Nike 2014 Annual Report Download - page 10

PART I
changing consumer preferences that cannot be predicted with certainty. Our
new products may not receive consumer acceptance as consumer
preferences could shift rapidly to different types of performance products or
away from these types of products altogether, and our future success
depends in part on our ability to anticipate and respond to these changes. If
we fail to anticipate accurately and respond to trends and shifts in consumer
preferences by adjusting the mix of existing product offerings, developing new
products, designs, styles, and categories, and influencing sports and fitness
preferences through aggressive marketing, we could experience lower sales,
excess inventories, or lower profit margins, any of which could have an
adverse effect on our results of operations and financial condition. In addition,
we market our products globally through a diverse spectrum of advertising
and promotional programs and campaigns, including social media and online
advertising. If we do not successfully market our products or if advertising and
promotional costs increase, these factors could have an adverse effect on our
business, financial condition, and results of operations.
We rely on technical innovation and high-quality products
to compete in the market for our products.
Technical innovation and quality control in the design and manufacturing
process of footwear, apparel, and athletic equipment is essential to the
commercial success of our products. Research and development plays a key
role in technical innovation. We rely upon specialists in the fields of
biomechanics, chemistry, exercise physiology, engineering, industrial design,
sustainability, and related fields, as well as research committees and advisory
boards made up of athletes, coaches, trainers, equipment managers,
orthopedists, podiatrists, and other experts to develop and test cutting edge
performance products. While we strive to produce products that help to
enhance athletic performance, reduce injury, and maximize comfort, if we fail
to introduce technical innovation in our products, consumer demand for our
products could decline, and if we experience problems with the quality of our
products, we may incur substantial expense to remedy the problems.
Failure to continue to obtain high quality endorsers of our
products could harm our business.
We establish relationships with professional athletes, sports teams, and
leagues to develop, evaluate and promote our products, as well as establish
product authenticity with consumers. If certain endorsers were to stop using
our products contrary to their endorsement agreements, our business could
be adversely affected. In addition, actions taken by athletes, teams, or
leagues associated with our products that harm the reputations of those
athletes, teams, or leagues, could also seriously harm our brand image with
consumers and, as a result, could have an adverse effect on our sales and
financial condition. In addition, poor performance by our endorsers, a failure to
continue to correctly identify promising athletes to use and endorse our
products, or a failure to enter into cost-effective endorsement arrangements
with prominent athletes and sports organizations could adversely affect our
brand, sales, and profitability.
Currency exchange rate fluctuations could result in lower
revenues, higher costs, and decreased margins and
earnings.
A majority of our products are manufactured and sold outside of the United
States. As a result, we conduct purchase and sale transactions in various
currencies, which increases our exposure to fluctuations in foreign currency
exchange rates globally. Our international revenues and expenses generally
are derived from sales and operations in foreign currencies, and these
revenues and expenses could be affected by currency fluctuations, including
amounts recorded in foreign currencies and translated into U.S. Dollars for
consolidated financial reporting, as weakening of foreign currencies relative to
the U.S. Dollar adversely affects the U.S. Dollar value of the Company’s
foreign currency-denominated sales and earnings. Currency exchange rate
fluctuations could also disrupt the business of the independent manufacturers
that produce our products by making their purchases of raw materials more
expensive and more difficult to finance. Foreign currency fluctuations have
adversely affected, and could continue to have an adverse effect on our
results of operations and financial condition.
We may hedge certain foreign currency exposures to lessen and delay, but
not to completely eliminate, the effects of foreign currency fluctuations on our
financial results. Since the hedging activities are designed to lessen volatility,
they not only reduce the negative impact of a stronger U.S. Dollar or other
trading currency, but they also reduce the positive impact of a weaker
U.S. Dollar or other trading currency. Our future financial results could be
significantly affected by the value of the U.S. Dollar in relation to the foreign
currencies in which we conduct business. The degree to which our financial
results are affected for any given time period will depend in part upon our
hedging activities.
Global economic conditions could have a material adverse
effect on our business, operating results, and financial
condition.
Although the global economy has been showing signs of improvement, its
uncertain state continues to impact businesses around the world, and most
acutely in emerging markets and developing economies. Continuing
uncertainty in the global capital and credit markets have led to fluctuations in
the availability of business credit and capital liquidity, a contraction of
consumer credit, business failures, sustained unemployment at historically
high levels, and declines in consumer confidence and spending in many parts
of the world. If global economic and financial market conditions do not
improve or deteriorate, the following factors could have a material adverse
effect on our business, operating results, and financial condition:
•Slower consumer spending may result in reduced demand for our
products, reduced orders from retailers for our products, order
cancellations, lower revenues, higher discounts, increased inventories, and
lower gross margins.
•In the future, we may be unable to access financing in the credit and capital
markets at reasonable rates in the event we find it desirable to do so.
•We conduct transactions in various currencies, which increase our
exposure to fluctuations in foreign currency exchange rates relative to the
U.S. Dollar. Continued volatility in the markets and exchange rates for
foreign currencies and contracts in foreign currencies could have a
significant impact on our reported financial results and condition.
•Continued volatility in the availability and prices for commodities and raw
materials we use in our products and in our supply chain (such as cotton or
petroleum derivatives) could have a material adverse effect on our costs,
gross margins, and profitability.
•If retailers of our products experience declining revenues, or experience
difficulty obtaining financing in the capital and credit markets to purchase
our products, this could result in reduced orders for our products, order
cancellations, late retailer payments, extended payment terms, higher
accounts receivable, reduced cash flows, greater expense associated with
collection efforts, and increased bad debt expense.
•If retailers of our products experience severe financial difficulty, some may
become insolvent and cease business operations, which could negatively
impact the sale of our products to consumers.
•If contract manufacturers of our products or other participants in our supply
chain experience difficulty obtaining financing in the capital and credit
markets to purchase raw materials or to finance capital equipment and
other general working capital needs, it may result in delays or non-delivery of
shipments of our products.
Our business is affected by seasonality, which could result
in fluctuations in our operating results.
We experience moderate fluctuations in aggregate sales volume during the
year. Historically, revenues in the first and fourth fiscal quarters have slightly
exceeded those in the second and third fiscal quarters. However, the mix of
product sales may vary considerably from time to time as a result of changes
in seasonal and geographic demand for particular types of footwear, apparel,
and equipment. In addition, our customers may cancel orders, change
delivery schedules, or change the mix of products ordered with minimal
notice. As a result, we may not be able to accurately predict our quarterly
NIKE, INC. 2014 Annual Report and Notice of Annual Meeting 53
FORM 10-K