Nike Inventory, PP&E, and Comprehensive Income Analysis
This paper examines key financial reporting disclosures in Nike's FY 2016 Form 10-K, focusing on three interrelated areas: inventory management, property/plant/equipment (PP&E), and comprehensive income. The analysis reviews Nike's futures ordering program, its inventory valuation methodology, and the reserve policy for expected losses. It then evaluates Nike's PP&E categories, depreciation methods, and the limitations of the current disclosure structure. Finally, it considers gains and losses reported on the Consolidated Statement of Comprehensive Income, including foreign currency translation and hedging results, and explains why these items appear on a separate statement from core operating results.
- Nike's Futures Ordering Program: How advance ordering helps Nike manage production demand
- Inventory Valuation and Reserves: Lower of cost or market valuation and reserve policy
- Property, Plant, and Equipment: PP&E categories, depreciation methods, and recorded values
- Limitations of Nike's PP&E Disclosures: Critique of insufficient breakdown in asset categories
- Comprehensive Income: Foreign Currency and Hedging: Foreign currency and hedging losses on comprehensive income statement
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What makes this paper effective
- Grounds every claim in specific page references from Nike's FY 2016 Form 10-K, giving the analysis credibility and allowing readers to verify each point.
- Moves logically from inventory policy to asset valuation to comprehensive income, mirroring the structure of a financial statement analysis rather than jumping between topics.
- Identifies concrete limitations in Nike's disclosures — such as the lack of breakdown between machinery, equipment, and software — and explains why greater specificity would benefit investors.
Key academic technique demonstrated
The paper models critical reading of a corporate filing: rather than simply summarizing what Nike reports, it evaluates the adequacy and transparency of those disclosures. For example, pointing out that software has a shorter useful life than machinery and that grouping them together obscures risk is a higher-order analytical move beyond mere description.
Structure breakdown
The paper opens with inventory, addressing futures ordering and reserves before moving to valuation methodology. It then shifts to PP&E — first describing what is disclosed, then critiquing what is missing. The paper closes with a discussion of comprehensive income items, explaining their separation from the primary income statement. Each section follows a consistent describe-then-evaluate pattern, making the argument easy to follow.
Nike's Futures Ordering Program
Nike addresses futures ordering on page 64 of its FY 2016 Form 10-K. The futures ordering program "allows retailers to order five to six months in advance of delivery" at a fixed price. This program allows Nike to gain some advance knowledge of future demand, helping the company schedule its production in accordance with expected future sales. The company notes, however, that this program does not prevent excess or short inventory in the future, as not all retailers participate in the program and, ultimately, demand is not fixed.
Excess demand results in inventory write-downs, moving inventory around the market, or other tactics employed to recover costs. On page 92, the company specifically addresses inventory reserves. When Nike estimates that the realizable value of its inventory is less than the cost of that inventory, it creates an allowance on the books for this expected loss. The reserve is recorded as a charge to the cost of sales and can be increased or decreased based on changing information.
Inventory Valuation and Reserves
Nike records inventories at the "lower of cost or market" and states that they "are valued on either an average or specific identification cost basis" (p. 106). This approach is consistent with the company's expectation that it will, at the very least, be able to recover cost. The inventory reserve exists for those situations where Nike does not expect to recover cost on certain inventories, providing a conservative and transparent representation of inventory value on the balance sheet.
Property, Plant, and Equipment
The company describes Plant, Property, and Equipment on page 106. These assets are recorded at cost, using straight-line depreciation for buildings, leasehold improvements, and long-lived machinery. On page 109, Nike identifies the following categories of Property, Plant, and Equipment: land, buildings, machinery/equipment/software, leasehold improvements, and construction in progress. The category of machinery, equipment, and software is the largest, with buildings and leasehold improvements also representing significant line items.
The smallest portion of the Property, Plant, and Equipment balance is land. Land value is recorded before accumulated depreciation and may therefore be lower than what is stated on the books. The accumulated depreciation section is not broken down by category. Construction in progress is the second-smallest category, and notably, no accumulated depreciation applies to that particular category.
References
Nike FY 2016 Form 10-K. Retrieved November 13, 2016, from http://s1.q4cdn.com/806093406/files/doc_financials/2016/ar/docs/nike-2016-form-10K.pdf
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