | 3,600 | $ | 3,875 | -7 | % | $ | 3,763 | 3 | % | ||||||||
Europe, Middle East & Africa | 1,587 | 1,507 | 5 | % | 1,787 | -16 | % | |||||||||||
Greater China | 1,807 | 1,507 | 20 | % | 1,372 | 10 | % | |||||||||||
Asia Pacific & Latin America | 1,189 | 980 | 21 | % | 1,002 | -2 | % | |||||||||||
Global Brand Divisions | (2,658 | ) | (2,677 | ) | 1 | % | (2,596 | ) | -3 | % | ||||||||
TOTAL NIKE BRAND | 5,525 | 5,192 | 6 | % | 5,328 | -3 | % | |||||||||||
Converse | 310 | 477 | -35 | % | 487 | -2 | % | |||||||||||
Corporate | (1,456 | ) | (724 | ) | -101 | % | (1,173 | ) | 38 | % | ||||||||
TOTAL NIKE, INC. EARNINGS BEFORE INTEREST AND TAXES | 4,379 | 4,945 | -11 | % | 4,642 | 7 | % | |||||||||||
Interest expense (income), net | 54 | 59 | — | 19 | — | |||||||||||||
TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES | $ | 4,325 | $ | 4,886 | -11 | % | $ | 4,623 | 6 | % | ||||||||
(1) | Certain prior year amounts have been reclassified to conform to fiscal 2018 presentation. This includes reclassified operating segment data to reflect the changes in the Company’s operating structure, which became effective June 1, 2017. These changes had no impact on previously reported consolidated results of operations or shareholders’ equity. |
26
North America
(Dollars in millions) | Fiscal 2018 | Fiscal 2017 | % Change | % Change Excluding Currency Changes | Fiscal 2016 | % Change | % Change Excluding Currency Changes | |||||||||||||||||
Revenues by: | ||||||||||||||||||||||||
Footwear | $ | 9,322 | $ | 9,684 | -4 | % | -4 | % | $ | 9,299 | 4 | % | 4 | % | ||||||||||
Apparel | 4,938 | 4,886 | 1 | % | 1 | % | 4,746 | 3 | % | 3 | % | |||||||||||||
Equipment | 595 | 646 | -8 | % | -8 | % | 719 | -10 | % | -10 | % | |||||||||||||
TOTAL REVENUES | $ | 14,855 | $ | 15,216 | -2 | % | -2 | % | $ | 14,764 | 3 | % | 3 | % | ||||||||||
Revenues by: | ||||||||||||||||||||||||
Sales to Wholesale Customers | $ | 10,159 | $ | 10,756 | -6 | % | -6 | % | $ | 10,674 | 1 | % | 1 | % | ||||||||||
Sales through NIKE Direct | 4,696 | 4,460 | 5 | % | 5 | % | 4,090 | 9 | % | 9 | % | |||||||||||||
TOTAL REVENUES | $ | 14,855 | $ | 15,216 | -2 | % | -2 | % | $ | 14,764 | 3 | % | 3 | % | ||||||||||
EARNINGS BEFORE INTEREST AND TAXES | $ | 3,600 | $ | 3,875 | -7 | % | $ | 3,763 | 3 | % | ||||||||||||||
In the current marketplace environment, we believe there has been a meaningful shift in the way consumers shop for product and make purchasing decisions. Consumers are demanding a constant flow of fresh and innovative product, and have an expectation for superior service and real-time delivery, all fueled by the shift toward digital. Specifically, in North America we anticipate continued evolution within the retail landscape, driven by shifting consumer traffic patterns across digital and physical channels. The evolution of the North America marketplace has resulted in third-party retail store closures; however, we are currently seeing stabilization and momentum building in our business, fueled by innovative product and NIKE Brand consumer experiences, leveraging digital.
Fiscal 2018 Compared to Fiscal 2017
North America revenues decreased 2%, as growth in our Sportswear and NIKE Basketball categories was more than offset by declines in all other categories, most notably the Jordan Brand and Running. NIKE Direct revenues increased 5% for fiscal 2018 due to digital commerce sales growth and the addition of new stores.
Footwear revenues declined 4% for fiscal 2018, as lower revenues in nearly all categories, most notably the Jordan Brand, more than offset higher revenues in Sportswear. Unit sales of footwear decreased 5%, while ASP per pair contributed approximately 1 percentage point of footwear growth, driven by the favorable impact of growth in our NIKE Direct business.
Apparel revenue growth of 1% for fiscal 2018 was attributable to higher revenues in our Sportswear and NIKE Basketball categories, which was only partially offset by declines in nearly all other categories. Unit sales of apparel decreased 4%, while higher ASP per unit contributed approximately 5 percentage points of apparel revenue growth, primarily due to the favorable impact of growth in our NIKE Direct business and, to a lesser extent, higher full-price ASP and favorable changes in off-price sales.
EBIT declined 7% for fiscal 2018, primarily reflecting lower revenues and higher selling and administrative expense. Gross margin declined 10 basis points as lower full-price ASP more than offset the favorable impact of growth in our NIKE Direct business. Selling and administrative expense grew due to higher operating overhead expense resulting from continued investments in our growing NIKE Direct business. Demand creation expense also increased, as higher sports marketing costs were only partially offset by lower retail brand presentation costs.
Fiscal 2017 Compared to Fiscal 2016
North America revenues increased 3%, driven by growth in our Sportswear and Jordan Brand categories, partially offset by declines in other categories, including NIKE Basketball. NIKE Direct revenues increased 9% for fiscal 2017 due to digital commerce sales growth, the addition of new stores and comparable store sales growth of 3%.
Footwear revenue growth for fiscal 2017 was attributable to higher revenues in our Sportswear and Jordan Brand categories, partially offset by declines in other categories. Unit sales of footwear increased 4%, while ASP per pair was flat as higher off-price ASP was offset by unfavorable off-price mix.
The increase in apparel revenues for fiscal 2017 was due to growth concentrated in Sportswear, partially offset by declines in other categories. Unit sales of apparel grew 2% and higher ASP per unit contributed approximately 1 percentage point of apparel revenue growth, primarily due to higher full-price ASP.
EBIT grew 3% for fiscal 2017 as revenue growth and gross margin expansion were partially offset by higher selling and administrative expense as a percent of revenues. Gross margin increased 10 basis points as higher full-price ASP and favorable off-price margin more than offset higher product costs and increased off-price mix as a result of clearing excess inventories through off-price channels, including through our NIKE Direct business. Selling and administrative expense grew due to higher operating overhead as continued investments in our growing NIKE Direct business were partially offset by lower bad debt expense. Demand creation was flat as higher sports marketing and retail brand presentation costs offset lower marketing and advertising costs.
27
Europe, Middle East & Africa
(Dollars in millions) | Fiscal 2018 | Fiscal 2017 | % Change | % Change Excluding Currency Changes | Fiscal 2016 | % Change | % Change Excluding Currency Changes | |||||||||||||||||
Revenues by: | ||||||||||||||||||||||||
Footwear | $ | 5,875 | $ | 5,192 | 13 | % | 6 | % | $ | 5,043 | 3 | % | 8 | % | ||||||||||
Apparel | 2,940 | 2,395 | 23 | % | 16 | % | 2,149 | 11 | % | 17 | % | |||||||||||||
Equipment | 427 | 383 | 11 | % | 6 | % | 376 | 2 | % | 7 | % | |||||||||||||
TOTAL REVENUES | $ | 9,242 | $ | 7,970 | 16 | % | 9 | % | $ | 7,568 | 5 | % | 10 | % | ||||||||||
Revenues by: | ||||||||||||||||||||||||
Sales to Wholesale Customers | $ | 6,765 | $ | 5,917 | 14 | % | 8 | % | $ | 5,869 | 1 | % | 5 | % | ||||||||||
Sales through NIKE Direct | 2,477 | 2,053 | 21 | % | 13 | % | 1,699 | 21 | % | 27 | % | |||||||||||||
TOTAL REVENUES | $ | 9,242 | $ | 7,970 | 16 | % | 9 | % | $ | 7,568 | 5 | % | 10 | % | ||||||||||
EARNINGS BEFORE INTEREST AND TAXES | $ | 1,587 | $ | 1,507 | 5 | % | $ | 1,787 | -16 | % | ||||||||||||||
Fiscal 2018 Compared to Fiscal 2017
On a currency-neutral basis, EMEA revenues for fiscal 2018 increased 9%, driven by higher revenues in every territory, most notably our UK & Ireland territory, which grew 21%. Revenues increased in nearly all key categories, led by Sportswear and Football (Soccer). NIKE Direct revenues grew 13% for fiscal 2018 due to strong digital commerce sales growth, comparable store sales growth of 6% and the addition of new stores.
The 6% increase in currency-neutral footwear revenues for fiscal 2018 was due to growth in most key categories, led by Sportswear. For fiscal 2018, unit sales of footwear increased 6% while ASP per pair was flat, as higher off-price ASP was offset by lower full-price ASP.
Currency-neutral apparel revenues grew 16% for fiscal 2018, driven by higher revenues in all key categories, most notably Sportswear and Football (Soccer). Unit sales of apparel increased 12% and higher ASP per unit contributed approximately 4 percentage points of apparel revenue growth. The increase in ASP per unit was primarily attributable to higher full-price ASP.
Reported EBIT increased 5% for fiscal 2018 due to revenue growth and slight selling and administrative expense leverage, which was partially offset by gross margin contraction. Gross margin declined 180 basis points as lower product costs were more than offset by unfavorable standard foreign currency exchange rates, lower full-price ASP due to product mix, and lower NIKE Direct margin. Selling and administrative expense increased due to higher demand creation expense driven by sports marketing and advertising costs. Operating overhead also increased primarily due to continued investments in our growing NIKE Direct business and, to a lesser extent, higher administrative costs.
Fiscal 2017 Compared to Fiscal 2016
On a currency-neutral basis, EMEA revenues for fiscal 2017 increased 10%. Revenue growth was broad-based across all territories, led by the UK & Ireland, which grew 11%. On a category basis, revenues increased for nearly all key categories, led by Sportswear and, to a lesser extent, Running and the Jordan Brand. NIKE Direct revenues grew 27% for fiscal 2017 due to comparable store sales growth of 15%, strong digital commerce sales growth and the addition of new stores.
The currency-neutral increase in footwear revenues was led by Sportswear, Running and the Jordan Brand, partially offset by declines in Football (Soccer) and Training. For fiscal 2017, unit sales of footwear increased 5% and higher ASP per pair contributed approximately 3 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to the favorable impact of growth in our NIKE Direct business.
Currency-neutral apparel revenue growth was driven by higher revenues in all key categories, most notably Sportswear and, to a lesser extent, Training and Football (Soccer). Unit sales of apparel for fiscal 2017 increased 12%, while higher ASP per unit contributed approximately 5 percentage points of apparel revenue growth. The increase in ASP per unit was primarily attributable to the favorable impact of growth in our NIKE Direct business and higher full-price ASP.
Reported EBIT decreased 16% for fiscal 2017, in part reflecting the negative impact of weakening foreign currency exchange rates. Higher revenues and selling and administrative expense leverage were more than offset by significant gross margin contraction. Gross margin declined 530 basis points primarily driven by the effects of significant unfavorable standard foreign currency exchange rates. Selling and administrative expense increased due to higher demand creation expense, as increased sports marketing and advertising expenses more than offset lower marketing costs. Operating overhead also increased due to continued investments in our growing NIKE Direct business, partially offset by administrative cost efficiencies and lower variable compensation costs.
28
Greater China
(Dollars in millions) | Fiscal 2018 | Fiscal 2017 | % Change | % Change Excluding Currency Changes | Fiscal 2016 | % Change | % Change Excluding Currency Changes | |||||||||||||||||
Revenues by: | ||||||||||||||||||||||||
Footwear | $ | 3,496 | $ | 2,920 | 20 | % | 16 | % | $ | 2,599 | 12 | % | 18 | % | ||||||||||
Apparel | 1,508 | 1,188 | 27 | % | 23 | % | 1,055 | 13 | % | 18 | % | |||||||||||||
Equipment | 130 | 129 | 1 | % | -1 | % | 131 | -2 | % | 3 | % | |||||||||||||
TOTAL REVENUES | $ | 5,134 | $ | 4,237 | ||||||||||||||||||||