Total Selling and Administrative Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
Demand creation expense
(1)
|
|
$
|
804
|
|
|
$
|
731
|
|
|
10
|
%
|
|
$
|
2,405
|
|
|
$
|
2,394
|
|
|
0
|
%
|
Operating overhead expense
|
|
1,762
|
|
|
1,648
|
|
|
7
|
%
|
|
5,298
|
|
|
4,903
|
|
|
8
|
%
|
Total selling and administrative expense
|
|
$
|
2,566
|
|
|
$
|
2,379
|
|
|
8
|
%
|
|
$
|
7,703
|
|
|
$
|
7,297
|
|
|
6
|
%
|
% of Revenues
|
|
31.9
|
%
|
|
31.9
|
%
|
|
—
|
|
|
31.9
|
%
|
|
32.0
|
%
|
|
(10) 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.
|
Demand creation expense
increased 10% for the third quarter of fiscal 2016 due to higher advertising, marketing and digital brand marketing costs, primarily to support key sporting and brand events, including Super Bowl 50, and other initiatives, as well as increased investments in DTC marketing. For the third quarter, changes in foreign currency exchange rates reduced growth in
Demand creation expense
by approximately 6 percentage points. For the first nine months of fiscal 2016,
Demand creation expense
was mostly flat as investments in DTC and higher marketing costs to support key sporting and brand events were offset by lower advertising and other demand creation expenses, as well as changes in foreign currency exchange rates, which reduced growth by 7 percentage points.
Operating overhead expense
increased 7% and 8% for the third quarter and first nine months of fiscal 2016, respectively. The increases for both periods were driven by continued growth in our DTC business, as well as ongoing investments in operational infrastructure and consumer-focused digital capabilities. These increases were partially offset for both periods by lower performance-based compensation. Changes in foreign currency exchange rates reduced the growth in
Operating overhead expense
by approximately 4 and 5 percentage points for the third quarter and first nine months of fiscal 2016, respectively.
Other (Income) Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In millions)
|
|
February 29, 2016
|
|
February 28, 2015
|
|
February 29, 2016
|
|
February 28, 2015
|
Other (income) expense, net
|
|
$
|
(17
|
)
|
|
$
|
(5
|
)
|
|
$
|
(82
|
)
|
|
$
|
—
|
|
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.
For the third quarter of fiscal 2016,
Other (income) expense, net
increased from $5 million of other income, net in the prior year to $17 million of other income, net in the current year, primarily due to a $7 million net change in foreign currency conversion gains and losses
and other non-operating items.
For the first nine months of fiscal 2016
, Other (income) expense, net
increased to $82 million of other income, net, primarily due to a $49 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 other non-operating items.
We estimate the combination of the translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in
Other (income) expense, net
had unfavorable impacts of approximately $97 million and $358 million on our
Income before income taxes
for the third quarter and first nine months of fiscal 2016, respectively.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
Effective tax rate
|
|
16.3
|
%
|
|
24.4
|
%
|
|
(810) bps
|
|
|
17.9
|
%
|
|
23.6
|
%
|
|
(570) bps
|
|
Our effective tax rate for the
third quarter
of fiscal 2016 was
810 basis points
lower than the prior year period 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, increased recognition of foreign tax credits, adjustments to tax expense on intercompany transactions in the prior year, and the retroactive and permanent reinstatement of the U.S. research and development tax credit.
Our effective tax rate for the first nine months of fiscal 2016 was 570 basis points lower than the prior year period 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, increased recognition of foreign tax credits, and adjustments to tax expense on intercompany transactions in the prior year period. These factors were partially offset by benefits from the resolution of tax audits across several jurisdictions in the prior year period.
We anticipate the effective tax rate for the full fiscal year will be approximately 19%.
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 months in advance of the future selling season 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 29, 2016
|
|
February 28, 2015
(1)
|
|
% Change
|
|
% Change Excluding Currency Changes
(2)
|
|
February 29, 2016
|
|
February 28, 2015
(1)
|
|
% Change
|
|
% Change Excluding Currency Changes
(2)
|
North America
|
|
$
|
3,683
|
|
|
$
|
3,254
|
|
|
13
|
%
|
|
14
|
%
|
|
$
|
11,029
|
|
|
$
|
10,008
|
|
|
10
|
%
|
|
11
|
%
|
Western Europe
|
|
1,442
|
|
|
1,413
|
|
|
2
|
%
|
|
12
|
%
|
|
4,382
|
|
|
4,438
|
|
|
-1
|
%
|
|
13
|
%
|
Central & Eastern Europe
|
|
359
|
|
|
321
|
|
|
12
|
%
|
|
29
|
%
|
|
1,086
|
|
|
1,061
|
|
|
2
|
%
|
|
23
|
%
|
Greater China
|
|
982
|
|
|
801
|
|
|
23
|
%
|
|
27
|
%
|
|
2,806
|
|
|
2,238
|
|
|
25
|
%
|
|
29
|
%
|
Japan
|
|
205
|
|
|
166
|
|
|
23
|
%
|
|
27
|
%
|
|
589
|
|
|
525
|
|
|
12
|
%
|
|
26
|
%
|
Emerging Markets
|
|
879
|
|
|
955
|
|
|
-8
|
%
|
|
11
|
%
|
|
2,829
|
|
|
2,964
|
|
|
-5
|
%
|
|
14
|
%
|
Global Brand Divisions
(3)
|
|
17
|
|
|
29
|
|
|
-41
|
%
|
|
-35
|
%
|
|
61
|
|
|
85
|
|
|
-28
|
%
|
|
-19
|
%
|
Total NIKE Brand Revenues
|
|
7,567
|
|
|
6,939
|
|
|
9
|
%
|
|
15
|
%
|
|
22,782
|
|
|
21,319
|
|
|
7
|
%
|
|
14
|
%
|
Converse
|
|
489
|
|
|
538
|
|
|
-9
|
%
|
|
-5
|
%
|
|
1,442
|
|
|
1,547
|
|
|
-7
|
%
|
|
-2
|
%
|
Corporate
(4)
|
|
(24
|
)
|
|
(17
|
)
|
|
—
|
|
|
—
|
|
|
(92
|
)
|
|
(44
|
)
|
|
—
|
|
|
—
|
|
TOTAL NIKE, INC. REVENUES
|
|
$
|
8,032
|
|
|
$
|
7,460
|
|
|
8
|
%
|
|
14
|
%
|
|
$
|
24,132
|
|
|
$
|
22,822
|
|
|
6
|
%
|
|
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 Unaudited Condensed Consolidated Statements of Income. As discussed in
Note 12 — Operating Segments
in the accompanying Notes to the Unaudited Condensed 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 29, 2016
|
|
February 28, 2015
(1)
|
|
% Change
|
|
February 29, 2016
|
|
February 28, 2015
(1)
|
|
% Change
|
North America
|
|
$
|
903
|
|
|
$
|
830
|
|
|
9
|
%
|
|
$
|
2,827
|
|
|
$
|
2,585
|
|
|
9
|
%
|
Western Europe
|
|
334
|
|
|
333
|
|
|
0
|
%
|
|
1,126
|
|
|
998
|
|
|
13
|
%
|
Central & Eastern Europe
|
|
69
|
|
|
52
|
|
|
33
|
%
|
|
243
|
|
|
178
|
|
|
37
|
%
|
Greater China
|
|
358
|
|
|
251
|
|
|
43
|
%
|
|
1,015
|
|
|
727
|
|
|
40
|
%
|
Japan
|
|
36
|
|
|
22
|
|
|
64
|
%
|
|
119
|
|
|
62
|
|
|
92
|
%
|
Emerging Markets
|
|
202
|
|
|
234
|
|
|
-14
|
%
|
|
701
|
|
|
626
|
|
|
12
|
%
|
Global Brand Divisions
|
|
(625
|
)
|
|
(552
|
)
|
|
-13
|
%
|
|
(1,874
|
)
|
|
(1,640
|
)
|
|
-14
|
%
|
Total NIKE Brand
|
|
1,277
|
|
|
1,170
|
|
|
9
|
%
|
|
4,157
|
|
|
3,536
|
|
|
18
|
%
|
Converse
|
|
127
|
|
|
163
|
|
|
-22
|
%
|
|
359
|
|
|
437
|
|
|
-18
|
%
|
Corporate
|
|
(264
|
)
|
|
(281
|
)
|
|
6
|
%
|
|
(952
|
)
|
|
(796
|
)
|
|
-20
|
%
|
TOTAL CONSOLIDATED EARNINGS BEFORE INTEREST AND TAXES
|
|
1,140
|
|
|
1,052
|
|
|
8
|
%
|
|
3,564
|
|
|
3,177
|
|
|
12
|
%
|
Interest expense (income), net
|
|
5
|
|
|
6
|
|
|
—
|
|
|
14
|
|
|
24
|
|
|
—
|
|
TOTAL CONSOLIDATED INCOME BEFORE INCOME TAXES
|
|
$
|
1,135
|
|
|
$
|
1,046
|
|
|
9
|
%
|
|
$
|
3,550
|
|
|
$
|
3,153
|
|
|
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.
|
North America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
$
|
2,404
|
|
|
$
|
2,081
|
|
|
16
|
%
|
|
16
|
%
|
|
$
|
6,932
|
|
|
$
|
6,189
|
|
|
12
|
%
|
|
13
|
%
|
Apparel
|
|
1,115
|
|
|
988
|
|
|
13
|
%
|
|
14
|
%
|
|
3,583
|
|
|
3,223
|
|
|
11
|
%
|
|
12
|
%
|
Equipment
|
|
164
|
|
|
185
|
|
|
-11
|
%
|
|
-11
|
%
|
|
514
|
|
|
596
|
|
|
-14
|
%
|
|
-13
|
%
|
TOTAL REVENUES
|
|
$
|
3,683
|
|
|
$
|
3,254
|
|
|
13
|
%
|
|
14
|
%
|
|
$
|
11,029
|
|
|
$
|
10,008
|
|
|
10
|
%
|
|
11
|
%
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Wholesale Customers
|
|
$
|
2,597
|
|
|
$
|
2,378
|
|
|
9
|
%
|
|
10
|
%
|
|
$
|
8,024
|
|
|
$
|
7,427
|
|
|
8
|
%
|
|
9
|
%
|
Sales Direct to Consumer
|
|
1,086
|
|
|
876
|
|
|
24
|
%
|
|
25
|
%
|
|
3,005
|
|
|
2,581
|
|
|
16
|
%
|
|
17
|
%
|
TOTAL REVENUES
|
|
$
|
3,683
|
|
|
$
|
3,254
|
|
|
13
|
%
|
|
14
|
%
|
|
$
|
11,029
|
|
|
$
|
10,008
|
|
|
10
|
%
|
|
11
|
%
|
EARNINGS BEFORE INTEREST AND TAXES
|
|
$
|
903
|
|
|
$
|
830
|
|
|
9
|
%
|
|
|
|
$
|
2,827
|
|
|
$
|
2,585
|
|
|
9
|
%
|
|
|
Excluding changes in currency exchange rates, North America revenues for the third quarter and first nine months of fiscal 2016 increased 14% and 11%, respectively, due to strong demand for NIKE Brand products across nearly all key categories, led by Sportswear, the Jordan Brand, Running and Men's Training. For the third quarter of fiscal 2016, DTC revenues grew 25%, driven by strong online sales growth, comparable store sales growth of 9% and the addition of new stores. DTC revenues increased 17% for the first nine months of fiscal 2016, fueled by online sales growth, the addition of new stores and comparable store sales growth of 5%.
Footwear revenue growth for both the third quarter and first nine months of fiscal 2016 was driven by higher revenues in most key categories, led by the Jordan Brand, Sportswear and Running, partially offset by declines in NIKE Basketball. Third quarter unit sales of footwear increased approximately 17%, while decreases in average selling price per pair reduced footwear revenue growth by approximately 1 percentage point as increases in the proportion of revenues from our higher-priced DTC business were offset by unfavorable off-price mix and shifts in mix to lower-priced products. For the first nine months of fiscal 2016, unit sales of footwear increased approximately 11% and increases in average selling price per pair contributed approximately 2 percentage points of footwear revenue growth. The increase in average selling price per pair for the first nine months of fiscal 2016 was attributable to growth in our higher-priced DTC business and shifts in mix to higher-priced products, partially offset by unfavorable off-price mix.
The increases in apparel revenues for the third quarter and first nine months of fiscal 2016 were fueled by growth in most key categories, led by Sportswear, Men's Training and Women's Training. Unit sales of apparel for the third quarter of fiscal 2016 increased approximately 17%, while decreases in average selling price per unit reduced apparel revenue growth by approximately 3 percentage points. The decrease in average selling price per unit was due to unfavorable off-price mix, partially offset by growth in our higher-priced DTC business. For the first nine months of fiscal 2016, unit sales of apparel increased approximately 12%, while average selling price per unit was flat.
EBIT grew 9% for the third quarter of fiscal 2016, as revenue growth was offset by lower gross margin and higher selling and administrative expenses. Gross margin decreased 70 basis points primarily driven by lower average selling prices, higher inventory obsolescence and unfavorable off-price mix as we work to clear excess inventories, as well as higher warehousing costs. Selling and administrative expense increased as a percent of revenue due to higher demand creation resulting from higher advertising and marketing costs, primarily to support key sporting and brand events, as well as higher sports marketing costs. Operating overhead declined as a percent of revenue, but grew due to increased support for our growing DTC business and higher bad debt expense relating to the bankruptcy of a customer, partially offset by lower performance-based compensation.
EBIT for the first nine months of fiscal 2016 increased 9% as higher revenues and selling and administrative expense leverage were offset by lower gross margin. Gross margin decreased 40 basis points for the first nine months of fiscal 2016 as higher warehousing costs, inventory obsolescence, unfavorable off-price mix and higher product input costs more than offset higher average selling prices. Selling and administrative expense decreased as a percent of revenue despite higher demand creation costs, primarily for sports marketing. Operating overhead remained flat as a percent of revenue, as increased investments to support DTC growth and higher bad debt expense were offset by lower performance-based compensation.
Inventories in North America remain somewhat elevated as of the third quarter due to supply chain challenges we have experienced dating back to the congestion at the ports on the West Coast of the United States in the prior year and continuing through our expansion of capacity and implementation of new capabilities in our distribution centers in Memphis, Tennessee. However, our supply chain challenges are improving and product flow is normalizing.
Western Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
$
|
985
|
|
|
$
|
985
|
|
|
0
|
%
|
|
10
|
%
|
|
$
|
2,958
|
|
|
$
|
2,976
|
|
|
-1
|
%
|
|
14
|
%
|
Apparel
|
|
392
|
|
|
361
|
|
|
9
|
%
|
|
19
|
%
|
|
1,217
|
|
|
1,242
|
|
|
-2
|
%
|
|
12
|
%
|
Equipment
|
|
65
|
|
|
67
|
|
|
-3
|
%
|
|
7
|
%
|
|
207
|
|
|
220
|
|
|
-6
|
%
|
|
7
|
%
|
TOTAL REVENUES
|
|
$
|
1,442
|
|
|
$
|
1,413
|
|
|
2
|
%
|
|
12
|
%
|
|
$
|
4,382
|
|
|
$
|
4,438
|
|
|
-1
|
%
|
|
13
|
%
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Wholesale Customers
|
|
$
|
1,078
|
|
|
$
|
1,098
|
|
|
-2
|
%
|
|
8
|
%
|
|
$
|
3,335
|
|
|
$
|
3,511
|
|
|
-5
|
%
|
|
9
|
%
|
Sales Direct to Consumer
|
|
364
|
|
|
315
|
|
|
16
|
%
|
|
27
|
%
|
|
1,047
|
|
|
927
|
|
|
13
|
%
|
|
28
|
%
|
TOTAL REVENUES
|
|
$
|
1,442
|
|
|
$
|
1,413
|
|
|
2
|
%
|
|
12
|
%
|
|
$
|
4,382
|
|
|
$
|
4,438
|
|
|
-1
|
%
|
|
13
|
%
|
EARNINGS BEFORE INTEREST AND TAXES
|
|
$
|
334
|
|
|
$
|
333
|
|
|
0
|
%
|
|
|
|
$
|
1,126
|
|
|
$
|
998
|
|
|
13
|
%
|
|
|
On a currency-neutral basis, Western Europe revenues for the third quarter and first nine months of fiscal 2016 increased 12% and 13%, respectively, due to higher revenues in every territory. Revenue growth for the third quarter was led by our largest territory, the UK & Ireland, which grew 14%, and France, AGS (Austria, Germany and Switzerland) and Southern Europe (which includes Italy, Spain and Portugal), which grew 20%, 10% and 12%, respectively. For the first nine months of fiscal 2016, revenue growth was also broad-based, with increases in AGS, UK & Ireland and Southern Europe of 15%, 11% and 13%, respectively. On a category basis, revenues grew in nearly all key categories for the third quarter and first nine months of fiscal 2016 led by Sportswear and the Jordan Brand. DTC revenues grew 27% for the third quarter of fiscal 2016, driven by strong online sales growth, comparable store sales growth of 10% and the addition of new stores. DTC revenues grew 28% for the first nine months of fiscal 2016, fueled by comparable store sales growth of 13%, online sales growth and the addition of new stores.
Constant currency footwear revenue growth for the third quarter and first nine months of fiscal 2016 reflects increases in most key categories, led by Sportswear and the Jordan Brand. For the third quarter and first nine months of fiscal 2016, unit sales of footwear increased approximately 6% and 9%, respectively, and increases in average selling price per pair contributed approximately 4 and 5 percentage points of footwear revenue growth for the respective periods. The increase in average selling price per pair for the third quarter was attributable to increases in the proportion of revenues from our higher-priced DTC business and shifts in mix to higher-priced products, partially offset by unfavorable off-price mix. The increase in average selling price per pair for the first nine months of fiscal 2016 was due to shifts in mix to higher-priced products and growth in DTC.
The constant currency apparel revenue growth for the third quarter and first nine months of fiscal 2016 was due to higher revenues in nearly every key category, most notably Sportswear, while Football (Soccer) declined for the year-to-date period due to the expiration of certain club endorsement agreements and comparisons to higher World Cup-related revenues in the first quarter of fiscal 2015. Unit sales of apparel for the third quarter and first nine months of fiscal 2016 increased approximately 13% and 10%, respectively, and average selling price per unit contributed approximately 6 and 2 percentage points of apparel revenue growth for the respective periods. The increase in average selling price per unit for the third quarter was primarily due to the favorable impact of increases in the proportion of revenues from our higher-priced DTC business and shifts in mix to higher-priced products, partially offset by unfavorable off-price mix. For the first nine months of fiscal 2016, the increase in average selling price per unit was due to the favorable impact of increases in the proportion of revenues from our higher-priced DTC business.
On a reported basis, EBIT was flat for the third quarter of fiscal 2016, primarily due to the negative translation impact from changes in foreign currency exchange rates, most notably the Euro. Reported revenue growth of 2% and selling and administrative expense leverage was offset by lower gross margin. Gross margin declined 190 basis points for the third quarter of fiscal 2016 primarily driven by the significant effects of unfavorable standard foreign currency exchange rates, which more than offset shifts in mix to lower-cost products, the favorable impact of growth in our higher-margin DTC business and higher average selling prices. Selling and administrative expense was lower as a percent of revenues despite higher operating overhead, primarily reflecting increased investments in our growing DTC business. Demand creation decreased due to lower sports marketing costs and a shift in the timing of expenses related to digital brand marketing and advertising which was more heavily weighted in the first-half of fiscal 2016 compared to the prior year, partially offset by increased spending to support our DTC business.
Reported EBIT grew 13% for the first nine months of fiscal 2016, despite the weaker Euro. Lower reported revenues, which declined 1%, were more than offset by gross margin expansion, selling and administrative expense leverage and the favorable settlement of a legal judgment related to a bankruptcy case reflected in
Other (income) expense, net
in the second quarter. Gross margin expanded 130 basis points for the first nine months of fiscal 2016 due to shifts in mix to lower-cost products, higher average selling prices and lower third party royalties. These increases were partially offset by the impact of unfavorable standard foreign currency exchange rates and higher off-price mix. 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 growth in DTC and other demand creation costs were largely offset by lower sports marketing expense.
Central & Eastern Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
$
|
237
|
|
|
$
|
187
|
|
|
27
|
%
|
|
46
|
%
|
|
$
|
658
|
|
|
$
|
590
|
|
|
12
|
%
|
|
34
|
%
|
Apparel
|
|
102
|
|
|
113
|
|
|
-10
|
%
|
|
5
|
%
|
|
361
|
|
|
397
|
|
|
-9
|
%
|
|
11
|
%
|
Equipment
|
|
20
|
|
|
21
|
|
|
-5
|
%
|
|
4
|
%
|
|
67
|
|
|
74
|
|
|
-9
|
%
|
|
9
|
%
|
TOTAL REVENUES
|
|
$
|
359
|
|
|
$
|
321
|
|
|
12
|
%
|
|
29
|
%
|
|
$
|
1,086
|
|
|
$
|
1,061
|
|
|
2
|
%
|
|
23
|
%
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Wholesale Customers
|
|
$
|
311
|
|
|
$
|
280
|
|
|
11
|
%
|
|
28
|
%
|
|
$
|
938
|
|
|
$
|
933
|
|
|
1
|
%
|
|
20
|
%
|
Sales Direct to Consumer
|
|
48
|
|
|
41
|
|
|
17
|
%
|
|
38
|
%
|
|
148
|
|
|
128
|
|
|
16
|
%
|
|
47
|
%
|
TOTAL REVENUES
|
|
$
|
359
|
|
|
$
|
321
|
|
|
12
|
%
|
|
29
|
%
|
|
$
|
1,086
|
|
|
$
|
1,061
|
|
|
2
|
%
|
|
23
|
%
|
EARNINGS BEFORE INTEREST AND TAXES
|
|
$
|
69
|
|
|
$
|
52
|
|
|
33
|
%
|
|
|
|
$
|
243
|
|
|
$
|
178
|
|
|
37
|
%
|
|
|
Excluding changes in currency exchange rates, Central & Eastern Europe revenues increased 29% and 23% for the third quarter and first nine months of fiscal 2016, respectively, with double-digit growth in nearly every territory. Revenues in two of our largest territories, Turkey and Russia, grew 99% and 29%, respectively, for the third quarter of fiscal 2016, and 52% and 23%, respectively, for the first nine months of fiscal 2016. The significant growth in Turkey was primarily due to a favorable comparison to the prior year, when import delays resulted in product planned for sale in the third quarter actually being sold in the fourth quarter. Our distributors business also grew 21% and 22% for the third quarter and first nine months of fiscal 2016, respectively. On a category basis, revenues for the third quarter and first nine months of fiscal 2016 increased in nearly every key category, led by Sportswear, Running and Football (Soccer). For the third quarter and first nine months of fiscal 2016, DTC revenues increased 38% and 47%, respectively, fueled by strong comparable store sales growth of 21% and 26%, respectively, as well as the addition of new stores.
The constant currency increase in footwear revenues for the third quarter and first nine months of fiscal 2016 was attributable to growth in nearly every key category. Growth in both periods was led by Sportswear and Running, with Football (Soccer) also contributing significantly to growth for the third quarter. Unit sales of footwear for the third quarter and first nine months of fiscal 2016 increased approximately 20% and 13%, respectively, while increases in average selling price per pair contributed approximately 26 and 21 percentage points, respectively, of footwear revenue growth. The increases in average selling price per pair for both periods were primarily attributable to price increases reflecting inflationary conditions in certain territories.
Constant currency apparel revenue growth for the third quarter of fiscal 2016 was attributable to growth in most key categories, most notably Football (Soccer), Running and Women's Training, partially offset by a decline in Sportswear. For the first nine months of fiscal 2016, nearly all key categories grew, most notably Running, Football (Soccer) and Women's Training. Unit sales of apparel for the third quarter and first nine months of fiscal 2016 declined approximately 10% and 1%, respectively, while increases in average selling price per unit contributed approximately 15 and 12 percentage points of growth for the respective periods. The increases in average selling price per unit for both periods were primarily attributable to price increases reflecting inflationary conditions in certain territories.
On a reported basis, EBIT for the third quarter of fiscal 2016 increased 33% despite the negative impact of changes in foreign currency exchange rates, primarily the Russian Ruble and Turkish Lira. EBIT growth was driven by reported revenue growth of 12%, gross margin expansion and selling and administrative expense leverage. Gross margin increased 90 basis points as significantly higher average selling prices and growth in 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 and demand creation costs. Operating overhead increased largely due to ongoing investments in our growing DTC business, while demand creation increased slightly due to higher brand marketing costs.
Despite the negative impact of translation, reported EBIT for the first nine months of fiscal 2016 increased 37%. Reported revenue grew 2%, while gross margin expanded significantly and selling and administrative expense declined as a percent of revenue. Gross margin increased 320 basis points as significantly higher average selling prices more than offset unfavorable standard foreign currency exchange rates and shifts in mix to higher-cost products. Selling and administrative expense was leveraged despite higher operating overhead costs to support our growing DTC business, and higher demand creation expense due to increased sports marketing costs and spending to support brand events.
Greater China
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
$
|
719
|
|
|
$
|
562
|
|
|
28
|
%
|
|
33
|
%
|
|
$
|
1,918
|
|
|
$
|
1,465
|
|
|
31
|
%
|
|
34
|
%
|
Apparel
|
|
235
|
|
|
212
|
|
|
11
|
%
|
|
15
|
%
|
|
787
|
|
|
680
|
|
|
16
|
%
|
|
19
|
%
|
Equipment
|
|
28
|
|
|
27
|
|
|
4
|
%
|
|
4
|
%
|
|
101
|
|
|
93
|
|
|
9
|
%
|
|
9
|
%
|
TOTAL REVENUES
|
|
$
|
982
|
|
|
$
|
801
|
|
|
23
|
%
|
|
27
|
%
|
|
$
|
2,806
|
|
|
$
|
2,238
|
|
|
25
|
%
|
|
29
|
%
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Wholesale Customers
|
|
$
|
672
|
|
|
$
|
579
|
|
|
16
|
%
|
|
21
|
%
|
|
$
|
1,963
|
|
|
$
|
1,651
|
|
|
19
|
%
|
|
22
|
%
|
Sales Direct to Consumer
|
|
310
|
|
|
222
|
|
|
40
|
%
|
|
45
|
%
|
|
843
|
|
|
587
|
|
|
44
|
%
|
|
47
|
%
|
TOTAL REVENUES
|
|
$
|
982
|
|
|
$
|
801
|
|
|
23
|
%
|
|
27
|
%
|
|
$
|
2,806
|
|
|
$
|
2,238
|
|
|
25
|
%
|
|
29
|
%
|
EARNINGS BEFORE INTEREST AND TAXES
|
|
$
|
358
|
|
|
$
|
251
|
|
|
43
|
%
|
|
|
|
$
|
1,015
|
|
|
$
|
727
|
|
|
40
|
%
|
|
|
Excluding changes in currency exchange rates, Greater China revenues grew 27% and 29% for the third quarter and first nine months of fiscal 2016, respectively. Nearly all key categories grew for both periods, led by Sportswear, Running, NIKE Basketball and the Jordan Brand, with the Jordan Brand having a greater impact than NIKE Basketball for the third quarter. DTC revenue growth of 45% for the third quarter of fiscal 2016 was attributable to an increase in online sales, comparable store sales growth of 19% and the addition of new stores. For the first nine months of fiscal 2016, DTC revenues increased 47%, driven by comparable store sales growth of 22%, online sales growth and the addition of new stores.
The constant currency increase in footwear revenue growth for the third quarter and first nine months of fiscal 2016 was attributable to increases in nearly all key categories, led by Sportswear, Running, NIKE Basketball and the Jordan Brand, with the Jordan Brand having a greater impact than NIKE Basketball for the third quarter. Unit sales of footwear for the third quarter and first nine months of fiscal 2016 increased approximately 27% and 28%, respectively, while increases in average selling price per pair contributed approximately 6 percentage points of footwear revenue growth for each period. The increases in average selling price per pair for both periods were due primarily to increases in the proportion of revenues from our higher-priced DTC business and shifts in mix to higher-priced products.
Constant currency apparel revenue growth for the third quarter and first nine months of fiscal 2016 was due to higher revenues in nearly all key categories, most notably Sportswear and Running, with Running having a greater impact than Sportswear for the third quarter. Unit sales of apparel in the third quarter of fiscal 2016 increased approximately 17%, while lower average selling price per unit reduced apparel revenue growth by approximately 2 percentage points as increases in the proportion of revenues from our higher-priced DTC business were more than offset by higher off-price mix. For the first nine months of fiscal 2016, unit sales of apparel increased approximately 19%, while average selling price per unit was flat.
On a reported basis, EBIT increased 43% for the third quarter of fiscal 2016, driven by higher reported revenues, gross margin expansion and strong selling and administrative expense leverage. Gross margin increased 90 basis points primarily attributable to higher average selling prices and growth in our higher-margin DTC business, which more than offset 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 primarily due to increased investments in our growing DTC business. Demand creation expense also increased as lower sports marketing costs were more than offset by higher retail presentation costs to re-profile category and consumer-focused retail stores.
On a reported basis, EBIT increased 40% for the first nine months of fiscal 2016, reflecting higher revenues, gross margin expansion and selling and administrative expense leverage. Gross margin expanded 100 basis points due to higher average selling prices and the favorable impact of 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 decreased as a percent of revenues despite higher operating overhead to support our growing DTC business. Demand creation expense also increased due to spending for retail presentation and brand events.
Japan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
$
|
133
|
|
|
$
|
99
|
|
|
34
|
%
|
|
37
|
%
|
|
$
|
383
|
|
|
$
|
307
|
|
|
25
|
%
|
|
40
|
%
|
Apparel
|
|
52
|
|
|
46
|
|
|
13
|
%
|
|
16
|
%
|
|
158
|
|
|
167
|
|
|
-5
|
%
|
|
6
|
%
|
Equipment
|
|
20
|
|
|
21
|
|
|
-5
|
%
|
|
0
|
%
|
|
48
|
|
|
51
|
|
|
-6
|
%
|
|
5
|
%
|
TOTAL REVENUES
|
|
$
|
205
|
|
|
$
|
166
|
|
|
23
|
%
|
|
27
|
%
|
|
$
|
589
|
|
|
$
|
525
|
|
|
12
|
%
|
|
26
|
%
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Wholesale Customers
|
|
$
|
133
|
|
|
$
|
112
|
|
|
19
|
%
|
|
22
|
%
|
|
$
|
391
|
|
|
$
|
371
|
|
|
5
|
%
|
|
18
|
%
|
Sales Direct to Consumer
|
|
72
|
|
|
54
|
|
|
33
|
%
|
|
36
|
%
|
|
198
|
|
|
154
|
|
|
29
|
%
|
|
44
|
%
|
TOTAL REVENUES
|
|
$
|
205
|
|
|
$
|
166
|
|
|
23
|
%
|
|
27
|
%
|
|
$
|
589
|
|
|
$
|
525
|
|
|
12
|
%
|
|
26
|
%
|
EARNINGS BEFORE INTEREST AND TAXES
|
|
$
|
36
|
|
|
$
|
22
|
|
|
64
|
%
|
|
|
|
$
|
119
|
|
|
$
|
62
|
|
|
92
|
%
|
|
|
On a constant currency basis, revenues for Japan increased 27% and 26% for the third quarter and first nine months of fiscal 2016, respectively, driven by growth in most key categories, led by Sportswear, Running and the Jordan Brand. DTC revenues grew 36% for the third quarter of fiscal 2016 due to an increase in online sales, comparable store sales growth of 16% and the addition of new stores. DTC revenue growth of 44% for the first nine months of fiscal 2016 was attributable to comparable store sales growth of 22%, online sales growth and the addition of new stores.
On a reported basis, EBIT increased 64% and 92% for the third quarter and first nine months of fiscal 2016, respectively, despite the weaker Yen. EBIT growth in both periods was driven by higher reported revenues, gross margin expansion and selling and administrative expense leverage. Gross margin increased 20 basis points for the third quarter primarily due to lower product input costs, higher average selling prices, largely reflecting lower discounts, and growth in our higher-margin DTC business, which together more than offset the impact of unfavorable standard foreign currency exchange rates. For the first nine months of fiscal 2016, gross margin expanded 320 basis points primarily due to higher average selling prices, including lower discounts, and DTC growth, partially offset by unfavorable standard foreign currency exchange rates. For the third quarter and first nine months of fiscal 2016, selling and administrative expense declined as a percent of revenues despite increased operating overhead and demand creation expense, primarily to support our growing DTC business.
Emerging Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
$
|
596
|
|
|
$
|
655
|
|
|
-9
|
%
|
|
9
|
%
|
|
$
|
1,940
|
|
|
$
|
2,010
|
|
|
-3
|
%
|
|
15
|
%
|
Apparel
|
|
228
|
|
|
240
|
|
|
-5
|
%
|
|
14
|
%
|
|
721
|
|
|
772
|
|
|
-7
|
%
|
|
11
|
%
|
Equipment
|
|
55
|
|
|
60
|
|
|
-8
|
%
|
|
10
|
%
|
|
168
|
|
|
182
|
|
|
-8
|
%
|
|
12
|
%
|
TOTAL REVENUES
|
|
$
|
879
|
|
|
$
|
955
|
|
|
-8
|
%
|
|
11
|
%
|
|
$
|
2,829
|
|
|
$
|
2,964
|
|
|
-5
|
%
|
|
14
|
%
|
Revenues by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Wholesale Customers
|
|
$
|
702
|
|
|
$
|
779
|
|
|
-10
|
%
|
|
7
|
%
|
|
$
|
2,340
|
|
|
$
|
2,474
|
|
|
-5
|
%
|
|
12
|
%
|
Sales Direct to Consumer
|
|
177
|
|
|
176
|
|
|
1
|
%
|
|
25
|
%
|
|
489
|
|
|
490
|
|
|
0
|
%
|
|
24
|
%
|
TOTAL REVENUES
|
|
$
|
879
|
|
|
$
|
955
|
|
|
-8
|
%
|
|
11
|
%
|
|
$
|
2,829
|
|
|
$
|
2,964
|
|
|
-5
|
%
|
|
14
|
%
|
EARNINGS BEFORE INTEREST AND TAXES
|
|
$
|
202
|
|
|
$
|
234
|
|
|
-14
|
%
|
|
|
|
$
|
701
|
|
|
$
|
626
|
|
|
12
|
%
|
|
|
On a currency-neutral basis, Emerging Markets revenues for the third quarter and first nine months of fiscal 2016 increased 11% and 14%, respectively. Growth for the third quarter was attributable to higher revenues in most territories, led by SOCO (which includes Argentina, Uruguay and Chile) and Pacific (which includes Australia and New Zealand), which grew 31% and 18%, respectively. For the first nine months of fiscal 2016, most territories grew, led by SOCO, Mexico and Pacific, which grew 27%, 38% and 28%, respectively. Revenues in one of our largest territories, Brazil, declined 2% for the first nine months of fiscal 2016, reflecting on-going macroeconomic challenges and comparisons to strong sales related to the World Cup in the first quarter of fiscal 2015, but increased 2% for the third quarter, as improved retail concepts developed with wholesale partners are helping to drive increased demand. Revenues were higher for all key categories for the third quarter and first nine months of fiscal 2016, led by Sportswear, Running and Action Sports, with Football (Soccer) and Women's Training also contributing to growth in the third quarter. DTC revenues increased 25% for the third quarter, driven by the addition of new stores, online sales growth and comparable store sales growth of 5%. DTC revenues grew 24% for the first nine months of fiscal 2016, attributable to the addition of new stores, comparable store sales growth of 9% and online sales growth.
Constant currency footwear revenue growth for the third quarter and first nine months of fiscal 2016 was driven by higher revenues in nearly all key categories, most notably Sportswear and Running. For the third quarter of fiscal 2016, unit sales of footwear decreased 6%, while increases in average selling price per pair contributed approximately 15 percentage points of footwear revenue growth. For the first nine months of fiscal 2016, unit sales of footwear increased 3%, with average selling price per pair contributing approximately 12 percentage points of footwear revenue growth. The increases in average selling price per pair for both the third quarter and first nine months of fiscal 2016 were primarily due to price increases reflecting inflationary conditions in certain territories, as well the favorable impact of increases in the proportion of revenues from our higher-priced DTC business.
The constant currency apparel revenue growth for the third quarter of fiscal 2016 was driven by increases in most key categories, led by Sportswear, Football (Soccer) and Running. For the first nine months of fiscal 2016, the growth was led by Sportswear, Running and Women's Training. Unit sales of apparel increased approximately 6% and 2% for the third quarter and first nine months of fiscal 2016, respectively, while increases in average selling price per unit contributed approximately 8 and 9 percentage points, respectively, of apparel revenue growth. The increases in average selling price per unit for both the third quarter and first nine months of fiscal 2016 were primarily attributable to price increases reflecting inflationary conditions in certain territories, as well as growth in our higher-priced DTC business.
Reported EBIT decreased 14% for the third quarter of fiscal 2016, in part reflecting the negative impact of changes in foreign currency exchange rates, primarily the Argentine Peso, Mexican Peso, Korean Won and Brazilian Real. On a reported basis, revenues declined 8% and selling and administrative expense increased as a percent of revenues, while gross margin expanded 220 basis points. Gross margin expanded due to higher average selling prices, the favorable impact of our higher-margin DTC business and favorable off-price margins, which more than offset unfavorable standard foreign currency exchange rates and shifts in mix to higher-cost products. Selling and administrative expense grew due to higher demand creation expense primarily due to higher advertising and digital brand marketing. Operating overhead also grew, reflecting increased investments in DTC and operating infrastructure, as well as higher performance-based compensation.
For the first nine months of fiscal 2016, reported EBIT increased 12%, despite the negative impact of foreign currency translation. On a reported basis, revenues declined 5%, while gross margin expanded and selling and administrative expense was flat as a percent of revenues. Gross margin expanded 360 basis points due to higher average selling prices, favorable off-price margins, lower obsolescence and warehousing costs and the favorable impact of our higher-margin DTC business. These benefits were partially offset by shifts in mix to higher-cost products and unfavorable standard foreign currency exchange rates. Selling and administrative expense on a reported basis declined, but was flat as a percent of revenues as higher operating overhead due to additional investments in DTC and higher performance-based compensation were more than offset by changes in foreign currency exchange rates. Demand creation expense also increased driven by higher sports marketing and digital brand marketing costs, offset by the impact of foreign currency exchange rates.
Global Brand Divisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues
|
|
$
|
17
|
|
|
$
|
29
|
|
|
-41
|
%
|
|
-35
|
%
|
|
$
|
61
|
|
|
$
|
85
|
|
|
-28
|
%
|
|
-19
|
%
|
(Loss) Before Interest and Taxes
|
|
$
|
(625
|
)
|
|
$
|
(552
|
)
|
|
13
|
%
|
|
|
|
$
|
(1,874
|
)
|
|
$
|
(1,640
|
)
|
|
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.
Global Brand Divisions' loss before interest and taxes increased for the third quarter and first nine months of fiscal 2016 due to higher operating overhead and demand creation expense. The increases in operating overhead for both periods were primarily due to investments in operational infrastructure, consumer-focused digital capabilities and product creation and design initiatives, partially offset by lower performance-based compensation costs. Demand creation expense increased for the third quarter of fiscal 2016 due to higher advertising expense and digital brand marketing, largely in support of key sporting and brand events during the quarter, including Super Bowl 50 and other key brand initiatives. For the first nine months of fiscal 2016, demand creation expense increased as higher sports marketing and advertising costs were only partially offset by lower other demand creation costs.
Converse
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
|
% Change Excluding Currency Changes
|
Revenues
|
|
$
|
489
|
|
|
$
|
538
|
|
|
-9
|
%
|
|
-5
|
%
|
|
$
|
1,442
|
|
|
$
|
1,547
|
|
|
-7
|
%
|
|
-2
|
%
|
Earnings Before Interest and Taxes
|
|
$
|
127
|
|
|
$
|
163
|
|
|
-22
|
%
|
|
|
|
$
|
359
|
|
|
$
|
437
|
|
|
-18
|
%
|
|
|
In territories we define as "direct distribution markets," Converse designs, markets and sells products directly to distributors, wholesale customers and 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.
Excluding changes in currency exchange rates, revenues for Converse decreased 5% and 2% for the third quarter and first nine months of fiscal 2016, respectively. Comparable direct distribution markets (i.e., markets served under a direct distribution model for comparable periods in the current and prior fiscal years), declined 6% for the third quarter of fiscal 2016, reducing total Converse revenue by approximately 5 percentage points. For the first nine months of fiscal 2016, comparable direct distribution markets declined 1%, reducing total Converse revenue by approximately 1 percentage point. Comparable direct distribution market unit sales decreased approximately 14% and 8% for the third quarter and first nine months of fiscal 2016, respectively, while increases in average selling price per unit contributed approximately 8 and 7 percentage points of direct distribution markets revenue growth, respectively. The decline in revenues for the third quarter of fiscal 2016 was primarily due to comparisons to higher revenues in the third quarter of fiscal 2015 in advance of a major systems go-live in the fourth quarter of fiscal 2015. On a territory basis, the decline in revenues for the third quarter of fiscal 2016 was led by lower revenues in certain European markets, most notably the United Kingdom, as well as the United States, partially offset by increases in Asia Pacific. For the first nine months of fiscal 2016, 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 increased total Converse revenues by approximately 1 percentage point for the third quarter, but had an insignificant impact on total Converse revenues for the first nine months of fiscal 2016. Revenues from comparable licensed markets decreased 5% and 14% for the third quarter and first nine months of fiscal 2016, respectively, reducing total Converse revenues by approximately 1 percentage point for both periods. The decrease in comparable licensed markets revenues was primarily due to poor macroeconomic conditions in Latin America.
Reported EBIT for Converse decreased 22% and 18% for the third quarter and first nine months of fiscal 2016, respectively, driven for both periods by lower reported revenues, lower gross margin and higher selling and administrative expense as a percent of revenues. Gross margin decreased 280 and 180 basis points for the third quarter and first nine months of fiscal 2016, respectively, driven for both periods by unfavorable standard foreign currency exchange rates, as well as shifts in mix to lower-margin products and territories. Selling and administrative expense was higher as a percent of revenues, but decreased for the third quarter of fiscal 2016 due to both lower demand creation and lower operating overhead costs. For the first nine months of fiscal 2016, selling and administrative expense was mostly flat compared to the first nine months of fiscal 2015 as lower demand creation spending was offset by higher operating overhead costs, primarily driven by investments in infrastructure to support growth initiatives and higher intellectual property enforcement costs.
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in millions)
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
|
February 29, 2016
|
|
February 28, 2015
|
|
% Change
|
Revenues
|
|
$
|
(24
|
)
|
|
$
|
(17
|
)
|
|
—
|
|
|
$
|
(92
|
)
|
|
$
|
(44
|
)
|
|
—
|
|
(Loss) Before Interest and Taxes
|
|
$
|
(264
|
)
|
|
$
|
(281
|
)
|
|
-6
|
%
|
|
$
|
(952
|
)
|
|
$
|
(796
|
)
|
|
20
|
%
|
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.
Corporate's loss before interest and taxes decreased $17 million for the third quarter of fiscal 2016 and increased $156 million for the first nine months of fiscal 2016. The changes are primarily due to the following:
|
|
•
|
a beneficial change of $57 million for the third quarter of fiscal 2016 from net foreign currency losses to net foreign currency gains, and a detrimental change of $44 million for the first nine months of fiscal 2016 from net foreign currency gains to net foreign currency 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 and losses; these results are reported as a component of consolidated gross margin;
|
|
|
•
|
an increase of $54 million and $168 million for the third quarter and first nine months of fiscal 2016, respectively, primarily driven by higher operating overhead to support corporate growth initiatives; and
|
|
|
•
|
an increase in net foreign currency gains of $14 million for the third quarter and a beneficial change of $56 million for the first nine months of fiscal 2016 from net foreign currency losses to 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 consolidated
Other (income) expense, net
.
|
|
|
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 Unaudited Condensed 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, including those supporting our North America, Greater China, Japan and European geographies, 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 reduces 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 10 — Risk Management and Derivatives
in the accompanying Notes to the Unaudited Condensed 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 strengthening 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 10 — Risk Management and Derivatives
in the accompanying Notes to the Unaudited Condensed 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 the remaining effect of exchange rate fluctuations on probable forecasted future cash flows, including certain product cost 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 components of the product cost exposures and other contractual agreements as discussed above.
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 embedded derivative contracts 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 4 — Fair Value Measurements
and
Note 10 — Risk Management and Derivatives
in the accompanying Notes to the Unaudited Condensed 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
Shareholders’ equity
. In the translation of our Unaudited Condensed 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 $493 million and $375 million for the three months ended February 29, 2016 and February 28, 2015, respectively, and a detriment of approximately $1,780 million and $560 million for the nine months ended February 29, 2016 and February 28, 2015, respectively. The impact of foreign exchange rate fluctuations on the translation of our
Income before income taxes
was a detriment of approximately $104 million and $73 million for the three months ended February 29, 2016 and February 28, 2015, respectively, and a detriment of approximately $407 million and $101 million for the nine months ended February 29, 2016 and February 28, 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 investments 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 4 — Fair Value Measurements
and
Note 10 — Risk Management and Derivatives
in the accompanying Notes to the Unaudited Condensed 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 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 $97 million and $358 million on our
Income before income taxes
for the three and nine month periods ended February 29, 2016, 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
February 29, 2016
and
February 28, 2015
. There were no cash flows from net investment hedge settlements for the three or nine month periods ended
February 29, 2016
and
February 28, 2015
.
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Liquidity and Capital Resources
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Cash Flow Activity
Cash provided by operations
was
$1,912 million
for the first nine months of fiscal 2016 compared to
$3,338 million
for the first nine months of fiscal 2015. Our primary source of operating cash flows for the first nine months of fiscal 2016 was
Net income
of
$2,914 million
compared to
$2,408 million
for the first nine months of fiscal 2015. Changes in working capital for the first nine months of fiscal 2016 resulted in a cash outflow of
$1,863 million
compared to an outflow of
$145 million
for the first nine months of fiscal 2015. The change in working capital was primarily due to a net decrease in the amount of cash collateral received from derivative counterparties as a result of hedging activities during the comparative periods (refer to the Credit Risk section of
Note 10 — Risk Management and Derivatives
for additional detail). For the first nine months of fiscal 2016, cash collateral received from counterparties declined $630 million compared to an increase in collateral received from counterparties of $769 million during the first nine months of fiscal 2015. Working capital also decreased from lower accounts payable resulting from the timing of payments made during the period.
Cash used by investing activities
was
$544 million
for the first nine months of fiscal 2016 compared to
$382 million
for the first nine months of fiscal 2015. The primary driver of the increased use of cash was a reduction in the net sales/maturities (including sales, maturities and purchases) of short-term investments to
$201 million
for the first nine months of fiscal 2016 from
$588 million
of net sales/maturities for the first nine months of fiscal 2015, as well as higher additions to property plant and equipment for the first nine months of fiscal 2016.
Cash used by financing activities
was
$2,045 million
for the first nine months of fiscal 2016 compared to
$2,095 million
for the same period of fiscal 2015.
Cash used by financing activities
was nearly flat as net proceeds of $981 million from the issuance of long-term debt in October 2015 were mostly offset by increased common stock repurchases and dividends paid during the first nine months of fiscal 2016 compared to the first nine months of fiscal 2015.
During the first nine months of fiscal 2016, we purchased
46.4 million
shares of NIKE's Class B Common Stock for
$2,698 million
(an average price of
$58.15
per share). During the third quarter, 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
$8.0 billion
(an average price of
$40.58
per share). Immediately following the completion of this program, the Company began repurchases under a four-year, $12 billion program approved by our Board of Directors in November 2015. Of the total 46.4 million shares repurchased during the first nine months of fiscal 2016,
11.1 million
shares were purchased under this new program at a cost of approximately
$649 million
(an average price of
$58.66
per share). We continue to expect funding of share repurchases will come from operating cash flows, 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 permits us to issue an unlimited amount of debt securities. The Shelf expires on April 23, 2016, which we plan to renew in calendar year 2016. On April 26, 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 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.
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
nine month period ended
February 29, 2016
, 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 rating 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 and the amount of debt secured by liens we may incur, as well as limitations 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
February 29, 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
nine months ended February 29, 2016
, we did not issue commercial paper, and as of
February 29, 2016
, there were no outstanding borrowings under this program. We may issue commercial paper or other debt securities during fiscal 2016 depending 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
February 29, 2016
, we had cash, cash equivalents and short-term investments totaling
$5.1 billion
, of which $4.0 billion was held by our foreign subsidiaries. Included in
Cash and equivalents
as of
February 29, 2016
was
$338 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
February 29, 2016
, the average duration of our cash equivalents and short-term investments portfolio was 89 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
.
Contractual Obligations
As a result of renewals of, and additions to, outstanding endorsement contracts, cash payments due under these contracts have increased significantly from what was reported in our Annual Report on Form 10-K for the fiscal year ended
May 31, 2015
.
Obligations under endorsement contracts as of
February 29, 2016
, including significant endorsement contracts entered into through the date of this report, are as follows:
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Description of Commitment
|
|
Cash Payments Due During the Year Ending May 31,
|
(In millions)
|
|
Remainder of 2016
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
Thereafter
|
|
Total
|
Endorsement Contracts
(1)
|
|
$
|
272
|
|
|
$
|
1,093
|
|
|
$
|
1,036
|
|
|
$
|
800
|
|
|
$
|
647
|
|
|
$
|
3,555
|
|
|
$
|
7,403
|
|
|
|
(1)
|
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.
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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.
Other than the changes reported above, there have been no significant changes to the contractual obligations reported in our Annual Report on Form 10-K for the fiscal year ended
May 31, 2015
.
Off-Balance Sheet Arrangements
As of
February 29, 2016
, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
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Recently Issued Accounting Standards
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In May 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standards update that replaces existing revenue recognition guidance. The updated guidance requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Based on the FASB's decision in July 2015 to defer the effective date and to allow more flexibility with implementation, we anticipate the new standard will be effective for us beginning June 1, 2018. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. We have not yet selected a transition method and are currently evaluating the effect the guidance will have on the Consolidated Financial Statements.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes to simplify the presentation of deferred taxes in the statement of financial position. The updated guidance requires that deferred tax assets and liabilities be classified as noncurrent in a classified balance sheet. The update to the standard is effective for us beginning June 1, 2017, with early application permitted as of the beginning of any interim or annual reporting period. This guidance may be applied either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. We plan to early adopt ASU 2015-17 on a retrospective basis in the fourth quarter of fiscal 2016 and do not expect the adoption to have a material impact on the Consolidated Financial Statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation, and disclosure. The update to the standard is effective for us beginning June 1, 2018. We do not expect the adoption to have a material impact on the Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) that replaces existing lease guidance. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The new guidance will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income. The standard is effective for us beginning June 1, 2019, with early application permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients. We are currently evaluating the effect the guidance will have on the Consolidated Financial Statements.
In March 2016, the FASB Issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The update to the standard is effective for us beginning June 1, 2017, with early application permitted. We are currently evaluating the effect the guidance will have on the Consolidated Financial Statements.
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Critical Accounting Policies
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Our discussion and analysis of our financial condition and results of operations are based upon our Unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. 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 in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our most recent Annual Report on Form 10-K have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Actual results could differ from the estimates we use in applying our critical accounting policies. We are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.