Nike 2012 Annual Report Download - page 18

PART II
ITEM 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
NIKE designs, develops, markets and sells high quality footwear, apparel,
equipment, accessories and services worldwide. We are the largest seller of
athletic footwear and apparel in the world. We sell our products to retail
accounts, through NIKE-owned retail stores and internet sales, which we
refer to as our “Direct to Consumer” operations, and through a mix of
independent distributors, licensees and sales representatives, worldwide. Our
goal is to deliver value to our shareholders by building a profitable global
portfolio of branded footwear, apparel, equipment, accessories and service
businesses. 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 consumer
experiences at retail and online.
In addition to achieving long-term revenue growth, we continue to strive to
deliver shareholder value by driving operational excellence in several key areas:
• Expanding gross margin by:
– Making our supply chain a competitive advantage,
– Reducing product costs through a continued focus on manufacturing
efficiency, product design and innovation,
– Utilizing price increases to effectively manage the price-to-value equation
for our customers.
• Improving selling and administrative expense productivity by focusing on
investments that drive economic returns in the form of incremental revenue
and gross profit, and leveraging existing infrastructure across our portfolio of
businesses to eliminate duplicative costs,
• Improving working capital efficiency, and
• Deploying capital effectively.
Through execution of this strategy, our long-term financial goals continue to
be:
• High-single-digit revenue growth,
• Mid-teens earnings per share growth,
• Increased return on invested capital and accelerated cash flows, and
• Consistent results through effective management of our diversified portfolio
of businesses.
Over the past ten years, we have achieved or exceeded all of these financial
goals. During this time, NIKE, Inc.’s revenues and earnings per share have
grown 9% and 15%, respectively, on an annual compounded basis. Our
return on invested capital has increased from 15% to 22% and we expanded
gross margins by 4 percentage points.
Our fiscal 2012 results demonstrated our continued focus toward delivering
appropriate returns to our shareholders, while positioning ourselves for
sustainable, profitable long-term growth. Despite the ongoing challenges in
the global economy, we delivered record revenues and earnings per share in
fiscal 2012. Our revenues grew 16% to $24.1 billion, net income increased
4% to $2.2 billion, and we delivered diluted earnings per share of $4.73, an
8% increase from fiscal 2011.
Income before income taxes increased 5% for fiscal 2012, driven by revenue
growth and improved leverage on selling and administrative expense, which
more than offset a decrease in gross margin and an increase in other
expense. The increase in revenues was driven by growth across all
NIKE Brand geographies, key categories and product types. Brand strength,
innovative products and strong category retail presentation continues to fuel
the demand for our NIKE Brand products. During fiscal 2012, we introduced
a number of innovations, including the NIKE Fuelband and the Flyknit
technology. The NIKE Fuelband is a digital device that tracks one’s daily
activities through a sport-tested accelerometer, while Flyknit is a new
footwear technology that uses advanced materials and proprietary
manufacturing technology to produce a form-fitting, lightweight and seamless
upper. During this time, we also expanded our NIKE + platform into our
Basketball and Training categories, and launched new high performance
uniforms for all 32 NFL teams. Revenue for our Other Businesses also grew,
reflective of growth across most businesses, led by Converse. Our gross
margin continued to be impacted by higher product input costs, including
materials and labor, which more than offset the positive impacts of higher
product selling prices, the growth of our Direct to Consumer business and
benefits from ongoing product cost reduction initiatives.
For fiscal 2012, the growth of our net income was negatively affected by a
year-over-year increase in our effective tax rate. However, diluted earnings per
share grew at a higher rate than net income due to a 3% decrease in the
weighted average number of diluted common shares outstanding, driven by
share repurchases during fiscal 2012 and 2011.
As part of our long-term growth strategy, we continually evaluate our existing
portfolio of businesses to ensure the Company is investing in those
businesses that are accretive to the NIKE Brand, and with the largest growth
potential and highest returns. On May 31, 2012, we announced our intention
to divest of the Cole Haan and Umbro businesses, which will allow us to focus
our resources on driving growth in the NIKE, Jordan, Converse and Hurley
brands. For additional details, refer to our “Other Businesses” section below.
While we will continue to face headwinds from higher input costs and foreign
exchange volatility in fiscal 2013, we continue to see opportunities to drive
future growth and remain committed to effectively managing our business to
achieve our financial goals over the long-term, by executing against the
operational strategies outlined above.
Results of Operations
(Dollars in millions, except per share data) Fiscal 2012 Fiscal 2011
FY12 vs. FY11
% Change Fiscal 2010
FY11 vs. FY10
% Change
Revenues $ 24,128 $ 20,862 16% $ 19,014 10%
Cost of sales 13,657 11,354 20% 10,214 11%
Gross profit 10,471 9,508 10% 8,800 8%
Gross margin % 43.4% 45.6% 46.3%
Demand creation expense 2,711 2,448 11% 2,356 4%
Operating overhead expense 4,720 4,245 11% 3,970 7%
Total selling and administrative expense 7,431 6,693 11% 6,326 6%
% of Revenues 30.8% 32.1% 33.3%
Income before income taxes 2,983 2,844 5% 2,517 13%
Net income 2,223 2,133 4% 1,907 12%
Diluted earnings per share 4.73 4.39 8% 3.86 14%
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