Nike 2015 Annual Report Download - page 11

PART I
including without limitation the Olympics and the World Cup. 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 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, transportation disruptions 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 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 sales, our ability to collect on receivables and our financial
condition. 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.
If the technology-based systems that give our customers
the ability to shop with us online do not function effectively,
our operating results, as well as our ability to grow our e-
commerce business globally, could be materially adversely
affected.
Many of our customers shop with us through our e-commerce website and
mobile commerce applications. Increasingly, customers are using tablets and
smart phones to shop online with us and with our competitors and to do
comparison shopping. We are increasingly using social media and proprietary
mobile applications to interact with our customers and as a means to
enhance their shopping experience. Any failure on our part to provide
attractive, effective, reliable, user-friendly e-commerce platforms that offer a
wide assortment of merchandise with rapid delivery options and that
continually meet the changing expectations of online shoppers could place us
at a competitive disadvantage, result in the loss of e-commerce and other
sales, harm our reputation with customers, have a material adverse impact on
the growth of our e-commerce business globally and could have a material
adverse impact on our business and results of operations.
Risks specific to our e-commerce business also include diversion of sales
from our and our retailers’ brick and mortar stores, difficulty in recreating the
in-store experience through direct channels and liability for online content. Our
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