|
|
Consolidated Operating Results
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Fiscal 2016
|
Fiscal 2015
(1)
|
% Change
|
% Change Excluding Currency Changes
(2)
|
Fiscal 2014
(1)
|
% Change
|
% Change Excluding Currency Changes
(2)
|
NIKE, Inc. Revenues:
|
|
|
|
|
|
|
|
NIKE Brand Revenues by:
|
|
|
|
|
|
|
|
Footwear
|
$
|
19,871
|
|
$
|
18,318
|
|
8
|
%
|
15
|
%
|
$
|
16,208
|
|
13
|
%
|
17
|
%
|
Apparel
|
9,067
|
|
8,637
|
|
5
|
%
|
11
|
%
|
8,109
|
|
7
|
%
|
10
|
%
|
Equipment
|
1,496
|
|
1,631
|
|
-8
|
%
|
-2
|
%
|
1,670
|
|
-2
|
%
|
1
|
%
|
Global Brand Divisions
(3)
|
73
|
|
115
|
|
-37
|
%
|
-30
|
%
|
125
|
|
-8
|
%
|
-2
|
%
|
Total NIKE Brand Revenues
|
30,507
|
|
28,701
|
|
6
|
%
|
13
|
%
|
26,112
|
|
10
|
%
|
14
|
%
|
Converse
|
1,955
|
|
1,982
|
|
-1
|
%
|
2
|
%
|
1,684
|
|
18
|
%
|
21
|
%
|
Corporate
(4)
|
(86
|
)
|
(82
|
)
|
—
|
|
—
|
|
3
|
|
—
|
|
—
|
|
TOTAL NIKE, INC. REVENUES
|
$
|
32,376
|
|
$
|
30,601
|
|
6
|
%
|
12
|
%
|
$
|
27,799
|
|
10
|
%
|
14
|
%
|
Supplemental NIKE Brand Revenues Details:
|
|
|
|
|
|
|
|
NIKE Brand Revenues by:
|
|
|
|
|
|
|
|
Sales to Wholesale Customers
|
$
|
22,577
|
|
$
|
21,952
|
|
3
|
%
|
9
|
%
|
$
|
20,683
|
|
6
|
%
|
10
|
%
|
Sales Direct to Consumer
|
7,857
|
|
6,634
|
|
18
|
%
|
25
|
%
|
5,304
|
|
25
|
%
|
29
|
%
|
Global Brand Divisions
(3)
|
73
|
|
115
|
|
-37
|
%
|
-30
|
%
|
125
|
|
-8
|
%
|
-2
|
%
|
TOTAL NIKE BRAND REVENUES
|
$
|
30,507
|
|
$
|
28,701
|
|
6
|
%
|
13
|
%
|
$
|
26,112
|
|
10
|
%
|
14
|
%
|
NIKE Brand Revenues on a Wholesale Equivalent Basis:
(5)
|
|
|
|
|
|
|
|
Sales to Wholesale Customers
|
$
|
22,577
|
|
$
|
21,952
|
|
3
|
%
|
9
|
%
|
$
|
20,683
|
|
6
|
%
|
10
|
%
|
Sales from our Wholesale Operations to Direct to Consumer Operations
|
4,672
|
|
3,881
|
|
20
|
%
|
27
|
%
|
3,107
|
|
25
|
%
|
29
|
%
|
TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES
|
$
|
27,249
|
|
$
|
25,833
|
|
5
|
%
|
12
|
%
|
$
|
23,790
|
|
9
|
%
|
13
|
%
|
NIKE Brand Wholesale Equivalent Revenues by:
(5)
|
|
|
|
|
|
|
|
Men's
|
$
|
15,410
|
|
$
|
14,689
|
|
5
|
%
|
11
|
%
|
$
|
13,996
|
|
5
|
%
|
9
|
%
|
Women's
|
6,296
|
|
5,732
|
|
10
|
%
|
17
|
%
|
4,976
|
|
15
|
%
|
20
|
%
|
Young Athletes'
|
4,560
|
|
4,301
|
|
6
|
%
|
11
|
%
|
3,737
|
|
15
|
%
|
19
|
%
|
Others
(6)
|
983
|
|
1,111
|
|
-12
|
%
|
-4
|
%
|
1,081
|
|
3
|
%
|
7
|
%
|
TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES
|
$
|
27,249
|
|
$
|
25,833
|
|
5
|
%
|
12
|
%
|
$
|
23,790
|
|
9
|
%
|
13
|
%
|
NIKE Brand Wholesale Equivalent Revenues by:
(5)
|
|
|
|
|
|
|
|
Running
|
$
|
5,017
|
|
$
|
4,863
|
|
3
|
%
|
10
|
%
|
$
|
4,626
|
|
5
|
%
|
9
|
%
|
NIKE Basketball
|
1,378
|
|
1,385
|
|
-1
|
%
|
2
|
%
|
1,178
|
|
18
|
%
|
19
|
%
|
Jordan Brand
|
2,753
|
|
2,329
|
|
18
|
%
|
21
|
%
|
1,941
|
|
20
|
%
|
22
|
%
|
Football (Soccer)
|
2,143
|
|
2,250
|
|
-5
|
%
|
7
|
%
|
2,414
|
|
-7
|
%
|
-2
|
%
|
Men’s Training
|
2,611
|
|
2,545
|
|
3
|
%
|
6
|
%
|
2,485
|
|
2
|
%
|
4
|
%
|
Women’s Training
|
1,344
|
|
1,281
|
|
5
|
%
|
11
|
%
|
1,145
|
|
12
|
%
|
16
|
%
|
Action Sports
|
711
|
|
737
|
|
-4
|
%
|
3
|
%
|
738
|
|
0
|
%
|
4
|
%
|
Sportswear
|
7,513
|
|
6,604
|
|
14
|
%
|
22
|
%
|
5,744
|
|
15
|
%
|
20
|
%
|
Golf
|
706
|
|
769
|
|
-8
|
%
|
-6
|
%
|
788
|
|
-2
|
%
|
0
|
%
|
Others
(7)
|
3,073
|
|
3,070
|
|
0
|
%
|
6
|
%
|
2,731
|
|
12
|
%
|
17
|
%
|
TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES
|
$
|
27,249
|
|
$
|
25,833
|
|
5
|
%
|
12
|
%
|
$
|
23,790
|
|
9
|
%
|
13
|
%
|
|
|
(1)
|
Certain prior year amounts have been reclassified to conform to fiscal 2016 presentation. These changes had no impact on previously reported results of operations or shareholders' equity.
|
|
|
(2)
|
Results have been restated 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.
|
|
|
(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 are intended to provide context as to the total size of our NIKE Brand market footprint if we had no Direct to Consumer operations. NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to our Direct to Consumer operations which are charged at prices that are comparable to prices 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 2016
Compared to
Fiscal 2015
On a currency-neutral basis, NIKE, Inc.
Revenues
grew 12% for fiscal 2016, primarily driven by higher revenues for the NIKE Brand. Every NIKE Brand geography grew revenues for fiscal 2016 as our category offense continued to deliver innovative products, deep brand connections and compelling retail experiences to consumers online and at NIKE-owned and retail partner stores, driving strong demand for NIKE Brand products. North America contributed approximately 4 percentage points of the increase in NIKE, Inc. revenues, while Greater China and Western Europe each contributed approximately 3 percentage points, Emerging Markets contributed approximately 2 percentage points and Central & Eastern Europe contributed approximately 1 percentage point.
Excluding the effects of changes in currency exchange rates, NIKE Brand footwear and apparel revenues increased 15% and 11%, respectively, for fiscal 2016, while NIKE Brand equipment revenues decreased 2%. The increase in NIKE Brand footwear revenues for fiscal 2016 was driven by growth in nearly every key category, including strong growth in Sportswear, the Jordan Brand and Running. Footwear unit sales for fiscal 2016 increased 9%, with higher average selling price (ASP) per pair contributing approximately 6 percentage points of footwear revenue growth. Higher ASP per pair was driven by higher full-price ASP, and to a lesser extent, the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business.
The constant-currency increase in NIKE Brand apparel revenues for fiscal 2016 was attributable to growth in most key categories, led by Sportswear, Men's Training, Running, Women's Training and Football (Soccer). Apparel unit sales for fiscal 2016 increased 7%. Higher ASP per unit contributed approximately 4 percentage points of apparel revenue growth, primarily due to higher full-price ASP and growth in our higher-priced DTC business.
While wholesale revenues remain the largest component of overall NIKE Brand revenues, we continue to expand our DTC businesses in each of our geographies. NIKE Brand DTC operations include NIKE-owned in-line and factory stores, as well as online sales through NIKE-owned websites. For fiscal 2016, DTC revenues represented approximately 26% of our total NIKE Brand revenues. On a currency-neutral basis, DTC revenues increased 25% for fiscal 2016, driven by strong online sales growth, the addition of new stores and comparable store sales growth of 10%. 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. Online sales through NIKE-owned websites, which are not included in comparable store sales, grew 51% in fiscal 2016. For fiscal 2016, online sales represented approximately 22% of our total NIKE Brand DTC revenues.
On a wholesale equivalent basis and excluding the effects of changes in currency exchange rates, fiscal 2016 NIKE Brand Men’s revenues increased 11%, driven by growth in Sportswear and the Jordan Brand, while Women's revenues increased 17%, led by Sportswear, Running and Women's Training. Revenues for our Young Athletes' business increased 11%, with growth across multiple categories, most notably the Jordan Brand.
Fiscal 2015
Compared to
Fiscal 2014
On a currency-neutral basis, revenues from NIKE, Inc. continuing operations grew 14% for fiscal 2015, driven by increases in revenues for both the NIKE Brand and Converse. Every NIKE Brand geography delivered higher revenues for fiscal 2015 as our category offense continued to deliver innovative products, deep brand connections and compelling retail experiences to consumers. North America contributed 5 percentage points of the increase in NIKE, Inc. revenues, while Western Europe contributed 4 percentage points, Greater China contributed 2 percentage points and Central & Eastern Europe, Emerging Markets and Converse each contributed 1 percentage point.
Excluding the effects of changes in currency exchange rates, NIKE Brand footwear and apparel revenues increased 17% and 10%, respectively, while NIKE Brand equipment revenues increased 1% during fiscal 2015. The increase in NIKE Brand footwear revenues for fiscal 2015 was driven by strong performance in Sportswear, the Jordan Brand, Running, NIKE Basketball and Football (Soccer). Footwear unit sales in fiscal 2015 increased 9%. Higher ASP per pair contributed approximately 8 percentage points of footwear revenue growth, driven primarily by higher full-price ASP, and to a lesser extent, the favorable impact of growth in our higher-priced DTC business.
The constant-currency increase in NIKE Brand apparel revenues for fiscal 2015 was driven by growth in most key categories, led by Sportswear, Running and Women's Training, which were partially offset by a decline in Football (Soccer) due largely to the comparison to significant sales of replica apparel in advance of the World Cup in 2014. Fiscal 2015 unit sales of apparel increased 8% with higher ASP per unit contributing approximately 2 percentage points of apparel revenue growth, driven primarily by growth in our higher-priced DTC business.
For fiscal 2015, DTC revenues represented approximately 23% of our total NIKE Brand revenues compared to 20% in fiscal 2014. On a currency-neutral basis, DTC revenues grew 29% for fiscal 2015, driven by strong comparable store sales growth of 16%, significant online sales growth and the addition of new stores. Online sales through NIKE-owned websites grew 59% in fiscal 2015. Online sales represented approximately 18% of our total NIKE Brand DTC revenues for fiscal 2015 compared to 15% for fiscal 2014.
On a wholesale equivalent basis and excluding the effects of changes in currency exchange rates, fiscal 2015 NIKE Brand Men’s revenues increased 9%, driven by growth in our Sportswear, the Jordan Brand, NIKE Basketball and Running categories. Women’s revenues accelerated in fiscal 2015, achieving 20% growth primarily due to increases in Sportswear, Running and Women's Training categories. Revenues in our Young Athletes' business increased 19% as a result of continued efforts to expand footwear and apparel offerings for this group across multiple categories, particularly the Jordan Brand.
Futures Orders
Futures orders for NIKE Brand footwear and apparel scheduled for delivery from June through November 2016 totaled $
14.9 billion
and were
8%
higher than the orders reported for the comparable prior year period. NIKE Brand reported futures include (1) orders from external wholesale customers and (2) internal orders from our DTC in-line stores and e-commerce operations which are reflected at prices that are comparable to prices charged to external wholesale customers. The U.S. Dollar futures orders amount is calculated based upon our internal forecast of the currency exchange rates under which our revenues will be translated during this period. Excluding the impact of currency changes, futures orders increased
11%
, with unit orders increasing
4%
and average selling price per unit contributing approximately
7
percentage points of growth.
By geography, futures orders growth was as follows:
|
|
|
|
|
|
|
|
Reported Futures Orders
|
|
Futures Orders Excluding
Currency Changes
(1)
|
North America
|
|
6%
|
|
6%
|
Western Europe
|
|
8%
|
|
11%
|
Central & Eastern Europe
|
|
3%
|
|
7%
|
Greater China
|
|
19%
|
|
24%
|
Japan
|
|
24%
|
|
15%
|
Emerging Markets
|
|
3%
|
|
13%
|
TOTAL NIKE BRAND FUTURES ORDERS
|
|
8%
|
|
11%
|
|
|
(1)
|
Reported futures have been restated using prior year exchange rates for the comparative period to enhance the visibility of the underlying business trends, excluding the impact of foreign currency exchange rate fluctuations.
|
The reported futures orders growth is not necessarily indicative of our expectation of revenue growth during this period. This is due to year-over-year changes in shipment timing, changes in the mix of orders between futures and at-once orders, and because the fulfillment of certain orders may fall outside of the schedule noted above. In addition, exchange rate fluctuations as well as differing levels of order cancellations, discounts and returns can cause differences in the comparisons between futures orders and actual revenues. Moreover, a portion of our revenue is not derived from futures orders, including sales of at-once and closeout NIKE Brand footwear and apparel, all sales of NIKE Brand equipment, the difference between retail sales and internal orders from our DTC in-line stores and e-commerce operations, and sales from Converse, NIKE Golf and Hurley.
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Fiscal 2016
|
|
|
Fiscal 2015
|
|
|
% Change
|
|
Fiscal 2014
|
|
|
% Change
|
Gross profit
|
|
$
|
14,971
|
|
|
$
|
14,067
|
|
|
6
|
%
|
|
$
|
12,446
|
|
|
13
|
%
|
Gross margin %
|
|
46.2
|
%
|
|
46.0
|
%
|
|
20
|
bps
|
|
44.8
|
%
|
|
120
|
bps
|
Fiscal 2016
Compared to
Fiscal 2015
For fiscal 2016, our consolidated gross margin was 20 basis points higher than fiscal 2015, primarily attributable to the following factors:
|
|
•
|
Higher NIKE Brand full-price ASP (increasing gross margin approximately 190 basis points) aligned with our strategy to deliver innovative, premium products with higher prices and, to a lesser extent, due to price increases reflecting inflationary conditions in certain territories;
|
|
|
•
|
Growth in our higher-margin DTC business (increasing gross margin approximately 20 basis points);
|
|
|
•
|
Higher NIKE Brand product costs (decreasing gross margin approximately 70 basis points) as shifts in mix to higher-cost products and labor input cost inflation were only partially offset by lower material input costs;
|
|
|
•
|
Higher off-price mix (decreasing gross margin approximately 30 basis points), primarily reflecting the impacts from clearing excess inventory in North America;
|
|
|
•
|
Unfavorable changes in foreign currency exchange rates, net of hedges (decreasing gross margin approximately 40 basis points);
|
|
|
•
|
Higher other costs (decreasing gross margin approximately 20 basis points), primarily due to higher product design and development costs; and
|
|
|
•
|
Lower gross margin from Converse (decreasing gross margin approximately 20 basis points), primarily resulting from shifts in mix to lower-margin products.
|
Fiscal 2015
Compared to
Fiscal 2014
For fiscal 2015, our consolidated gross margin was 120 basis points higher than fiscal 2014, primarily driven by the following factors:
|
|
•
|
Higher NIKE Brand full-price ASP (increasing gross margin approximately 250 basis points) primarily attributable to shifts in mix to higher-priced products and, to a lesser extent, price increases in response to inflationary conditions in certain territories;
|
|
|
•
|
Higher NIKE Brand product costs (decreasing gross margin approximately 190 basis points) largely due to shifts in mix to higher-cost products, labor input cost inflation and higher air freight costs, in part to mitigate the negative impacts from product delays due to the West Coast port congestion in the United States;
|
|
|
•
|
Growth in our higher-margin DTC business (increasing gross margin approximately 40 basis points); and
|
|
|
•
|
Changes in foreign currency exchange rates (including gains and losses on hedge transactions) increased gross margin approximately 20 basis points.
|
Total Selling and Administrative Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Fiscal 2016
|
|
|
Fiscal 2015
|
|
|
% Change
|
|
Fiscal 2014
|
|
|
% Change
|
Demand creation expense
(1)
|
|
$
|
3,278
|
|
|
$
|
3,213
|
|
|
2
|
%
|
|
$
|
3,031
|
|
|
6
|
%
|
Operating overhead expense
|
|
7,191
|
|
|
6,679
|
|
|
8
|
%
|
|
5,735
|
|
|
16
|
%
|
Total selling and administrative expense
|
|
$
|
10,469
|
|
|
$
|
9,892
|
|
|
6
|
%
|
|
$
|
8,766
|
|
|
13
|
%
|
% of Revenues
|
|
32.3
|
%
|
|
32.3
|
%
|
|
—
|
|
|
31.5
|
%
|
|
80
|
bps
|
|
|
(1)
|
Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, television, digital and print advertising, brand events and retail brand presentation.
|
Fiscal 2016
Compared to
Fiscal 2015
Demand creation expense
increased 2% for fiscal 2016 compared to fiscal 2015, primarily due to investments in digital brand marketing, including for our DTC business, as well as support for key brand events and initiatives, and sports marketing investments, partially offset by lower advertising expense. For fiscal 2016, changes in foreign currency exchange rates decreased growth in
Demand creation expense
by approximately 6 percentage points.
Operating overhead expense
increased 8% compared to fiscal 2015, primarily as a result of continued investments in our DTC business, including new store openings and higher variable expenses, as well as targeted investments in operational infrastructure and consumer-focused digital capabilities, partially offset by lower performance-based compensation. Changes in foreign currency exchange rates decreased growth in
Operating overhead expense
by approximately 4 percentage points for fiscal 2016.
Fiscal 2015
Compared to
Fiscal 2014
Demand creation expense
increased 6% for fiscal 2015 compared to the prior year, primarily due to support for key brand and consumer events, including the World Cup in early fiscal 2015, increased digital brand marketing, investments in DTC marketing and higher sports marketing expense. Changes in foreign currency exchange rates decreased growth in
Demand creation expense
by approximately 4 percentage points for fiscal 2015.
Operating overhead expense
increased 16% compared to the prior year, primarily driven by investments in our rapidly growing DTC business, including new store openings and higher variable expenses, investments in operational infrastructure and consumer-focused digital capabilities and higher performance-based compensation. For fiscal 2015, changes in foreign currency exchange rates decreased growth in
Operating overhead expense
by approximately 3 percentage points.
Other (Income) Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Fiscal 2016
|
|
|
Fiscal 2015
|
|
|
Fiscal 2014
|
|
Other (income) expense, net
|
|
$
|
(140
|
)
|
|
$
|
(58
|
)
|
|
$
|
103
|
|
Other (income) expense, 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 that are outside the normal course of business.
Fiscal 2016
Compared to
Fiscal 2015
Other (income) expense, net
increased from $58 million of other income, net for fiscal 2015 to $140 million of other income, net for fiscal 2016, driven by a $26 million net change in foreign currency conversion gains and losses, a favorable settlement of a legal judgment related to a bankruptcy case in Western Europe and net gains from other non-operating items.
We estimate the combination of the translation of foreign currency-denominated profits from our international business and the year-over-year change in foreign currency-related gains and losses included in
Other (income) expense, net
had an unfavorable impact on our
Income before income taxes
of $423 million for fiscal 2016.
Fiscal 2015
Compared to
Fiscal 2014
Other (income) expense, net
shifted from $103 million of other expense, net for fiscal 2014 to $58 million of other income, net for fiscal 2015, primarily driven by a $147 million net change in foreign currency conversion gains and losses, primarily due to significant hedge gains from available-for-sale investments, as well as an adverse legal judgment in the prior year related to a long outstanding bankruptcy case for a former customer in Western Europe.
We estimate the combination of the translation of foreign currency-denominated profits from our international business and the year-over-year change in foreign currency-related gains and losses included in
Other (income) expense, net
had an unfavorable impact on our
Income before income taxes
of $73 million for fiscal 2015.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016
|
|
|
Fiscal 2015
|
|
|
% Change
|
|
Fiscal 2014
|
|
|
% Change
|
Effective tax rate
|
|
18.7
|
%
|
|
22.2
|
%
|
|
(350) bps
|
|
|
24.0
|
%
|
|
(180) bps
|
|
Fiscal 2016
Compared to
Fiscal 2015
The 350 basis point decrease in our effective tax rate for the fiscal year was primarily due to an increase in the proportion of earnings from operations outside the United States, which are generally subject to a lower tax rate.
Fiscal 2015
Compared to
Fiscal 2014
The 180 basis point decrease in our effective tax rate for the fiscal year was primarily due to the favorable resolution of audits in several jurisdictions.
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, Western Europe, Central & Eastern Europe, Greater China, Japan and Emerging Markets, and include results for the NIKE, Jordan and Hurley brands. The Company’s NIKE Brand DTC 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 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.
The breakdown of revenues is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Fiscal 2016
|
|
Fiscal 2015
(1)
|
|
% Change
|
|
% Change Excluding Currency Changes
(2)
|
|
Fiscal 2014
(1)
|
|
% Change
|
|
% Change Excluding Currency Changes
(2)
|
North America
|
|
$
|
14,764
|
|
|
$
|
13,740
|
|
|
7
|
%
|
|
8
|
%
|
|
$
|
12,299
|
|
|
12
|
%
|
|
12
|
%
|
Western Europe
|
|
5,884
|
|
|
5,705
|
|
|
3
|
%
|
|
14
|
%
|
|
4,979
|
|
|
15
|
%
|
|
21
|
%
|
Central & Eastern Europe
|
|
1,431
|
|
|
1,421
|
|
|
1
|
%
|
|
17
|
%
|
|
1,387
|
|
|
2
|
%
|
|
15
|
%
|
Greater China
|
|
3,785
|
|
|
3,067
|
|
|
23
|
%
|
|
27
|
%
|
|
2,602
|
|
|
18
|
%
|
|
19
|
%
|
Japan
|
|
869
|
|
|
755
|
|
|
15
|
%
|
|
22
|
%
|
|
771
|
|
|
-2
|
%
|
|
9
|
%
|
Emerging Markets
|
|
3,701
|
|
|
3,898
|
|
|
-5
|
%
|
|
13
|
%
|
|
3,949
|
|
|
-1
|
%
|
|
8
|
%
|
Global Brand Divisions
(3)
|
|
73
|
|
|
115
|
|
|
-37
|
%
|
|
-30
|
%
|
|
125
|
|
|
-8
|
%
|
|
-2
|
%
|
Total NIKE Brand Revenues
|
|
30,507
|
|
|
28,701
|
|
|
6
|
%
|
|
13
|
%
|
|
26,112
|
|
|
10
|
%
|
|
14
|
%
|
Converse
|
|
1,955
|
|
|
1,982
|
|
|
-1
|
%
|
|
2
|
%
|
|
1,684
|
|
|
18
|
%
|
|
21
|
%
|
Corporate
(4)
|
|
(86
|
)
|
|
(82
|
)
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
TOTAL NIKE, INC. REVENUES
|
|
$
|
32,376
|
|
|
$
|
30,601
|
|
|
6
|
%
|
|
12
|
%
|
|
$
|
27,799
|
|
|
10
|
%
|
|
14
|
%
|
|
|
(1)
|
Certain prior year amounts have been reclassified to conform to fiscal 2016 presentation. These changes had no impact on previously reported results of operations or shareholders' equity.
|
|
|
(2)
|
Results have been restated 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.
|
|
|
(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 2016
|
|
Fiscal 2015
(1)
|
|
% Change
|
|
Fiscal 2014
(1)
|
|
% Change
|
North America
|
|
$
|
3,763
|
|
|
$
|
3,645
|
|
|
3
|
%
|
|
$
|
3,077
|
|
|
18
|
%
|
Western Europe
|
|
1,434
|
|
|
1,275
|
|
|
12
|
%
|
|
855
|
|
|
49
|
%
|
Central & Eastern Europe
|
|
289
|
|
|
249
|
|
|
16
|
%
|
|
279
|
|
|
-11
|
%
|
Greater China
|
|
1,372
|
|
|
993
|
|
|
38
|
%
|
|
816
|
|
|
22
|
%
|
Japan
|
|
174
|
|
|
100
|
|
|
74
|
%
|
|
131
|
|
|
-24
|
%
|
Emerging Markets
|
|
892
|
|
|
818
|
|
|
9
|
%
|
|
952
|
|
|
-14
|
%
|
Global Brand Divisions
|
|
(2,596
|
)
|
|
(2,267
|
)
|
|
-15
|
%
|
|
(1,993
|
)
|
|
-14
|
%
|
Total NIKE Brand
|
|
5,328
|
|
|
4,813
|
|
|
11
|
%
|
|
4,117
|
|
|
17
|
%
|
Converse
|
|
487
|
|
|
517
|
|
|
-6
|
%
|
|
496
|
|
|
4
|
%
|
Corporate
|
|
(1,173
|
)
|
|
(1,097
|
)
|
|
-7
|
%
|
|
(1,036
|
)
|
|
-6
|
%
|
TOTAL CONSOLIDATED EARNINGS
BEFORE INTEREST AND TAXES
|
|
4,642
|
|
|
4,233
|
|
|
10
|
%
|
|
3,577
|
|
|
18
|
%
|
Interest expense (income), net
|
|
19
|
|
|
28
|
|
|
—
|
|
|
33
|
|
|
—
|
|
TOTAL CONSOLIDATED INCOME
BEFORE INCOME TAXES
|
|
$
|
4,623
|
|
|
$
|
4,205
|
|
|
10
|
%
|
|
$
|
3,544
|
|
|
19
|
%
|
|
|
(1)
|
Certain prior year amounts have been reclassified to conform to fiscal 2016 presentation. These changes had no impact on previously reported results of operations or shareholders' equity.
|
North America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Fiscal 2016
|
|
Fiscal 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
Fiscal 2014
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
$
|
9,299
|
|
|
$
|
8,506
|
|
|
9
|
%
|
|
10
|
%
|
|
$
|
7,495
|
|
|
13
|
%
|
|
14
|
%
|
Apparel
|
|
4,746
|
|
|
4,410
|
|
|
8
|
%
|
|
8
|
%
|
|
3,937
|
|
|
12
|
%
|
|
12
|
%
|
Equipment
|
|
719
|
|
|
824
|
|
|
-13
|
%
|
|
-13
|
%
|
|
867
|
|
|
-5
|
%
|
|
-5
|
%
|
TOTAL REVENUES
|
|
$
|
14,764
|
|
|
$
|
13,740
|
|
|
7
|
%
|
|
8
|
%
|
|
$
|
12,299
|
|
|
12
|
%
|
|
12
|
%
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Wholesale Customers
|
|
$
|
10,674
|
|
|
$
|
10,243
|
|
|
4
|
%
|
|
5
|
%
|
|
$
|
9,296
|
|
|
10
|
%
|
|
10
|
%
|
Sales Direct to Consumer
|
|
4,090
|
|
|
3,497
|
|
|
17
|
%
|
|
17
|
%
|
|
3,003
|
|
|
16
|
%
|
|
17
|
%
|
TOTAL REVENUES
|
|
$
|
14,764
|
|
|
$
|
13,740
|
|
|
7
|
%
|
|
8
|
%
|
|
$
|
12,299
|
|
|
12
|
%
|
|
12
|
%
|
EARNINGS BEFORE INTEREST
AND TAXES
|
|
$
|
3,763
|
|
|
$
|
3,645
|
|
|
3
|
%
|
|
|
|
$
|
3,077
|
|
|
18
|
%
|
|
|
Fiscal 2016
Compared to
Fiscal 2015
Excluding changes in foreign currency exchange rates, North America revenues increased 8% primarily due to growth in our Sportswear, Jordan Brand and Running categories. DTC revenues grew 17% for fiscal 2016, fueled by strong online sales growth, the addition of new stores and comparable store sales growth of 6%.
Currency-neutral footwear revenue growth was attributable to higher revenues in most key categories, led by the Jordan Brand, Sportswear, Running and Women's Training, partially offset by a slight decline in NIKE Basketball. Fiscal 2016 unit sales of footwear increased 8%. Higher average selling price (ASP) per pair contributed approximately 2 percentage points of footwear revenue growth, driven by higher full-price ASP and the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business, partially offset by higher off-price mix.
Apparel revenue growth for fiscal 2016 was primarily driven by our Sportswear and Men's Training categories. For fiscal 2016, unit sales of apparel grew 7%. Higher ASP per unit contributed approximately 1 percentage point of apparel revenue growth, primarily attributable to higher full-price ASP.
Reported EBIT increased 3% for fiscal 2016 as higher revenues were largely offset by lower gross margin and higher selling and administrative expense as a percent of revenues. Gross margin declined 80 basis points as higher off-price mix, higher warehousing and inventory obsolescence costs, as well as higher product input costs more than offset higher full-price ASP. Selling and administrative expense increased as a percent of revenues as higher operating overhead to support our growing DTC operations and bad debt expense related to customer bankruptcies was only partially offset by lower performance-based compensation. Demand creation also grew at a faster rate than revenues due to higher spending for sports marketing, DTC marketing and key brand events and initiatives, partially offset by lower advertising expense.
Fiscal 2015
Compared to
Fiscal 2014
North America revenues increased 12%, despite congestion at ports on the West Coast of the United States in the second half of the fiscal year, which affected the Company's supply chain and flow of product to customers. Revenue growth was driven by nearly all key categories for fiscal 2015, led by the Jordan Brand, Sportswear, Men's Training, NIKE Basketball and Women's Training. On a constant currency basis, DTC revenue grew 17% for fiscal 2015, fueled by comparable store sales growth of 8%, strong online sales growth and the addition of new stores.
Footwear revenue growth was driven by increases in most key categories, notably the Jordan Brand, NIKE Basketball and Sportswear. Unit sales of footwear for fiscal 2015 increased 6%, while higher ASP per pair contributed approximately 8 percentage points of footwear revenue growth, primarily due to higher full-price ASP.
Apparel revenue growth was attributable to strong demand in most key categories, led by Sportswear, Men's Training, Women's Training and Running, partially offset by slight declines in Football (Soccer) and Action Sports. For fiscal 2015, unit sales of apparel increased 9%. Higher ASP per unit contributed approximately 3 percentage points of apparel revenue growth, driven primarily by higher full-price ASP and the favorable impact of growth in our higher-priced DTC business.
EBIT grew 18% for fiscal 2015 as a result of higher revenues, gross margin expansion and selling and administrative expense leverage. Gross margin increased 110 basis points due to higher full-price ASP, improved off-price product margins and lower inventory obsolescence costs, partially offset by higher product input and logistics costs. Selling and administrative expense decreased as a percent of revenues despite higher demand creation expense to support key brand and sporting events and higher sports marketing expense. Operating overhead costs also increased to support DTC growth and investments in infrastructure, as well as higher performance-based compensation costs.
Western Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Fiscal 2016
|
|
Fiscal 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
Fiscal 2014
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
$
|
3,985
|
|
|
$
|
3,876
|
|
|
3
|
%
|
|
14
|
%
|
|
$
|
3,299
|
|
|
17
|
%
|
|
25
|
%
|
Apparel
|
|
1,628
|
|
|
1,552
|
|
|
5
|
%
|
|
16
|
%
|
|
1,427
|
|
|
9
|
%
|
|
14
|
%
|
Equipment
|
|
271
|
|
|
277
|
|
|
-2
|
%
|
|
8
|
%
|
|
253
|
|
|
9
|
%
|
|
15
|
%
|
TOTAL REVENUES
|
|
$
|
5,884
|
|
|
$
|
5,705
|
|
|
3
|
%
|
|
14
|
%
|
|
$
|
4,979
|
|
|
15
|
%
|
|
21
|
%
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Wholesale Customers
|
|
$
|
4,429
|
|
|
$
|
4,451
|
|
|
0
|
%
|
|
10
|
%
|
|
$
|
4,022
|
|
|
11
|
%
|
|
17
|
%
|
Sales Direct to Consumer
|
|
1,455
|
|
|
1,254
|
|
|
16
|
%
|
|
28
|
%
|
|
957
|
|
|
31
|
%
|
|
40
|
%
|
TOTAL REVENUES
|
|
$
|
5,884
|
|
|
$
|
5,705
|
|
|
3
|
%
|
|
14
|
%
|
|
$
|
4,979
|
|
|
15
|
%
|
|
21
|
%
|
EARNINGS BEFORE INTEREST AND TAXES
|
|
$
|
1,434
|
|
|
$
|
1,275
|
|
|
12
|
%
|
|
|
|
$
|
855
|
|
|
49
|
%
|
|
|
Fiscal 2016
Compared to
Fiscal 2015
Excluding changes in currency exchange rates, Western Europe revenues for fiscal 2016 increased 14% with double-digit growth in every territory. Growth was led by our largest territories, the UK & Ireland and AGS (Austria, Germany and Switzerland), which grew 12% and 16%, respectively. On a category basis, revenues grew for every key category, most notably Sportswear, Football (Soccer) and the Jordan Brand. DTC revenues grew 28% for fiscal 2016, due to strong online sales growth, the addition of new stores and comparable store sales growth of 13%.
Currency-neutral footwear revenue growth was fueled by increases in most key categories, led by Sportswear and the Jordan Brand. For fiscal 2016, unit sales of footwear increased 10%. Higher ASP per pair contributed approximately 4 percentage points of footwear revenue growth, driven by higher full-price ASP and the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business, partially offset by higher off-price mix.
The constant currency apparel revenue growth was attributable to increases in every key category, most notably Sportswear, with Football (Soccer) also providing strong growth. Unit sales of apparel for fiscal 2016 increased 11%. Higher ASP per unit contributed approximately 5 percentage points of apparel revenue growth, primarily driven by the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business and higher full-price ASP.
On a reported basis, EBIT grew 12% for fiscal 2016, despite the negative translation impact from changes in foreign currency exchange rates, most notably the Euro. EBIT grew at a higher rate than revenue as selling and administrative expense leverage and the favorable settlement of a legal judgment related to a bankruptcy case reflected in
Other (income) expense, net
, were only partially offset by lower gross margin. Gross margin declined 10 basis points as unfavorable standard foreign currency exchange rates and higher off-price mix were mostly offset by higher full-price ASP, shifts in mix to lower-cost products and growth in our higher-margin DTC business. Selling and administrative expense was lower as a percent of revenues despite higher operating overhead, primarily to support DTC expansion. Demand creation increased slightly as higher spending for DTC and other demand creation costs more than offset lower sports marketing costs.
Fiscal 2015
Compared to
Fiscal 2014
Excluding the changes in currency exchange rates, revenues for fiscal 2015 increased 21% and grew in every territory, led by AGS and the UK & Ireland, our largest territories in Western Europe, which grew 27% and 20%, respectively. Revenues grew for every key category, most notably Sportswear and Running. DTC revenues grew 40%, driven by comparable store sales growth of 24%, strong online sales growth and the addition of new stores.
The constant currency footwear revenue growth was driven by increases in nearly every category, most notably Sportswear, Running and Football (Soccer). For fiscal 2015, unit sales of footwear increased 20%. Higher ASP per pair contributed approximately 5 percentage points of footwear revenue growth, driven equally by higher full-price ASP and the favorable impact of growth in our higher-priced DTC business.
The constant currency apparel revenue growth was attributable to increases in nearly all key categories, led by Sportswear, Women's Training and Running, partially offset by a slight decline in Football (Soccer) primarily due to the impact of World Cup in fiscal 2014. Unit sales of apparel in fiscal 2015 increased 14% while ASP per unit was flat.
Despite the negative translation impact from changes in foreign currency exchange rates, most notably the Euro, reported EBIT grew 49% for fiscal 2015 as a result of strong revenue growth, gross margin expansion and selling and administrative expense leverage. Gross margin increased 190 basis points, primarily due to favorable standard foreign currency exchange rates and higher full-price ASP, which were only partially offset by higher product costs. Selling and administrative expense decreased as a percent of revenues despite increases in operating overhead, primarily as a result of higher costs to support our growing DTC business. Demand creation increased largely as a result of higher sports marketing and digital demand creation costs.
Central & Eastern Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Fiscal 2016
|
|
Fiscal 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
Fiscal 2014
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
$
|
882
|
|
|
$
|
827
|
|
|
7
|
%
|
|
23
|
%
|
|
$
|
763
|
|
|
8
|
%
|
|
22
|
%
|
Apparel
|
|
463
|
|
|
499
|
|
|
-7
|
%
|
|
9
|
%
|
|
532
|
|
|
-6
|
%
|
|
5
|
%
|
Equipment
|
|
86
|
|
|
95
|
|
|
-9
|
%
|
|
7
|
%
|
|
92
|
|
|
3
|
%
|
|
14
|
%
|
TOTAL REVENUES
|
|
$
|
1,431
|
|
|
$
|
1,421
|
|
|
1
|
%
|
|
17
|
%
|
|
$
|
1,387
|
|
|
2
|
%
|
|
15
|
%
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Wholesale Customers
|
|
$
|
1,215
|
|
|
$
|
1,241
|
|
|
-2
|
%
|
|
13
|
%
|
|
$
|
1,245
|
|
|
0
|
%
|
|
11
|
%
|
Sales Direct to Consumer
|
|
216
|
|
|
180
|
|
|
20
|
%
|
|
46
|
%
|
|
142
|
|
|
27
|
%
|
|
48
|
%
|
TOTAL REVENUES
|
|
$
|
1,431
|
|
|
$
|
1,421
|
|
|
1
|
%
|
|
17
|
%
|
|
$
|
1,387
|
|
|
2
|
%
|
|
15
|
%
|
EARNINGS BEFORE INTEREST AND TAXES
|
|
$
|
289
|
|
|
$
|
249
|
|
|
16
|
%
|
|
|
|
$
|
279
|
|
|
-11
|
%
|
|
|
Fiscal 2016
Compared to
Fiscal 2015
On a currency neutral basis, fiscal 2016 revenues for Central & Eastern Europe increased 17%, with double-digit growth in nearly every territory. Revenue growth was led by two of our largest territories, Turkey and Russia, which increased 26% and 18%, respectively, while our distributors business also grew 16%. Revenues grew in nearly every key category, driven by Sportswear, Running and Football (Soccer). DTC revenues increased 46%, fueled by comparable store sales growth of 27% and the addition of new stores.
Constant currency footwear revenue growth in fiscal 2016 was driven by growth in nearly every key category, led by Sportswear and Running. Fiscal 2016 unit sales of footwear increased 7%. Higher ASP per pair contributed approximately 16 percentage points of footwear revenue growth, primarily driven by higher full-price ASP, largely reflecting inflationary conditions in certain territories.
The currency-neutral growth in apparel revenue in fiscal 2016 was attributable to growth in nearly all key categories, most notably Football (Soccer) and Running. Unit sales of apparel decreased 2% for fiscal 2016. Higher ASP per unit contributed approximately 11 percentage points of apparel revenue growth, primarily driven by higher full-price ASP, largely reflecting inflationary conditions in certain territories.
On a reported basis, EBIT increased 16% for fiscal 2016, despite the negative impact of changes in foreign currency exchange rates, primarily the Russian Ruble and Turkish Lira. EBIT grew faster than reported revenues due to significant gross margin expansion and selling and administrative expense leverage. Gross margin increased 140 basis points as significantly higher full-price ASP, warehousing efficiencies and the favorable impact of a higher proportion of revenues from our higher-margin DTC business more than offset unfavorable standard foreign currency exchange rates and shifts in mix to higher-cost products. Selling and administrative expense decreased as a percent of revenues despite higher operating overhead to support DTC expansion and higher demand creation expense due to increased sports marketing costs and spending to support brand events.
Fiscal 2015
Compared to
Fiscal 2014
Excluding changes in currency exchange rates, Central & Eastern Europe revenues for fiscal 2015 grew 15%, attributable to increases in most territories. Turkey grew 23% and our distributors business grew 18%, while revenues declined in Israel, our smallest territory. On a category basis, revenue growth was driven by increases in most key categories, primarily Sportswear and Running. DTC revenues increased 48%, driven by strong comparable store sales growth of 28%, the addition of new stores and online sales growth.
The constant currency growth in footwear revenue in fiscal 2015 was driven by growth in nearly all key categories, most notably Sportswear and Running. Fiscal 2015 unit sales of footwear increased 11%. Higher ASP per pair contributed approximately 11 percentage points of footwear revenue growth, driven by higher full-price ASP, primarily reflecting inflationary conditions in certain territories.
The constant currency growth in apparel revenue in fiscal 2015 resulted from growth in most key categories, led by Sportswear and Running, partially offset by a decline in Football (Soccer) due to comparison to strong sales related to the World Cup in fiscal 2014. Unit sales of apparel increased 1% for fiscal 2015. Higher ASP per unit contributed approximately 4 percentage points of apparel revenue growth, primarily due to higher full-price ASP reflecting inflationary conditions in certain territories.
On a reported basis, EBIT
declined 11% for fiscal 2015, primarily reflecting the impact of weakening foreign currency exchange rates. Reported revenue increases and slight selling and administrative expense leverage were more than offset by lower gross margin. Gross margin decreased 340 basis points as higher product costs and unfavorable standard foreign currency exchange rates were only partially offset by higher full-price ASP. Selling and administrative expense decreased as a percent of revenue despite increases in both demand creation and operating overhead. Operating overhead increased primarily as a result of investments in our growing DTC business, while demand creation increased as a result of higher sports marketing costs.
Greater China
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Fiscal 2016
|
|
Fiscal 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
Fiscal 2014
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
$
|
2,599
|
|
|
$
|
2,016
|
|
|
29
|
%
|
|
33
|
%
|
|
$
|
1,600
|
|
|
26
|
%
|
|
28
|
%
|
Apparel
|
|
1,055
|
|
|
925
|
|
|
14
|
%
|
|
17
|
%
|
|
876
|
|
|
6
|
%
|
|
7
|
%
|
Equipment
|
|
131
|
|
|
126
|
|
|
4
|
%
|
|
7
|
%
|
|
126
|
|
|
0
|
%
|
|
1
|
%
|
TOTAL REVENUES
|
|
$
|
3,785
|
|
|
$
|
3,067
|
|
|
23
|
%
|
|
27
|
%
|
|
$
|
2,602
|
|
|
18
|
%
|
|
19
|
%
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Wholesale Customers
|
|
$
|
2,623
|
|
|
$
|
2,234
|
|
|
17
|
%
|
|
21
|
%
|
|
$
|
2,041
|
|
|
9
|
%
|
|
11
|
%
|
Sales Direct to Consumer
|
|
1,162
|
|
|
833
|
|
|
39
|
%
|
|
44
|
%
|
|
561
|
|
|
48
|
%
|
|
51
|
%
|
TOTAL REVENUES
|
|
$
|
3,785
|
|
|
$
|
3,067
|
|
|
23
|
%
|
|
27
|
%
|
|
$
|
2,602
|
|
|
18
|
%
|
|
19
|
%
|
EARNINGS BEFORE INTEREST AND TAXES
|
|
$
|
1,372
|
|
|
$
|
993
|
|
|
38
|
%
|
|
|
|
$
|
816
|
|
|
22
|
%
|
|
|
Fiscal 2016
Compared to
Fiscal 2015
On a currency-neutral basis, Greater China revenues for fiscal 2016 increased 27%, driven by higher revenues in nearly every key category, led by Sportswear, Running, NIKE Basketball and the Jordan Brand. DTC revenues increased 44%, driven by significant online sales growth, the addition of new stores and comparable store sales growth of 19%.
The constant currency increase in footwear revenue for fiscal 2016 was driven by growth in nearly every key category, most notably Sportswear, Running, NIKE Basketball and the Jordan Brand. For fiscal 2016, unit sales of footwear increased 27%. Higher ASP per pair contributed approximately 6 percentage points of footwear revenue growth, driven by higher full-price ASP and the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business.
Constant currency apparel revenue growth for fiscal 2016 was attributable to higher revenues in nearly every key category, led by Running and Sportswear. Unit sales of apparel increased 17% for fiscal 2016 while ASP per unit was flat.
On a reported basis, EBIT increased 38% for fiscal 2016 due to strong revenue growth, gross margin expansion and selling and administrative expense leverage. Gross margin increased 80 basis points due to higher full-price ASP and an increase in the proportion of revenues from our higher-margin DTC business, partially offset by shifts in mix to higher-cost products and unfavorable standard foreign currency exchange rates. Selling and administrative expense decreased as a percent of revenues despite higher operating overhead and demand creation expense. Operating overhead increased largely due to support for our growing DTC operations, while demand creation was also higher, primarily due to retail brand presentation costs to re-profile category and consumer-focused retail stores as well as spending for key brand events.
Fiscal 2015
Compared to
Fiscal 2014
Excluding changes in currency exchange rates, Greater China revenue growth for fiscal 2015 was driven by higher revenues in our Sportswear, Running, NIKE Basketball and Jordan Brand categories, partially offset by small declines in other categories. Strong growth in DTC revenues reflected a 28% increase in comparable store sales, strong online sales growth and the addition of new stores.
Constant currency footwear revenue growth in fiscal 2015 was driven by increased sales in our Sportswear, Running, NIKE Basketball and Jordan Brand categories, partially offset by small declines in other categories. Unit sales of footwear increased 20% for fiscal 2015. Higher ASP per pair contributed approximately 8 percentage points of footwear revenue growth, primarily due to an increase in the proportion of revenues from our higher-priced DTC business.
Constant currency apparel revenue growth in fiscal 2015 was driven by increases in the Sportswear, Running, Jordan Brand and NIKE Basketball categories, partially offset by decreases in other categories, primarily Football (Soccer) and Men’s Training. For fiscal 2015, unit sales of apparel increased 8%. Changes in ASP per unit reduced apparel revenues by approximately 1 percentage point, due primarily to lower full-price ASP, partially offset by increased revenues from our higher-priced DTC business.
On a reported basis, EBIT increased 22% for fiscal 2015 as higher revenues and gross margin expansion more than offset higher selling and administrative expense. Gross margin increased 270 basis points primarily due to higher full-price ASP on footwear and an increase in the proportion of revenues from our higher-margin DTC business, partially offset by higher product costs. Selling and administrative expense increased due to higher operating overhead to support growth initiatives, primarily related to our DTC operations, as well as higher demand creation spending, primarily for sports marketing.
Japan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Fiscal 2016
|
|
Fiscal 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
Fiscal 2014
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
$
|
570
|
|
|
$
|
452
|
|
|
26
|
%
|
|
34
|
%
|
|
$
|
409
|
|
|
11
|
%
|
|
23
|
%
|
Apparel
|
|
228
|
|
|
230
|
|
|
-1
|
%
|
|
5
|
%
|
|
276
|
|
|
-17
|
%
|
|
-8
|
%
|
Equipment
|
|
71
|
|
|
73
|
|
|
-3
|
%
|
|
3
|
%
|
|
86
|
|
|
-15
|
%
|
|
-6
|
%
|
TOTAL REVENUES
|
|
$
|
869
|
|
|
$
|
755
|
|
|
15
|
%
|
|
22
|
%
|
|
$
|
771
|
|
|
-2
|
%
|
|
9
|
%
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Wholesale Customers
|
|
$
|
587
|
|
|
$
|
536
|
|
|
10
|
%
|
|
16
|
%
|
|
$
|
597
|
|
|
-10
|
%
|
|
0
|
%
|
Sales Direct to Consumer
|
|
282
|
|
|
219
|
|
|
29
|
%
|
|
37
|
%
|
|
174
|
|
|
26
|
%
|
|
40
|
%
|
TOTAL REVENUES
|
|
$
|
869
|
|
|
$
|
755
|
|
|
15
|
%
|
|
22
|
%
|
|
$
|
771
|
|
|
-2
|
%
|
|
9
|
%
|
EARNINGS BEFORE INTEREST AND TAXES
|
|
$
|
174
|
|
|
$
|
100
|
|
|
74
|
%
|
|
|
|
$
|
131
|
|
|
-24
|
%
|
|
|
Fiscal 2016
Compared to
Fiscal 2015
Excluding changes in foreign currency exchange rates, revenues for Japan increased 22% for fiscal 2016, driven by growth in most key categories, led by Sportswear, Running and the Jordan Brand. DTC revenues were 37% higher, due to strong online sales growth, comparable store sales growth of 17% and the addition of new stores.
Reported EBIT increased 74%, despite the weaker Yen. EBIT growth was driven by higher reported revenues, gross margin expansion and significant selling and administrative expense leverage. Gross margin expanded 270 basis points due to higher full-price ASP, in part due to lower discounts, as well as growth in our higher-margin DTC business, lower product input costs and warehousing efficiencies, which more than offset unfavorable standard foreign currency exchange rates. Selling and administrative expense decreased as a percent of revenues despite investments in operating overhead to support our growing DTC business. Demand creation spending for DTC marketing and brand events was largely offset by lower spending for retail brand presentation and advertising costs.
Fiscal 2015
Compared to
Fiscal 2014
Constant currency revenues for Japan increased 9% in fiscal 2015, driven primarily by increases in Sportswear, Running, the Jordan Brand and NIKE Basketball
, partially offset by declines in Men's Training, Golf and Women's Training. DTC revenues grew 40% in fiscal 2015 driven by a 20% increase in comparable store sales, strong online sales growth and the addition of new stores.
On a reported basis, fiscal 2015 EBIT decreased 24% compared to the prior year period, reflecting the impact of the weaker Yen. Gross margin decreased 270 basis points as unfavorable standard foreign currency exchange rates and higher product costs more than offset higher full-price ASP and an increase in the proportion of revenues from our higher-margin DTC business. Selling and administrative expense increased as a percent of revenues as higher operating overhead, primarily to support our expanding DTC business, was only partially offset by a decrease in demand creation expense.
Emerging Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Fiscal 2016
|
|
Fiscal 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
Fiscal 2014
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
$
|
2,536
|
|
|
$
|
2,641
|
|
|
-4
|
%
|
|
14
|
%
|
|
$
|
2,642
|
|
|
0
|
%
|
|
9
|
%
|
Apparel
|
|
947
|
|
|
1,021
|
|
|
-7
|
%
|
|
11
|
%
|
|
1,061
|
|
|
-4
|
%
|
|
5
|
%
|
Equipment
|
|
218
|
|
|
236
|
|
|
-8
|
%
|
|
11
|
%
|
|
246
|
|
|
-4
|
%
|
|
5
|
%
|
TOTAL REVENUES
|
|
$
|
3,701
|
|
|
$
|
3,898
|
|
|
-5
|
%
|
|
13
|
%
|
|
$
|
3,949
|
|
|
-1
|
%
|
|
8
|
%
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Wholesale Customers
|
|
$
|
3,049
|
|
|
$
|
3,247
|
|
|
-6
|
%
|
|
11
|
%
|
|
$
|
3,483
|
|
|
-7
|
%
|
|
2
|
%
|
Sales Direct to Consumer
|
|
652
|
|
|
651
|
|
|
0
|
%
|
|
23
|
%
|
|
466
|
|
|
40
|
%
|
|
51
|
%
|
TOTAL REVENUES
|
|
$
|
3,701
|
|
|
$
|
3,898
|
|
|
-5
|
%
|
|
13
|
%
|
|
$
|
3,949
|
|
|
-1
|
%
|
|
8
|
%
|
EARNINGS BEFORE INTEREST
AND TAXES
|
|
$
|
892
|
|
|
$
|
818
|
|
|
9
|
%
|
|
|
|
$
|
952
|
|
|
-14
|
%
|
|
|
Fiscal 2016
Compared to
Fiscal 2015
Excluding changes in foreign currency exchange rates, fiscal 2016 revenues for Emerging Markets increased 13%. Growth was attributable to higher revenues in 7 of 9 territories, led by one of our largest territories, SOCO (which includes Argentina, Uruguay and Chile), which grew 32%, and by Mexico and Pacific (which includes Australia and New Zealand), which grew 31% and 27%, respectively. Revenues declined 5% in Brazil, primarily reflecting on-going macroeconomic challenges. On a category basis, revenues grew in nearly every key category, led by Sportswear and Running. DTC revenues increased 23%, driven by the addition of new stores, comparable store sales growth of 7% and online sales growth.
The constant currency growth in footwear revenue for fiscal 2016 was driven by higher revenues in nearly every key category, most notably Sportswear and Running. For fiscal 2016, unit sales of footwear increased 1%, while higher ASP per pair contributed approximately 13 percentage points of footwear revenue growth. Higher ASP was attributable to higher full-price ASP, primarily reflecting inflationary conditions in certain territories, and to a lesser extent, the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business.
The constant currency growth in apparel revenue was due to increases in most key categories, led by Sportswear, Running and Women's Training. Fiscal 2016 unit sales of apparel decreased 2%, while higher ASP per unit contributed approximately 13 percentage points of apparel revenue growth. Higher ASP was due to higher full-price ASP, primarily reflecting inflationary conditions in certain territories, and to a lesser extent, the favorable impact of an increase in the proportion of revenues from our higher-priced DTC business.
On a reported basis, EBIT increased 9%, despite the negative impact of foreign currency exchange rates, primarily the Argentine Peso, Mexican Peso and Korean Won, as gross margin expansion more than offset lower reported revenues and higher selling and administrative expense as a percent of revenues. Gross margin expanded 350 basis points due to higher full-price ASP, lower warehousing and obsolescence costs, and growth in our higher-margin DTC business, partially offset by shifts in mix to higher-cost products and unfavorable standard foreign currency exchange rates.
Selling and administrative expense declined on a reported basis, but was higher as a percent of revenues as higher operating overhead due to additional investments in our DTC business and operating infrastructure, and higher performance-based compensation were more than offset by changes in foreign currency exchange rates. Demand creation expense also increased driven by sports marketing and digital brand marketing costs, offset by the impact of foreign currency exchange rates.
Fiscal 2015
Compared to
Fiscal 2014
On a currency-neutral basis, fiscal 2015 revenues for Emerging Markets increased 8%, driven by growth in 7 of 9 territories. Growth was led by SOCO and Pacific which grew 28% and 26%, respectively. Revenues in our Mexico and Brazil territories decreased 21% and 3%, respectively. The decrease in Mexico was attributable to efforts to liquidate excess inventory in the marketplace largely resulting from an inconsistent flow of product to customers following distribution center transition issues in fiscal 2014, while the decrease in Brazil was primarily due to challenging macroeconomic conditions and comparison to strong sales related to the World Cup in fiscal 2014. On a category basis, revenues were higher in most key categories, led by Sportswear, Running, Action Sports and the Jordan Brand, partially offset by a decline in Football (Soccer). DTC revenues increased 51% compared to fiscal 2014, driven by strong comparable store sales growth of 26%, the addition of new stores and online sales growth.
The constant currency growth in footwear revenue for fiscal 2015 was attributable to increases in several key categories, most notably Sportswear, Action Sports, the Jordan Brand and Running. Unit sales of footwear decreased 2% while higher ASP per pair contributed approximately 11 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher full-price ASP reflecting price increases in response to inflationary conditions in certain Latin American countries, particularly Argentina, as well as the favorable impact of growth in our higher-priced DTC business.
Constant currency apparel revenue growth was due to increases in nearly all key categories, primarily Sportswear, Running and Women's Training, partially offset by a decline in Football (Soccer) revenues due to higher World Cup sales in fiscal 2014. Unit sales of apparel decreased 1% for fiscal 2015. Higher ASP per unit contributed approximately 6 percentage points of apparel revenue growth, primarily attributable to an increase in the proportion of revenues from our higher-priced DTC business, and to a lesser extent, higher full-price ASP driven by price increases in response to inflationary conditions.
On a reported basis, EBIT decreased 14% primarily due to reported revenue declines, lower gross margin and higher selling and administrative expense, as well as
the impact of weakening foreign currency exchange rates
. Gross margin decreased 140 basis points due to unfavorable standard foreign currency exchange rates, higher inventory obsolescence and higher off-price mix, partially offset by higher full-price ASP. Selling and administrative expense increased due to higher operating overhead costs, primarily to support DTC growth, as well as higher demand creation expense, in part as a result of support for the World Cup in early fiscal 2015 and higher sports marketing expense.
Global Brand Divisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Fiscal 2016
|
|
Fiscal 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
Fiscal 2014
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues
|
|
$
|
73
|
|
|
$
|
115
|
|
|
-37
|
%
|
|
-30
|
%
|
|
$
|
125
|
|
|
-8
|
%
|
|
-2
|
%
|
(Loss) Before Interest and Taxes
|
|
$
|
(2,596
|
)
|
|
$
|
(2,267
|
)
|
|
15
|
%
|
|
|
|
$
|
(1,993
|
)
|
|
14
|
%
|
|
|
Global Brand Divisions primarily represent demand creation, operating overhead and product creation and design expenses that are centrally managed for the NIKE Brand. Revenues for Global Brand Divisions are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment.
Fiscal 2016
Compared to
Fiscal 2015
Global Brand Divisions' loss before interest and taxes increased $329 million for fiscal 2016 due to higher operating overhead and demand creation expense, and to a lesser extent, lower revenues, largely resulting from the expiration of certain football club endorsement agreements. Operating overhead increased due to investments in operational infrastructure and consumer-focused digital capabilities, partially offset by lower performance-based compensation expenses. Demand creation expense increased due to higher advertising and digital brand marketing expenses.
Fiscal 2015
Compared to
Fiscal 2014
Global Brand Divisions' loss before interest and taxes increased $274 million in fiscal 2015, primarily due to higher operating overhead reflecting continued investments in operational infrastructure, including digital capabilities, consumer engagement and supply chain initiatives, as well as higher performance-based compensation. Demand creation expense increased slightly due to support for the World Cup in the first quarter of fiscal 2015 and key brand and consumer events.
Converse
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Fiscal 2016
|
|
Fiscal 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
Fiscal 2014
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues
|
|
$
|
1,955
|
|
|
$
|
1,982
|
|
|
-1
|
%
|
|
2
|
%
|
|
$
|
1,684
|
|
|
18
|
%
|
|
21
|
%
|
Earnings Before Interest and Taxes
|
|
$
|
487
|
|
|
$
|
517
|
|
|
-6
|
%
|
|
|
|
$
|
496
|
|
|
4
|
%
|
|
|
In territories we define as “direct distribution markets” Converse designs, markets and sells products directly to distributors, wholesale customers and to consumers through DTC operations. The largest direct distribution markets are the United States, the United Kingdom and China. We do not own the Converse trademarks in Japan. Territories other than direct distribution markets and Japan are serviced by third-party licensees who pay royalty revenues to Converse for the use of its registered trademarks and other intellectual property rights.
Fiscal 2016
Compared to
Fiscal 2015
Excluding changes in foreign currency exchange rates, Converse revenues increased 2% for fiscal 2016. Comparable direct distribution markets (i.e. markets served under a direct distribution model for comparable periods in the current and prior fiscal years) grew 4%, contributing approximately 3 percentage points of total Converse revenue growth for fiscal 2016. Comparable direct distribution market unit sales decreased 2%, while higher ASP per unit contributed approximately 6 percentage points of direct distribution market revenue growth. On a territory basis, growth in the United States and Asia Pacific was partially offset by declines in Europe, primarily the United Kingdom. Conversion of markets from licensed to direct distribution markets had an insignificant impact on total Converse revenue growth for fiscal 2016. Revenues from comparable licensed markets decreased 15% for fiscal 2016, reducing total Converse revenue growth by approximately 1 percentage point. The decrease in comparable licensed markets revenues was primarily due to poor macroeconomic conditions in Latin America.
Reported EBIT for Converse decreased 6% for fiscal 2016 as a decrease in reported revenues and lower gross margin more than offset selling and administrative expense leverage. Gross margin declined 220 basis points as unfavorable standard foreign currency exchange rates, shifts in mix to higher-cost products and higher off-price mix more than offset higher full-price ASP. Selling and administrative expense declined faster than reported revenues primarily due to lower demand creation, which more than offset slightly higher operating overhead due to investments in infrastructure to support growth.
Fiscal 2015
Compared to
Fiscal 2014
Excluding changes in currency exchange rates, revenues for Converse increased 21% for fiscal 2015. Comparable direct distribution markets grew 14%, contributing 12 percentage points of total revenue growth for fiscal 2015. Comparable direct distribution market unit sales increased 12% and higher ASP per unit contributed approximately 2 percentage points of Converse comparable direct distribution market revenue growth. The United States market was the most significant contributor to the growth of comparable direct distribution markets due to volume increases with key wholesale customers and expansion of our DTC business. Conversion of markets from licensed to direct distribution contributed 8 percentage points of total Converse revenue growth for fiscal 2015, driven by conversion of several European markets, most significantly AGS (Austria, Germany and Switzerland). Revenues from comparable licensed markets increased 8% for fiscal 2015, contributing 1 percentage point of total Converse revenue growth.
EBIT for Converse increased 4% for fiscal 2015 as strong revenue growth was partially offset by lower gross margin and higher selling and administrative expense. Gross margin decreased 60 basis points primarily due to transitions of licensed markets to direct distribution markets. Selling and administrative expense increased for fiscal 2015, primarily due to higher operating overhead costs resulting from investments in infrastructure to support current and future growth, including market transitions, new systems and new headquarters, as well as higher intellectual property enforcement costs.
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Fiscal 2016
|
|
Fiscal 2015
|
|
% Change
|
|
Fiscal 2014
|
|
% Change
|
Revenues
|
|
$
|
(86
|
)
|
|
$
|
(82
|
)
|
|
—
|
|
|
$
|
3
|
|
|
—
|
|
(Loss) Before Interest and Taxes
|
|
$
|
(1,173
|
)
|
|
$
|
(1,097
|
)
|
|
7
|
%
|
|
$
|
(1,036
|
)
|
|
6
|
%
|
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 Corporate loss before interest and taxes consists largely of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to our corporate headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses.
In addition to the foreign currency gains and losses recognized in Corporate revenues, foreign currency results in Corporate include gains and losses resulting from the difference between actual foreign currency rates and standard rates used to record non-functional currency denominated product purchases within the NIKE Brand geographic operating segments and Converse; related foreign currency hedge results; conversion gains and losses arising from re-measurement of monetary assets and liabilities in non-functional currencies; and certain other foreign currency derivative instruments.
Fiscal 2016
Compared to
Fiscal 2015
For fiscal 2016, Corporate's loss before interest and taxes increased $76 million primarily due to the following:
|
|
•
|
an increase of $179 million, primarily driven by higher operating overhead expense to support corporate growth initiatives;
|
|
|
•
|
a beneficial change of $76 million from net foreign currency losses to net foreign currency gains related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains; these gains are reported as a component of consolidated gross margin; and
|
|
|
•
|
a beneficial change of $27 million in net foreign currency gains related to the re-measurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, reported as a component of
Other (income) expense, net.
|
Fiscal 2015
Compared to
Fiscal 2014
For fiscal 2015, Corporate's loss before interest and taxes increased $61 million primarily due to the following:
|
|
•
|
a $203 million increase, primarily in corporate overhead expense related to corporate initiatives to support growth of the business as well as higher performance-based compensation;
|
|
|
•
|
a $144 million beneficial change from net foreign currency losses to net foreign currency gains, reported as a component of
Other (income) expense, net
; and
|
|
|
•
|
an approximate $2 million increase in foreign exchange losses related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains; these losses are reported as a component of consolidated gross margin.
|
|
|
Foreign Currency Exposures and Hedging Practices
|
Overview
As a global company with significant operations outside the United States, in the normal course of business we are exposed to risk arising from changes in currency exchange rates. Our primary foreign currency exposures arise from the recording of transactions denominated in non-functional currencies and the translation of foreign currency denominated results of operations, financial position and cash flows into U.S. Dollars.
Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We manage global foreign exchange risk centrally on a portfolio basis to address those risks that are material to NIKE, Inc. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and, where practical and material, by hedging a portion of the remaining exposures using derivative instruments such as forward contracts and options. As described below, the implementation of the NIKE Trading Company ("NTC") and our foreign currency adjustment program enhanced our ability to manage our foreign exchange risk by increasing the natural offsets and currency correlation benefits that exist within our portfolio of foreign exchange exposures. Our hedging policy is designed to partially or entirely offset the impact of exchange rate changes on the underlying net exposures being hedged. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Consolidated Financial Statements; the length of the delay is dependent upon hedge horizons. We do not hold or issue derivative instruments for trading or speculative purposes.
Transactional Exposures
We conduct business in various currencies and have transactions which subject us to foreign currency risk. Our most significant transactional foreign currency exposures are:
|
|
•
|
Product Costs — NIKE’s product costs are exposed to fluctuations in foreign currencies in the following ways:
|
|
|
1.
|
Product purchases denominated in currencies other than the functional currency of the transacting entity:
|
|
|
a.
|
Certain NIKE entities purchase product from the NTC, a wholly-owned sourcing hub that buys NIKE branded products from third-party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. When the NTC sells to a NIKE entity with a different functional currency, the result is a foreign currency exposure for the NTC.
|
|
|
b.
|
Other NIKE entities purchase product directly from third-party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar.
|
In both purchasing scenarios, a weaker U.S. Dollar decreases the inventory cost incurred by NIKE whereas a stronger U.S. Dollar increases its cost.
|
|
2.
|
Factory input costs: NIKE operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories’ foreign currency exposures, some of which are natural offsets to our existing foreign currency exposures. Under this program, our payments to these factories are adjusted for rate fluctuations in the basket of currencies (“factory currency exposure index”) in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products (“factory input costs”) are denominated.
|
For the currency within the factory currency exposure indices that is the local or functional currency of the factory, the currency rate fluctuation affecting the product cost is recorded within
Inventories
and is recognized in
Cost of sales
when the related product is sold to a third-party. All currencies within the indices, excluding the U.S. Dollar and the local or functional currency of the factory, are recognized as embedded derivative contracts and are recorded at fair value through
Other (income) expense, net
. Refer to
Note 16 — Risk Management and Derivatives
in the accompanying Notes to the Consolidated Financial Statements for additional detail.
As an offset to the impacts of the fluctuating U.S. Dollar on our non-functional currency denominated product purchases described above, a strengthe
ning U.S. Dollar against the foreign currencies within the factory currency exposure indices decreases NIKE’s U.S. Dollar inventory cost. Conversely, a weakening U.S. Dollar against the indexed foreign currencies increases our inventory cost.
|
|
•
|
Non-Functional Currency Denominated External Sales — A portion of our Western Europe and Central & Eastern Europe geography revenues, as well as a portion of our Converse European operations revenues, are earned in currencies other than the Euro (e.g. the British Pound) but are recognized at a subsidiary that uses the Euro as its functional currency. These sales generate a foreign currency exposure.
|
|
|
•
|
Other Costs — Non-functional currency denominated costs, such as endorsement contracts, also generate foreign currency risk, though to a lesser extent. In certain cases, the Company has also entered into other contractual agreements which have payments that are indexed to foreign currencies and create embedded derivative contracts that are recorded at fair value through
Other (income) expense, net
.
Refer to
Note 16 — Risk Management and Derivatives
in the accompanying Notes to the Consolidated Financial Statements for additional detail.
|
|
|
•
|
Non-Functional Currency Denominated Monetary Assets and Liabilities — Our global subsidiaries have various assets and liabilities, primarily receivables and payables, including intercompany receivables and payables, denominated in currencies other than their functional currencies. These balance sheet items are subject to re-measurement which may create fluctuations in
Other (income) expense, net
within our consolidated results of operations.
|
Managing Transactional Exposures
Transactional exposures are managed on a portfolio basis within our foreign currency risk management program. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and may also elect to use currency forward and option contracts to hedge a portion of the remaining effect of exchange rate fluctuations on probable forecasted future cash flows, including certain product cost purchase exposures, non-functional currency denominated external sales and other costs described above. Generally, these are accounted for as cash flow hedges in accordance with the accounting standards for derivatives and hedging, except for hedges of the embedded derivatives component of the product cost exposures as discussed below.
Certain currency forward contracts used to manage the foreign exchange exposure of non-functional currency denominated monetary assets and liabilities subject to re-measurement and the embedded derivative contracts discussed above are not formally designated as hedging instruments under the accounting standards for derivatives and hedging. Accordingly, changes in fair value of these instruments are immediately recognized in
Other (income) expense, net
and are intended to offset the foreign currency impact of the re-measurement of the related non-functional currency denominated asset or liability or the embedded derivative contract being hedged.
Refer to
Note 6 — Fair Value Measurements
and
Note 16 — Risk Management and Derivatives
in the accompanying Notes to the Consolidated Financial Statements for additional description of how the above financial instruments are valued and recorded as well as the fair value of outstanding derivatives at each reported period end.
Translational Exposures
Many of our foreign subsidiaries operate in functional currencies other than the U.S. Dollar. Fluctuations in currency exchange rates create volatility in our reported results as we are required to translate the balance sheets, operational results and cash flows of these subsidiaries into U.S. Dollars for consolidated reporting. The translation of foreign subsidiaries’ non-U.S. Dollar denominated balance sheets into U.S. Dollars for consolidated reporting results in a cumulative translation adjustment to
Accumulated other comprehensive income
within the Consolidated Statements of Shareholders’ Equity. In the translation of our Consolidated Statements of Income, a weaker U.S. Dollar in relation to foreign functional currencies benefits our consolidated earnings whereas a stronger U.S. Dollar reduces our consolidated earnings. The impact of foreign exchange rate fluctuations on the translation of our consolidated
Revenues
was a detriment of approximately $1,985 million and $1,171 million for the years ended May 31, 2016 and 2015, respectively. The impact of foreign exchange rate fluctuations on the translation of our
Income before income taxes
was a detriment of approximately $449 million and $221 million for the years ended May 31, 2016 and 2015, respectively.
Managing Translational Exposures
To minimize the impact of translating foreign currency denominated revenues and expenses into U.S. Dollars for consolidated reporting, certain foreign subsidiaries use excess cash to purchase U.S. Dollar denominated available-for-sale investments. The variable future cash flows associated with the purchase and subsequent sale of these U.S. Dollar denominated securities at non-U.S. Dollar functional currency subsidiaries creates a foreign currency exposure that qualifies for hedge accounting under the accounting standards for derivatives and hedging. We utilize forward contracts and/or options to mitigate the variability of the forecasted future purchases and sales of these U.S. Dollar investments. The combination of the purchase and sale of the U.S. Dollar investment and the hedging instrument has the effect of partially offsetting the year-over-year foreign currency translation impact on net earnings in the period the investments are sold. Hedges of available-for-sale investments are accounted for as cash flow hedges.
Refer to
Note 6 — Fair Value Measurements
and
Note 16 — Risk Management and Derivatives
in the accompanying Notes to the Consolidated Financial Statements for additional description of how the above financial instruments are valued and recorded as well as the fair value of outstanding derivatives at each reported period end.
We estimate the combination of 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 (income) expense, net
had an unfavorable impact of approximately $423 million and $73 million on our
Income before income taxes
for the years ended May 31, 2016 and 2015, respectively.
Net Investments in Foreign Subsidiaries
We are also exposed to the impact of foreign exchange fluctuations on our investments in wholly-owned foreign subsidiaries denominated in a currency other than the U.S. Dollar, which could adversely impact the U.S. Dollar value of these investments and therefore the value of future repatriated earnings. We have, in the past, hedged and may, in the future, hedge net investment positions in certain foreign subsidiaries to mitigate the effects of foreign exchange fluctuations on these net investments. These hedges are accounted for in accordance with the accounting standards for net investment hedges. There were no outstanding net investment hedges as of May 31, 2016 and 2015. There were no cash flows from net investment hedge settlements for the years ended May 31, 2016 and 2015.
|
|
Liquidity and Capital Resources
|
Cash Flow Activity
Cash provided by operations
was
$3,096 million
for
fiscal 2016
compared to
$4,680 million
for
fiscal 2015
. Our primary source of operating cash flow for
fiscal 2016
was
Net income
of
$3,760 million
. Our
fiscal 2016
change in working capital was a net cash
outflow
of
$1,580 million
as compared to a net cash
inflow
of
$256 million
for
fiscal 2015
. The change in working capital was primarily due to a net decrease in the amount of cash collateral received as a result of hedging activities (refer to the Credit Risk section of
Note 16 — Risk Management and Derivatives
for additional detail). For fiscal 2016, cash collateral received from counterparties declined $863 million as compared to an increase in collateral received from counterparties of $968 million for fiscal 2015.
Cash used by investing activities
was
$1,034 million
for
fiscal 2016
, compared to a
$175 million
use of cash for
fiscal 2015
. The primary driver of the increase in
Cash used by investing activities
was the net change in short-term investments (including sales, maturities and purchases) from net sales/maturities to net purchases. In fiscal 2016, there were
$57 million
of net purchases of short-term investments compared to
$935 million
of net sales/maturities of short-term investments in the same period of fiscal 2015.
Additions to property, plant and equipment
were
$1,143 million
for fiscal 2016 as compared to
$963 million
for fiscal 2015. The increase in
Additions to property, plant and equipment
resulted from continued investments in infrastructure to support current and future growth, primarily relating to supply chain and corporate initiatives, as well as expansion of our DTC operations.
In fiscal 2017, we plan to continue investing in our infrastructure to support future growth, as well as expand our digital capabilities. We anticipate investing approximately 4% of revenue, a portion of which will be used for the continued expansion of our corporate facilities, new DTC stores and digital capabilities.
Cash used by financing activities
was
$2,671 million
for
fiscal 2016
compared to
$2,790 million
for
fiscal 2015
, a decrease of $119 million, as increases in share repurchases and dividends were more than offset by the receipt of $981 million in net proceeds from the issuance of long-term debt in October 2015.
In
fiscal 2016
, we purchased
55.4 million
shares of NIKE’s Class B Common Stock for
$3,238 million
(an average price of $
58.44
). During the third quarter of fiscal 2016, we concluded the Company's four-year, $8 billion share repurchase program approved by our Board of Directors in September 2012. Under this program the Company purchased a total of 197.1 million shares at a cost of $8 billion (an average price of $40.58 per share). Following the completion of this program, the Company began purchases under a four-year, $12 billion program approved by our Board of Directors in November 2015. Of the total
55.4 million
shares repurchased in fiscal 2016,
20.1 million
shares were purchased under this new program at a cost of approximately
$1,189 million
(an average price of
$59.21
per share). We continue to expect funding of share repurchases will come from operating cash flow, excess cash and/or debt. The timing and the amount of shares purchased will be dictated by our capital needs and stock market conditions.
Capital Resources
On April 23, 2013, we filed a shelf registration statement (the "Shelf") with the SEC which permitted us to issue an unlimited amount of debt securities. On April 23, 2013, we issued $1.0 billion of senior notes with tranches maturing in 2023 and 2043. The 2023 senior notes were issued in an initial aggregate principal amount of $500 million at a 2.25% fixed, annual interest rate and will mature on May 1, 2023. The 2043 senior notes were issued in an initial aggregate principal amount of $500 million at a 3.625% fixed, annual interest rate and will mature on May 1, 2043. Interest on the senior notes is payable semi-annually on May 1 and November 1 of each year. The issuance resulted in gross proceeds before expenses of $998 million. On October 29, 2015, we issued an additional $1.0 billion of senior notes at a 3.875% fixed, annual interest rate that will mature on November 1, 2045. Interest on the senior notes is payable semi-annually on May 1 and November 1 of each year. The issuance resulted in proceeds before expenses of $991 million. The Shelf expired on April 23, 2016. We plan to file a new shelf registration statement with the SEC in July 2016.
On August 28, 2015, we entered into a committed credit facility agreement with a syndicate of banks, which provides for up to $2 billion of borrowings. The facility matures August 28, 2020, with a one year extension option prior to any anniversary of the closing date, provided that in no event shall it extend beyond August 28, 2022. This facility replaces the prior $1 billion credit facility agreement entered into on November 1, 2011, which would have matured November 1, 2017. As of and for the periods ended
May 31, 2016
and
2015
, we had no amounts outstanding under either committed credit facility.
We currently have long-term debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. If our long-term debt ratings were to decline, the facility fee and interest rate under our committed credit facility would increase. Conversely, if our long-term debt rating were to improve, the facility fee and interest rate would decrease. Changes in our long-term debt rating would not trigger acceleration of maturity of any then-outstanding borrowings or any future borrowings under the committed credit facility. Under this committed revolving credit facility, we have agreed to various covenants. These covenants include limits on our disposal of fixed assets, the amount of debt secured by liens we may incur, as well as limits on the indebtedness we can incur relative to our net worth. In the event we were to have any borrowings outstanding under this facility and failed to meet any covenant, and were unable to obtain a waiver from a majority of the banks in the syndicate, any borrowings would become immediately due and payable. As of
May 31, 2016
, we were in full compliance with each of these covenants and believe it is unlikely we will fail to meet any of these covenants in the foreseeable future.
Liquidity is also provided by our $2 billion commercial paper program, which increased $1 billion during the second quarter of fiscal 2016. During the year ended
May 31, 2016
, we did not issue commercial paper, and as of
May 31, 2016
, there were no outstanding borrowings under this program. Any future issuance of commercial paper or other debt securities during fiscal 2017 will depend on general corporate needs. We currently have short-term debt ratings of A1+ and P1 from Standard and Poor's Corporation and Moody's Investor Services, respectively.
As of
May 31, 2016
, we had cash, cash equivalents and short-term investments totaling
$5.5 billion
, of which
$4.6 billion
was held by our foreign subsidiaries. Included in
Cash and equivalents
as of May 31, 2016 was
$105 million
of cash collateral received from counterparties as a result of hedging activity.
Cash equivalents
and
Short-term investments
consist primarily of deposits held at major banks, money market funds, commercial paper, corporate notes, U.S. Treasury obligations, U.S. government sponsored enterprise obligations and other investment grade fixed income securities. Our fixed income investments are exposed to both credit and interest rate risk. All of our investments are investment grade to minimize our credit risk. While individual securities have varying durations, as of
May 31, 2016
, the weighted average remaining duration of our cash equivalents and short-term investments portfolio was
91
days.
To date we have not experienced difficulty accessing the credit markets or incurred higher interest costs. Future volatility in the capital markets, however, may increase costs associated with issuing commercial paper or other debt instruments or affect our ability to access those markets. We believe that existing cash, cash equivalents, short-term investments and cash generated by operations, together with access to external sources of funds as described above, will be sufficient to meet our domestic and foreign capital needs in the foreseeable future.
We utilize a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where they are needed. We routinely repatriate a portion of our foreign earnings for which U.S. taxes have previously been provided. We also indefinitely reinvest a significant portion of our foreign earnings, and our current plans do not demonstrate a need to repatriate these earnings. Should we require additional capital in the United States, we may elect to repatriate indefinitely reinvested foreign funds or raise capital in the United States through debt. If we were to repatriate indefinitely reinvested foreign funds, we would be required to accrue and pay additional U.S. taxes less applicable foreign tax credits. If we elect to raise capital in the United States through debt, we would incur additional interest expense
.
Off-Balance Sheet Arrangements
In connection with various contracts and agreements, we routinely provide indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where we are acting as the guarantor. Currently, we have several such agreements in place. However, based on our historical experience and the estimated probability of future loss, we have determined that the fair value of such indemnification is not material to our financial position or results of operations.
Contractual Obligations
Our significant long-term contractual obligations as of
May 31, 2016
and significant endorsement contracts, including related marketing commitments, entered into through the date of this report are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Commitment
|
|
Cash Payments Due During the Year Ending May 31,
|
(In millions)
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
|
Total
|
Operating Leases
|
|
$
|
491
|
|
|
$
|
453
|
|
|
$
|
395
|
|
|
$
|
347
|
|
|
$
|
301
|
|
|
$
|
1,244
|
|
|
$
|
3,231
|
|
Capital Leases
|
|
7
|
|
|
5
|
|
|
2
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
15
|
|
Long-Term Debt
(1)
|
|
115
|
|
|
75
|
|
|
74
|
|
|
74
|
|
|
71
|
|
|
3,365
|
|
|
3,774
|
|
Endorsement Contracts
(2)
|
|
1,198
|
|
|
1,238
|
|
|
945
|
|
|
827
|
|
|
698
|
|
|
4,514
|
|
|
9,420
|
|
Product Purchase Obligations
(3)
|
|
4,149
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,149
|
|
Other Purchase Obligations
(4)
|
|
384
|
|
|
118
|
|
|
90
|
|
|
48
|
|
|
42
|
|
|
90
|
|
|
772
|
|
TOTAL
|
|
$
|
6,344
|
|
|
$
|
1,889
|
|
|
$
|
1,506
|
|
|
$
|
1,297
|
|
|
$
|
1,112
|
|
|
$
|
9,213
|
|
|
$
|
21,361
|
|
|
|
(1)
|
The cash payments due for long-term debt include estimated interest payments. Estimates of interest payments are based on outstanding principal amounts, applicable fixed interest rates or currently effective interest rates as of
May 31, 2016
(if variable), timing of scheduled payments and the term of the debt obligations.
|
|
|
(2)
|
The amounts listed for endorsement contracts represent approximate amounts of base compensation and minimum guaranteed royalty fees we are obligated to pay athlete, sport team and league endorsers of our products. Actual payments under some contracts may be higher than the amounts listed as these contracts provide for bonuses to be paid to the endorsers based upon athletic achievements and/or royalties on product sales in future periods. Actual payments under some contracts may also be lower as these contracts include provisions for reduced payments if athletic performance declines in future periods.
|
In addition to the cash payments, we are obligated to furnish our endorsers with NIKE product for their use. It is not possible to determine how much we will spend on this product on an annual basis as the contracts generally do not stipulate a specific amount of cash to be spent on the product. The amount of product provided to the endorsers will depend on many factors, including general playing conditions, the number of sporting events in which they participate and our own decisions regarding product and marketing initiatives. In addition, the costs to design, develop, source and purchase the products furnished to the endorsers are incurred over a period of time and are not necessarily tracked separately from similar costs incurred for products sold to customers.
|
|
(3)
|
We generally order product at least four to five months in advance of sale based primarily on futures orders received from external wholesale customers and internal orders from our DTC in-line stores and e-commerce operations. The amounts listed for product purchase obligations represent agreements (including open purchase orders) to purchase products in the ordinary course of business that are enforceable and legally binding and that specify all significant terms. In some cases, prices are subject to change throughout the production process.
|
|
|
(4)
|
Other purchase obligations primarily include service and marketing commitments, including marketing commitments associated with endorsement contracts, made in the ordinary course of business. The amounts represent the minimum payments required by legally binding contracts and agreements that specify all significant terms, including open purchase orders for non-product purchases.
|
In addition to the above, we have long-term obligations for uncertain tax positions and various post-retirement benefits for which we are not able to reasonably estimate when cash payments will occur. Refer to
Note 9 — Income Taxes
and
Note 13 — Benefit Plans
in the accompanying Notes to the Consolidated Financial Statements for further information related to uncertain tax positions and post-retirement benefits, respectively.
We also have the following outstanding short-term debt obligations as of
May 31, 2016
. Refer to
Note 7 — Short-Term Borrowings and Credit Lines
in the accompanying Notes to the Consolidated Financial Statements for further description and interest rates related to the short-term debt obligations listed below.
|
|
|
|
|
|
Outstanding as of
|
(In millions)
|
May 31, 2016
|
Notes payable, due at mutually agreed-upon dates within one year of issuance or on demand
|
$
|
1
|
|
Payable to Sojitz America for the purchase of inventories, generally due 60 days after shipment of goods from a foreign port
|
39
|
|
As of
May 31, 2016
, the Company had letters of credit outstanding totaling
$157 million
. These letters of credit were issued primarily for the purchase of inventory and as guarantees of the Company’s performance under certain self-insurance and other programs.
|
|
New Accounting Pronouncements
|
Refer to
Note 1 — Summary of Significant Accounting Policies
in the accompanying Notes to the Consolidated Financial Statements for recently adopted and recently issued accounting standards.
|
|
Critical Accounting Policies
|
Our previous discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.
We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the policies for revenue recognition, the allowance for uncollectible accounts receivable, inventory reserves and contingent payments under endorsement contracts. These policies require that we make estimates in the preparation of our financial statements as of a given date. However, since our business cycle is relatively short, actual results related to these estimates are generally known within the six-month period following the financial statement date. Thus, these policies generally affect only the timing of reported amounts across two to three fiscal quarters.
Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.
Revenue Recognition
We record wholesale revenues when title passes and the risks and rewards of ownership have passed to the customer, based on the terms of sale. Title passes generally upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Retail store revenues are recorded at the time of sale and online store revenues are recorded upon delivery to the customer.
In some instances, we ship product directly from our supplier to the customer and recognize revenue when the product is delivered to and accepted by the customer. Our revenues may fluctuate in cases when our customers delay accepting shipment of product for periods of up to several weeks.
In certain countries outside of the United States, precise information regarding the date of receipt by the customer is not readily available. In these cases, we estimate the date of receipt by the customer based upon historical delivery times by geographic location. On the basis of our tests of actual transactions, we have no indication that these estimates have been materially inaccurate historically.
As part of our revenue recognition policy, we record estimated sales returns, discounts and miscellaneous claims from customers as reductions to revenues at the time revenues are recorded. Our post invoice sales discounts consist of contractual programs with certain customers or discretionary discounts that are expected to be granted to certain customers at a later date. We base our estimates on (1) historical rates of product returns, discounts and claims, (2) specific identification of outstanding claims and outstanding returns not yet received from customers and (3) estimated returns, discounts and claims expected but not yet finalized with our customers. Actual returns, discounts and claims in any future period are inherently uncertain and thus may differ from our estimates. If actual or expected future returns, discounts and claims are significantly greater or lower than established reserves, we record a reduction or increase to net revenues in the period in which we make such determination.
Allowance for Uncollectible Accounts Receivable
We make ongoing estimates relating to the ability to collect our accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the allowance, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Since we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger allowance might be required. In the event we determine that a smaller or larger allowance is appropriate, we would record a credit or a charge to
Operating overhead expense
in the period in which such a determination is made.
Inventory Reserves
We also make ongoing estimates relating to the net realizable value of inventories based upon our assumptions about future demand and market conditions. If we estimate that the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to
Cost of sales
. If changes in market conditions result in reductions in the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination and record a charge to
Cost of sales
.
Contingent Payments under Endorsement Contracts
A significant portion of our
Demand creation expense
relates to payments under endorsement contracts. In general, endorsement payments are expensed uniformly over the term of the contract. However, certain contract elements may be accounted for differently, based upon the facts and circumstances of each individual contract.
Certain contracts provide for contingent payments to endorsers based upon specific achievements in their sports (e.g., winning a championship). We record demand creation expense for these amounts when the endorser achieves the specific goal.
Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When we determine payments are probable, the amounts are recorded in
Demand creation expense
ratably over the contract period based on our best estimate of the endorser's performance. In these instances, to the extent that actual payments to the endorser differ from our estimate due to changes in the endorser’s performance, increased or decreased
Demand creation expense
may be recorded in a future period.
Certain contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products. We expense these payments in
Cost of sales
as the related sales occur. In certain contracts, we offer minimum guaranteed royalty payments. For contracts for which we estimate we will not meet the minimum guaranteed amount of royalty fees through sales of product, we record the amount of the guaranteed payment in excess of that earned through sales of product in
Demand creation expense
uniformly over the contract term.
Property, Plant and Equipment and Definite-Lived Assets
Property, plant and equipment, including buildings, equipment and computer hardware and software are recorded at cost (including, in some cases, the cost of internal labor) and are depreciated over the estimated useful life. Changes in circumstances (such as technological advances or changes to our business operations) can result in differences between the actual and estimated useful lives. In those cases where we determine that the useful life of a long-lived asset should be shortened, we increase depreciation expense over the remaining useful life to depreciate the asset’s net book value to its salvage value.
We review the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies that would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset group’s carrying amount and its estimated fair value.
Goodwill and Indefinite-Lived Intangible Assets
We perform annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of each fiscal year or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below its carrying value. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, planned divestitures or an expectation that the carrying amount may not be recoverable, among other factors. We may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we determine that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, the two-step impairment test is unnecessary. The two-step impairment test requires us to estimate the fair value of our reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and we proceed to step two of the impairment analysis. In step two of the analysis, we measure and record an impairment loss equal to the excess of the carrying value of the reporting unit's goodwill over its implied fair value, if any.
We generally base our measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and the market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows that we expect the reporting unit to generate in the future. Our significant estimates in the discounted cash flows model include: our weighted average cost of capital; long-term rate of growth and profitability of the reporting unit's business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the reporting unit to comparable publicly traded companies in similar lines of business. Significant estimates in the market valuation approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit.
Indefinite-lived intangible assets primarily consist of acquired trade names and trademarks. We may first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, we determine that it is more likely than not that the indefinite-lived intangible asset is not impaired, no quantitative fair value measurement is necessary. If a quantitative fair value measurement calculation is required for these intangible assets, we utilize the relief-from-royalty method. This method assumes that trade names and trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital.
Fair Value Measurements
For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine the fair values of our financial instruments. This pricing methodology applies to our Level 1 investments, including U.S. Treasury securities.
In the absence of active markets for identical assets or liabilities, such measurements involve developing assumptions based on market observable data, including quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. This pricing methodology applies to our Level 2 investments such as time deposits, commercial paper and bonds, U.S. Agency securities and money market funds.
Level 3 investments are valued using internally developed models with unobservable inputs. Assets and liabilities measured using unobservable inputs are an immaterial portion of our portfolio.
A majority of our available-for-sale securities are priced by pricing vendors and are generally Level 1 or Level 2 investments as these vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. Our fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include a comparison to another independent pricing vendor.
Hedge Accounting for Derivatives
We use derivative contracts to hedge certain anticipated foreign currency and interest rate transactions as well as certain non-functional currency monetary assets and liabilities. When the specific criteria to qualify for hedge accounting has been met, changes in the fair value of contracts hedging probable forecasted future cash flows are recorded in
Other comprehensive income
, rather than
Net income
, until the underlying hedged transaction affects
Net income
. In most cases, this results in gains and losses on hedge derivatives being released from
Other comprehensive income
into
Net income
sometime after the maturity of the derivative. One of the criteria for this accounting treatment is that the notional value of these derivative contracts should not be in excess of specifically identified anticipated transactions. By their very nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When anticipated transaction estimates or actual transaction amounts decline below hedged levels, or if it is no longer probable that a forecasted transaction will occur by the end of the originally specified time period or within an additional two-month period of time thereafter, we are required to reclassify the cumulative change in fair value of the over-hedged portion of the related hedge contract from
Other comprehensive income
to
Other (income) expense, net
during the quarter in which the decrease occurs.
We have used in the past, and may use in the future, forward contracts or options to hedge our investment in the net assets of certain international subsidiaries to offset foreign currency translation related to our net investment in those subsidiaries. The change in fair value of the forward contracts or options hedging our net investments is reported in the cumulative translation adjustment component of
Accumulated other comprehensive income
within
Total shareholders’ equity
, to the extent effective, to offset the foreign currency translation adjustments on those investments. As the value of our underlying net investments in wholly-owned international subsidiaries is known at the time a hedge is placed, the designated hedge is matched to the portion of our net investment at risk. Accordingly, the variability involved in net investment hedges is substantially less than that of other types of hedge transactions and we do not expect any material ineffectiveness. We consider, on a quarterly basis, the need to redesignate existing hedge relationships based on changes in the underlying net investment. Should the level of our net investment decrease below hedged levels, the cumulative change in fair value of the over-hedged portion of the related hedge contract would be reported as
Other (income) expense, net
during the period in which changes occur.
Stock-based Compensation
We account for stock-based compensation by estimating the fair value of stock-based compensation on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the input of highly subjective assumptions including volatility. Expected volatility is estimated based on implied volatility in market traded options on our common stock with a term greater than one year, along with other factors. Our decision to use implied volatility was based on the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. If factors change and we use different assumptions for estimating stock-based compensation expense in future periods, stock-based compensation expense may differ materially in the future from that recorded in the current period.
Income Taxes
We record valuation allowances against our deferred tax assets, when necessary. Realization of deferred tax assets (such as net operating loss carry-forwards) is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our net deferred tax asset, which increases our
Income tax expense
in the period when such determination is made.
In addition, we have not recorded U.S. income tax expense for foreign earnings that we have determined to be indefinitely reinvested outside the United States, thus reducing our overall
Income tax expense
. The amount of earnings designated as indefinitely reinvested offshore is based upon the actual deployment of such earnings in our offshore assets and our expectations of the future cash needs of our U.S. and foreign entities. Income tax considerations are also a factor in determining the amount of foreign earnings to be indefinitely reinvested offshore.
We carefully review all factors that drive the ultimate disposition of foreign earnings determined to be reinvested offshore and apply stringent standards to overcome the presumption of repatriation. Despite this approach, because the determination involves our future plans and expectations of future events, the possibility exists that amounts declared as indefinitely reinvested offshore may ultimately be repatriated. For instance, the actual cash needs of our U.S. entities may exceed our current expectations, or the actual cash needs of our foreign entities may be less than our current expectations. This would result in additional
Income tax expense
in the year we determined that amounts were no longer indefinitely reinvested offshore. Conversely, our approach may also result in a determination that accumulated foreign earnings (for which U.S. income taxes have been provided) will be indefinitely reinvested offshore. In this case, our
Income tax expense
would be reduced in the year of such determination.
On an interim basis, we estimate what our effective tax rate will be for the full fiscal year. This estimated annual effective tax rate is then applied to the year-to-date
Income before income taxes
excluding infrequently occurring or unusual items, to determine the year-to-date
Income tax expense
. The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs.
On a quarterly basis, we evaluate the probability that a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to income tax matters in
Income tax expense
.
Other Contingencies
In the ordinary course of business, we are involved in legal proceedings regarding contractual and employment relationships, product liability claims, trademark rights and a variety of other matters. We record contingent liabilities resulting from claims against us, including related legal costs, when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If future adjustments to estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges during the period in which the actual loss or change in estimate occurred. In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will materially exceed the recorded liability. While we cannot predict the outcome of pending legal matters with certainty, we do not believe any currently identified claim, proceeding or litigation, either individually or in aggregate, will have a material impact on our results of operations, financial position or cash flows.