Company Update (NYSE:NKE): Nike Inc Reports Fiscal 2016 Fourth Quarter and Full Year Results


Nike Inc (NYSE:NKE) reported fiscal 2016 financial results for its fourth quarter and full year ended May 31, 2016. Strong global demand fueled revenue increases across nearly all geographies in fiscal 2016, while robust international revenue drove growth in the fourth quarter.

Diluted earnings per share for the quarter were $0.49 as international momentum and a lower average share count were offset by a higher tax rate; a gross margin decline partially due to the clearance of excess inventory in North America; and higher selling and administrative expense.

Fiscal 2016 diluted earnings per share rose 17 percent to $2.16, reflecting revenue growth of 6 percent, gross margin expansion, a lower tax rate and a lower average share count.

“Our consistent growth is fueled by innovation, which is why fiscal 2016 was such a breakthrough year for NIKE in everything we do,” said Mark Parker, President and CEO, NIKE, Inc. “From product to manufacturing to how we serve our consumers – more personally and at scale – we’ve raised the bar of what’s possible. It’s a great time to be in sports, and the NIKE Brand has never been stronger. Fueled by our unrivaled roster of athletes, fiscal 2017’s calendar of sport moments promises to build on our business momentum and inspire consumers.”*

Fourth Quarter Income Statement Review

  • Revenues for NIKE, Inc. rose 6 percent to $8.2 billion, up 9 percent on a currency-neutral basis.
    • Revenues for the NIKE Brand were $7.7 billion, up 8 percent on a currency-neutral basis driven by double-digit growth in Western Europe,Greater China, Emerging Markets and Japan, including strong growth in Sportswear, Global Football and the Jordan Brand.
    • Revenues for Converse were $513 million, up 18 percent on a currency-neutral basis, mainly driven by a major system go-live that accelerated orders from the fourth quarter to the third quarter in the prior year.
  • Gross margin declined 30 basis points to 45.9 percent as higher average selling prices were more than offset by higher product costs, the negative impact of clearing excess inventory in North America and unfavorable changes in foreign currency exchange rates.
  • Selling and administrative expense increased 7 percent to $2.8 billion. Demand creation expense was $873 million, up 7 percent, reflecting investments in digital demand creation, sports marketing and brand events which were partially offset by lower advertising expense. Operating overhead expense increased 7 percent to $1.9 billion, reflecting continued growth in the Direct-to-Consumer (DTC) business, and targeted investments in operational infrastructure and consumer-focused digital capabilities.
  • Other income, net was $58 million, primarily comprised of net foreign currency exchange gains. For the quarter, the Company estimates the year-over-year change in foreign currency-related gains and losses included in other income, net, combined with the impact of changes in exchange rates on the translation of foreign currency-denominated profits, decreased pretax income by approximately $66 million.
  • The effective tax rate was 21.2 percent, compared to 17.8 percent for the same period last year, primarily due to adjustments in the prior year to reduce tax expense recognized in the interim quarters of fiscal 2015 on intercompany transactions.
  • Net income decreased 2 percent to $846 million as revenue growth was more than offset by lower gross margin, higher selling and administrative expense and a higher tax rate, while diluted earnings per share remained unchanged from the prior year at $0.49 reflecting a 2 percent decline in the weighted average diluted common shares outstanding.

Fiscal 2016 Income Statement Review

  • Revenues for NIKE, Inc. rose 6 percent to $32.4 billion, up 12 percent on a currency-neutral basis.
    • Revenues for the NIKE Brand were $30.5 billion, up 13 percent excluding the impact of changes in foreign currency.
    • NIKE Brand sales to wholesale customers increased 9 percent on a currency-neutral basis while DTC revenues grew to $7.9 billion, up 25 percent excluding the impact of changes in foreign currency, driven by a 51 percent increase in online sales, the addition of new stores and 10 percent growth in comparable store sales. As of May 31, 2016, the NIKE Brand had 919 DTC stores in operation as compared to 832 a year ago.
    • On a currency neutral basis, NIKE Brand revenue growth was driven by robust growth in every geography as well as most key categories including Sportswear, Running and the Jordan Brand. Our Men’s, Women’s and Young Athletes’ businesses all grew double-digits.
    • Revenues for Converse were $2.0 billion, up 2 percent on a currency neutral basis, mainly driven by strong growth in the United States andAsia Pacific, slightly offset by lower sales in Europe.
  • Gross margin expanded 20 basis points to 46.2 percent primarily driven by higher average selling prices and growth in the higher margin DTC business which were partially offset by higher product costs, the negative impact of foreign currency exchange rates, and the impact from clearing excess inventory in North America.
  • Selling and administrative expense grew 6 percent to $10.5 billion. Demand creation expense was $3.3 billion, up 2 percent, reflecting investments in DTC marketing, brand events and sports marketing, which were partially offset by lower advertising expense. Operating overhead expense increased 8 percent to $7.2 billion due to the expanding DTC business, and targeted investments in operational infrastructure and consumer-focused digital capabilities.
  • Other income, net was $140 million for the fiscal year, mainly comprised of net foreign currency exchange gains. For the year, the Company estimates the year-over-year change in foreign currency-related gains and losses included in other income, net, combined with the impact of changes in currency exchange rates on the translation of foreign currency-denominated profits, decreased pretax income by approximately $423 million.
  • The effective tax rate was 18.7 percent, compared to 22.2 percent in the prior year, primarily due to an increase in the proportion of earnings from operations outside of the United States, which are generally subject to a lower tax rate.
  • Net income increased 15 percent to $3.8 billion reflecting strong global revenue growth, gross margin expansion and a lower tax rate. Diluted earnings per share increased 17 percent to $2.16, reflecting growth in net income and the additional benefit of a decline in the weighted average diluted common shares outstanding.

May 31, 2016 Balance Sheet Review

  • Inventories for NIKE, Inc. were $4.8 billion, up 12 percent from May 31, 2015, driven by a 6 percent increase in NIKE Brand wholesale unit inventories, increases in average product cost per unit, and growth in our DTC business, partially offset by changes in the value of inventories due to foreign currency exchange rates.
  • Cash and short-term investments were $5.5 billion, $467 million lower than last year as growth in net income and proceeds from the issuance of debt in the second quarter were more than offset by share repurchases, investments in infrastructure and working capital, higher dividends, and a reduction in collateral received from counterparties to foreign currency hedging instruments.

Share Repurchases

During the fourth quarter, NIKE, Inc. repurchased a total of 9.0 million shares for approximately$540 million as part of the four-year, $12 billion program approved by the Board of Directors inNovember 2015. As of the end of fiscal 2016, a total of 20.1 million shares had been repurchased under this program for approximately $1.2 billion, at an average cost of $59.21per share.

In fiscal 2016, NIKE, Inc. repurchased a total of 55.4 million shares for approximately $3.2 billion, at an average cost of $58.44, under the new $12 billion program currently in use as well as the previous $8 billion program approved by the Board of Directors in September 2012.

Futures Orders

As of May 31, 2016, worldwide futures orders for NIKE Brand athletic footwear and apparel scheduled for delivery from June through November 2016 totaled $14.9 billion, 8 percent higher than orders reported for the same period last year, and 11 percent higher on a currency neutral basis. (Original Source)

Shares of Nike fell nearly 4% to $50.95 in after-hours trading. NKE has a 1-year high of $68.20 and a 1-year low of $47.25. The stock’s 50-day moving average is $55.28 and its 200-day moving average is $59.08.

On the ratings front, Nike has been the subject of a number of recent research reports. In a report released yesterday, Deutsche Bank analyst Dave Weiner maintained a Buy rating on NKE, with a price target of $75, which implies an upside of 44.1% from current levels. Separately, on the same day, UBS’s Michael Binetti reiterated a Buy rating on the stock and has a price target of $70.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Dave Weiner and Michael Binetti have a total average return of 0.7% and 3.6% respectively. Weiner has a success rate of 42.3% and is ranked #1638 out of 3967 analysts, while Binetti has a success rate of 42.3% and is ranked #773.

The street is mostly Bullish on NKE stock. Out of 14 analysts who cover the stock, 11 suggest a Buy rating and 3 recommend to Hold the stock. The 12-month average price target assigned to the stock is $66.50, which implies an upside of 28% from current levels.