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Nike earned a net income of 2.133 billion in fiscal 2011 on revenues of $20.862 billion. A trend analysis of the income statement shows that net income grew 9.7% in FY 2011, whereas the net income grew by 11.8%. In the previous year (FY2010), Nike's revenue actually declined by 0.8%, while the net income increased by 28.2%. The performance over the past two years indicates that Nike has faced some trouble growing its revenues, but has made up for that with stronger cost controls. The common size income statement reveals where these improvements are found. It was not in the cost of sales which ranged between 53.7% in FY2010 to 55.1% in FY2009. The difference was in the company's "demand creation expense" (aka marketing), which fell from 12.3% of revenue in FY2010 to 11.7% in FY2011, a difference of $118, which is most of the difference between the net incomes of the two years. Thus, by controlling marketing costs, Nike has been able to see more of its revenue trickle down to the bottom line.
The company's balance sheet reveals that the company has grown larger, by 4% over FY2010 in terms of total assets. Plant, property and equipment grew much faster than total assets, at a rate of 9.4%. There was a significant drop in the company's cash, from 21.3% of total assets to 13%. This was matched by increases in both accounts receivable and inventory, both of which are a more important part of the balance sheet in FY 2011 than they were in the year previous. Nike's current liabilities have gone from 23.3% of the balance sheet to 26.3%. The company's long-term debt, however, has declined in the past year, from 3% of the balance sheet to 1.8%. The company's equity barely changed, in part because retained earnings fell as a percentage of total assets, from 42.2% to 38.6% in FY2011.
A trend analysis reveals that cash provided by operations spiked in FY2010 by 82%, only to fall back down again in FY2011 to a level that is just 4.3% above the FY2009 level. The increase in inventories and accounts receivable is largely responsible for the reduction in cash provided by operations. The ratio analysis should reveal more about these figures.
Nike's liquidity ratios are healthy. The company has a current ratio of 3.2 and a quick ratio of 2.2, both figures that indicate the company is liquid (MSN Moneycentral, 2012). In FY2010, the current ratio was 3.25 and the quick ratio was 2.65. That these ratios have declined is something that must be examined in the context of a broader trend, simply because the numbers are very healthy. However, should this trend continue over the next year or two there may be a point in time when Nike management needs to take the issue more seriously. For now, however, healthy liquidity ratios are noted. The company is also healthy with respect to its long-term solvency as well. The debt/equity ratio is 0.04, and the interest coverage is 431 times. As noted, Nike has a very low level of long-term debt and this contributes to very good financial health.
The company's profit margins are generally healthy. Nike's gross margin is 43.8%, and has averaged 45.2% over the course of the past five years. The company's operating margin is 13% and its net margin is 9.7%. While all of the company's margins lag the industry average and are in line with the average for Nike for the past five years, they are all healthy averages. The fact that Nike has kept its margins within a fairly narrow range in the past five years despite the global economic slowdown should be viewed as a positive sign.
In terms of management efficiency, Nike has a receivables turnover of 7.5 times, an inventory turnover of 4.5 times and an asset turnover of 1.6 times (MSN Moneycentral, 2012). Last year, the company turned over its receivables 9.3 times, its inventory 4.3 times and its assets 1.3 times. These figures reflect that Nike is carrying more receivables as a percentage of sales than they were last year. This should be cause for some concern, again if it becomes an ongoing trend. Normally, an investor would like to see that the company has control over its receivables. In this case, Nike's customers are stretching out their payment times, something that does not bode well for future business with those firms.
Nike's investment returns are generally positive, and in FY2011 they were higher than the company's five-year average investment returns. According to MSN Moneycentral (2012), the return on equity was 22.6%, the return on assets was 15.5% and the return on capital was 20.1%. These figures are, however, all below the company's industry peers, something that should concern an investor.
Overall, Nike has relatively strong financial performance. Liquidity is its greatest strength, but overall there are only a couple of areas of minor concern, and there are no glaring red flags. The biggest area of concern is the rapid increase in the receivables, both as a percentage of sales and in terms of the accounts receivable turnover. Ideally, Nike would be reducing its cash conversion cycle, not increasing it.
2. Revenue Analysis
Nike divides its business segment reporting two ways, by geography and by product type. By geography, Nike's biggest market is in North America, where it does 41.8% of its business. Western Europe accounts for 21% of the company's business. The next two largest categories are "emerging markets," which is worth $2.7 billion (13.1% of revenue) and Greater China, which at $2.06 billion accounts for 9.8% of revenue. The other geographies, Central and Eastern Europe and Japan, comprise a smaller portion of Nike's revenues. The trends within the geographical breakdown are revealing. The fastest growth region for Nike is Emerging Markets, with 24% growth year-over-year (2010 to 2011), followed by the 18% growth the company enjoyed in Greater China. The North American market grew at 13%. Japan, by contrast, fell by 13% in the year and Western Europe declined by 2%.
Nike provides product/regional breakdowns as well. In North America, apparel grew at 21% and now accounts for 27.8% of revenue, while footwear accounts for 67.4% of revenue. This market, with 41.8% of sales, contributes 53.2% of Nike brand EBIT. Western Europe, the second-largest market, contributed 21.9% of EBIT, ranking it behind both Greater China and Emerging Markets. The Western Europe market is 33.2% apparel and 61% footwear.
In Greater China, apparel represents 38.3% of revenue, and footwear is 56.5% and in the Emerging Markets those same figures are 24% and 69.3%. It is worth noting that with 13.1% of revenue, Emerging Markets contributes 20.9% of EBIT. Greater China, with 9.8% of revenue contributes 23.6% of EBIT.
From this analysis, in general shoes have a higher margin than apparel, so that the areas with the greatest percentage of footwear outperformed in terms of EBIT contribution relative to revenues. Greater China, however, is an exception, with strong EBIT contribution relative to its revenues. The older, declining markets in Western Europe and Japan contribute less in terms of EBIT than they do in terms of revenue and even the Central/Eastern Europe market showed an 8% decline in EBIT despite a 4% increase in revenue. North America continues to be the engine that drives Nike's business, but there is a case to be made for Greater China and Emerging Markets as the future of the business.
3. The gross margin declined from 46.3% in FY2010 to 45.6% in FY2011. Nike attributed this decline to "higher input costs across most businesses," "increased transportation costs including additional air freight costs" and "lower mix of licensee revenue" within the category of 'other businesses.
Net income, which grew at a faster rate than revenues, was affected by a number of factors. The gross margin declined, something that worked against the improved net income figures. The company saw its marketing expense decline by 4% in FY2011, something that it attributed to the fact that there was no World Cup in 2011, whereas in 2010 there was. The company saw its operating overhead increase by 7%, but this was slower than the increase in revenues. As a result, the percentage of selling and administrative expense was lower in FY2011. The net income is also affected by restructuring charges, but these were minor in both FY2010 and FY2011, so not a major factor in the change in net income.
4. Page 23 of the 2011 Form 10-K breaks down the revenue in Greater China and Central & Eastern Europe; it does not outline the company's financial policies or its strategy. The company outlines its strategy on page 17 as follows: "Our strategy is to achieve long-term revenue growth by creating innovative, "must have" products, building deep personal consumer connections with our brands, and delivering compelling retail presentation and experiences." The company notes that its goal is "to deliver value to our shareholders by building a profitable global portfolio of branded apparel,…[continue]
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