Nike 2014 Annual Report Download - page 21

PART II
ITEM 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
NIKE designs, develops, markets, and sells athletic 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, as well as through NIKE-owned in-line and factory retail stores and
NIKE-owned internet websites (which we refer to as our “Direct to Consumer”
or “DTC” operations), and through a mix of independent distributors,
licensees, and sales representatives in virtually all countries around the world.
Our goal is to deliver value to our shareholders by building a profitable global
portfolio of branded footwear, apparel, equipment, and accessories
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, sustainable revenue growth, we continue
to strive to deliver shareholder value by driving operational excellence in
several key areas:
•Expanding gross margin by:
–Delivering innovative, premium products that command higher prices
while maintaining a strong consumer price-to-value proposition;
–Reducing product costs through a continued focus on manufacturing
efficiency, product design, and innovation; and
–Making our supply chain a competitive advantage.
•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,
•Consistent return on invested capital and accelerated cash flows, and
•Steady results through effective management of our diversified portfolio of
businesses.
Over the past ten years, we have achieved many of these financial goals.
During this time, revenues and diluted earnings per common share for NIKE,
Inc., inclusive of both continuing and discontinued operations, have grown
9% and 13%, respectively, on an annual compounded basis. Our return on
invested capital has increased from 22% to 25% and we expanded gross
margins by approximately 190 basis points.
On November 15, 2012, we announced a two-for-one stock split of both
Class A and Class B Common shares. The stock split was in the form of a 100
percent stock dividend payable on December 24, 2012 to shareholders of
record at the close of business December 10, 2012. Common stock began
trading at the split-adjusted price on December 26, 2012. All share numbers
and per share amounts presented reflect the stock split.
Our fiscal 2014 results from continuing operations demonstrated the power of
the NIKE, Inc. portfolio to deliver consistent growth in revenues, earnings, and
cash returns to shareholders, while investing for long-term growth. Despite
significant foreign currency headwinds, we delivered record revenues and
earnings per share in fiscal 2014. Our revenues grew 10% to $27.8 billion, net
income from continuing operations increased 10% to $2.7 billion, and we
delivered diluted earnings per common share of $2.97, an 11% increase from
fiscal 2013.
Earnings before interest and income taxes (“EBIT”) from continuing operations
increased 10% for fiscal 2014, driven by revenue growth and improved gross
margin, which more than offset higher selling and administrative expense. The
increase in revenues was driven by growth across nearly all NIKE Brand
geographies, key categories, and product types. This growth was primarily
fueled by:
•Innovative performance and sportswear products, incorporating proprietary
technology platforms such as NIKE AIR, Lunar, Shox, Free, Flywire, Dri-Fit,
Flyknit, NIKE+, and NIKE Fuel;
•Deep brand connections to consumers through a category lens, reinforced
by investments in endorsements by high-profile athletes and teams, high-
impact marketing around global sporting events (such as the World Cup,
Olympics, and NFL Super Bowl) and digital marketing; and
•Strong category retail presentation online and at NIKE-owned and retail
partner stores.
We also delivered strong results for Converse, with revenue and EBIT growth
of 16% and 17%, respectively.
Our gross margins improved largely due to the positive impact of higher
average selling prices and contribution from our higher margin DTC business,
partially offset by higher product input costs, due primarily to labor cost
inflation in our product costs, and foreign currency headwinds.
For fiscal 2014, the growth of our net income from continuing operations was
positively affected by a year-over-year decrease in our effective tax rate. In
addition, diluted earnings per common share grew at a higher rate than net
income due to a 1% decrease in the weighted average number of diluted
common shares outstanding as a result of share repurchases.
During the second quarter of fiscal 2013, we completed the sale of certain
assets of the Umbro brand and recorded a loss on the sale of these assets of
$107 million, net of tax. During the third quarter of fiscal 2013, we completed
the sale of Cole Haan and recorded a gain on sale of $231 million, net of tax.
As of May 31, 2013, the Company had substantially completed all transition
services related to the sale of both businesses. Unless otherwise indicated,
the following disclosures reflect the Company’s continuing operations; refer to
our “Discontinued Operations” section for additional information regarding our
discontinued operations.
While macroeconomic uncertainties in the global economy are likely to
persist, 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.
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