Nike 2014 Annual Report Download - page 11

PART I
sales. Accordingly, our results of operations are likely to fluctuate significantly
from period to period. This seasonality, along with other factors that are
beyond our control, including general economic conditions, changes in
consumer preferences, weather conditions, availability of import quotas, and
currency exchange rate fluctuations, could adversely affect our business and
cause our results of operations to fluctuate. Our operating margins are also
sensitive to a number of additional factors that are beyond our control,
including manufacturing and transportation costs, shifts in product sales mix,
and geographic sales trends, all of which we expect to continue. Results of
operations in any period should not be considered indicative of the results to
be expected for any future period.
Futures orders may not be an accurate indication of our
future revenues.
We make substantial use of our futures ordering program, which allows
retailers to order five to six months in advance of delivery with the commitment
that their orders will be delivered within a set period of time at a fixed price.
Our futures ordering program allows us to minimize the amount of products
we hold in inventory, purchasing costs, the time necessary to fill customer
orders, and the risk of non-delivery. We report changes in futures orders in our
periodic financial reports. Although we believe futures orders are an important
indicator of our future revenues, reported futures orders are not necessarily
indicative of our expectation of changes in revenues for any future period. This
is because the mix of orders can shift between futures and at-once orders. In
addition, foreign currency exchange rate fluctuations, order cancellations,
shipping timing, returns, and discounts can cause differences in the
comparisons between futures orders and actual revenues. Moreover, a
significant portion of our revenue is not derived from futures orders, including
at-once and closeout sales of NIKE Brand footwear and apparel, sales of
NIKE Brand equipment, sales from our Direct to Consumer operations, and
sales from our Converse, Hurley, and NIKE Golf businesses.
Our futures ordering program does not prevent excess
inventories or inventory shortages, which could result in
decreased operating margins, cash flows and harm to our
business.
We purchase products from manufacturers outside of our futures ordering
program and in advance of customer orders, which we hold in inventory and
resell to customers. There is a risk we may be unable to sell excess products
ordered from manufacturers. Inventory levels in excess of customer demand
may result in inventory write-downs, and the sale of excess inventory at
discounted prices could significantly impair our brand image and have an
adverse effect on our operating results and financial condition. Conversely, if
we underestimate consumer demand for our products or if our manufacturers
fail to supply products we require at the time we need them, we may
experience inventory shortages. Inventory shortages might delay shipments
to customers, negatively impact retailer and distributor relationships, and
diminish brand loyalty.
The difficulty in forecasting demand also makes it difficult to estimate our
future results of operations and financial condition from period to period. A
failure to accurately predict the level of demand for our products could
adversely affect our net revenues and net income, and we are unlikely to
forecast such effects with any certainty in advance.
We may be adversely affected by the financial health of our
retailers.
We extend credit to our customers based on an assessment of a customer’s
financial condition, generally without requiring collateral. To assist in the
scheduling of production and the shipping of seasonal products, we offer
customers the ability to place orders five to six months ahead of delivery
under our futures ordering program. These advance orders may be canceled,
and the risk of cancellation may increase when dealing with financially ailing
retailers or retailers struggling with economic uncertainty. In the past, some
customers have experienced financial difficulties, which have had an adverse
effect on our business. When the retail economy weakens, retailers may be
more cautious with orders. A slowing economy in our key markets could
adversely affect the financial health of our customers, which in turn could have
an adverse effect on our results of operations and financial condition. In
addition, product sales are dependent in part on high quality merchandising
and an appealing store environment to attract consumers, which requires
continuing investments by retailers. Retailers that experience financial
difficulties may fail to make such investments or delay them, resulting in lower
sales and orders for our products.
Consolidation of retailers or concentration of retail market
share among a few retailers may increase and concentrate
our credit risk, and impair our ability to sell products.
The athletic footwear, apparel, and equipment retail markets in some
countries are dominated by a few large athletic footwear, apparel, and
equipment retailers with many stores. These retailers have in the past
increased their market share and may continue to do so in the future by
expanding through acquisitions and construction of additional stores. These
situations concentrate our credit risk with a relatively small number of retailers,
and, if any of these retailers were to experience a shortage of liquidity, it would
increase the risk that their outstanding payables to us may not be paid. In
addition, increasing market share concentration among one or a few retailers
in a particular country or region increases the risk that if any one of them
substantially reduces their purchases of our products, we may be unable to
find a sufficient number of other retail outlets for our products to sustain the
same level of sales and revenues.
Our Direct to Consumer operations have required and will
continue to require a substantial investment and
commitment of resources, and are subject to numerous
risks and uncertainties.
Our Direct to Consumer stores have required substantial fixed investment in
equipment and leasehold improvements, information systems, inventory, and
personnel. We have entered into substantial operating lease commitments for
retail space. Certain stores have been designed and built to serve as high-
profile venues to promote brand awareness and marketing activities.
Because of their unique design elements, locations, and size, these stores
require substantially more investment than other stores. Due to the high fixed-
cost structure associated with our Direct to Consumer operations, a decline in
sales, or the closure or poor performance of individual or multiple stores could
result in significant lease termination costs, write-offs of equipment and
leasehold improvements, and employee-related costs.
Many factors unique to retail operations, some of which are beyond the
Company’s control, pose risks and uncertainties. Risks include, but are not
limited to: credit card fraud; mismanagement of existing retail channel
partners; and inability to manage costs associated with store construction
and operation. In addition, extreme weather conditions in the areas in which
our stores are located could adversely affect our business. Risks specific to
our e-commerce business also include diversion of sales from our and our
retailer’s brick and mortar stores, difficulty in recreating the in-store
experience through direct channels, and liability for online content. Our failure
to successfully respond to these risks might adversely affect sales in our e-
commerce business, as well as damage our reputation and brands.
Failure to adequately protect or enforce our intellectual
property rights could adversely affect our business.
We utilize trademarks on nearly all of our products and believe that having
distinctive marks that are readily identifiable is an important factor in creating a
market for our goods, in identifying us, and in distinguishing our goods from
the goods of others. We consider our NIKE and Swoosh Design trademarks
to be among our most valuable assets and we have registered these
trademarks in almost 170 jurisdictions. In addition, we own many other
trademarks that we utilize in marketing our products and services.
We believe that our trademarks, patents, trade secrets, and other intellectual
property rights are important to our brand, our success, and our competitive
position. We periodically discover products that are counterfeit reproductions
of our products or that otherwise infringe on our intellectual property rights. If
we are unsuccessful in challenging a party’s products on the basis of trade
secret misappropriation or trademark, copyright, design patent, utility patent,
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