Nike 2016 Annual Report Download - page 34

PART II
In territories we define as “direct distribution markets” Converse designs,
markets and sells products directly to distributors, wholesale customers and
to consumers through DTC operations. The largest direct distribution markets
are the United States, the United Kingdom and China. We do not own the
Converse trademarks in Japan. Territories other than direct distribution
markets and Japan are serviced by third-party licensees who pay royalty
revenues to Converse for the use of its registered trademarks and other
intellectual property rights.
Fiscal 2016 Compared to Fiscal 2015
Excluding changes in foreign currency exchange rates, Converse revenues
increased 2% for fiscal 2016. Comparable direct distribution markets (i.e.
markets served under a direct distribution model for comparable periods in
the current and prior fiscal years) grew 4%, contributing approximately 3
percentage points of total Converse revenue growth for fiscal 2016.
Comparable direct distribution market unit sales decreased 2%, while higher
ASP per unit contributed approximately 6 percentage points of direct
distribution market revenue growth. On a territory basis, growth in the United
States and Asia Pacific was partially offset by declines in Europe, primarily the
United Kingdom. Conversion of markets from licensed to direct distribution
markets had an insignificant impact on total Converse revenue growth for
fiscal 2016. Revenues from comparable licensed markets decreased 15% for
fiscal 2016, reducing total Converse revenue growth by approximately 1
percentage point. The decrease in comparable licensed markets revenues
was primarily due to poor macroeconomic conditions in Latin America.
Reported EBIT for Converse decreased 6% for fiscal 2016 as a decrease in
reported revenues and lower gross margin more than offset selling and
administrative expense leverage. Gross margin declined 220 basis points as
unfavorable standard foreign currency exchange rates, shifts in mix to higher-
cost products and higher off-price mix more than offset higher full-price ASP.
Selling and administrative expense declined faster than reported revenues
primarily due to lower demand creation, which more than offset slightly higher
operating overhead due to investments in infrastructure to support growth.
Fiscal 2015 Compared to Fiscal 2014
Excluding changes in currency exchange rates, revenues for Converse
increased 21% for fiscal 2015. Comparable direct distribution markets grew
14%, contributing 12 percentage points of total revenue growth for fiscal
2015. Comparable direct distribution market unit sales increased 12% and
higher ASP per unit contributed approximately 2 percentage points of
Converse comparable direct distribution market revenue growth. The United
States market was the most significant contributor to the growth of
comparable direct distribution markets due to volume increases with key
wholesale customers and expansion of our DTC business. Conversion of
markets from licensed to direct distribution contributed 8 percentage points of
total Converse revenue growth for fiscal 2015, driven by conversion of several
European markets, most significantly AGS (Austria, Germany and
Switzerland). Revenues from comparable licensed markets increased 8% for
fiscal 2015, contributing 1 percentage point of total Converse revenue
growth.
EBIT for Converse increased 4% for fiscal 2015 as strong revenue growth
was partially offset by lower gross margin and higher selling and administrative
expense. Gross margin decreased 60 basis points primarily due to transitions
of licensed markets to direct distribution markets. Selling and administrative
expense increased for fiscal 2015, primarily due to higher operating overhead
costs resulting from investments in infrastructure to support current and future
growth, including market transitions, new systems and new headquarters, as
well as higher intellectual property enforcement costs.
Corporate
(Dollars in millions) Fiscal 2016 Fiscal 2015 % Change Fiscal 2014 % Change
Revenues $ (86) $ (82) — $ 3 —
(Loss) Before Interest and Taxes $ (1,173) $ (1,097) 7%$ (1,036) 6%
Corporate revenues primarily consist of foreign currency hedge gains and
losses related to revenues generated by entities within the NIKE Brand
geographic operating segments and Converse but managed through our
central foreign exchange risk management program.
The Corporate loss before interest and taxes consists largely of unallocated
general and administrative expenses, including expenses associated with
centrally managed departments; depreciation and amortization related to our
corporate headquarters; unallocated insurance, benefit and compensation
programs, including stock-based compensation; and certain foreign currency
gains and losses.
In addition to the foreign currency gains and losses recognized in Corporate
revenues, foreign currency results in Corporate include gains and losses
resulting from the difference between actual foreign currency rates and
standard rates used to record non-functional currency denominated product
purchases within the NIKE Brand geographic operating segments and
Converse; related foreign currency hedge results; conversion gains and
losses arising from re-measurement of monetary assets and liabilities in non-
functional currencies; and certain other foreign currency derivative
instruments.
Fiscal 2016 Compared to Fiscal 2015
For fiscal 2016, Corporate’s loss before interest and taxes increased $76
million primarily due to the following:
•an increase of $179 million, primarily driven by higher operating overhead
expense to support corporate growth initiatives;
•a beneficial change of $76 million from net foreign currency losses to net
foreign currency gains related to the difference between actual foreign
currency exchange rates and standard foreign currency exchange rates
assigned to the NIKE Brand geographic operating segments and Converse,
net of hedge gains; these gains are reported as a component of
consolidated gross margin; and
•a beneficial change of $27 million in net foreign currency gains related to the
re-measurement of monetary assets and liabilities denominated in non-
functional currencies and the impact of certain foreign currency derivative
instruments, reported as a component of Other (income) expense, net.
Fiscal 2015 Compared to Fiscal 2014
For fiscal 2015, Corporate’s loss before interest and taxes increased $61
million primarily due to the following:
•a $203 million increase, primarily in corporate overhead expense related to
corporate initiatives to support growth of the business as well as higher
performance-based compensation;
•a $144 million beneficial change from net foreign currency losses to net
foreign currency gains, reported as a component of Other (income)
expense, net;and
•an approximate $2 million increase in foreign exchange losses related to the
difference between actual foreign currency exchange rates and standard
foreign currency exchange rates assigned to the NIKE Brand geographic
operating segments and Converse, net of hedge gains; these losses are
reported as a component of consolidated gross margin.
NIKE, INC. 2016 Annual Report and Notice of Annual Meeting 87
FORM 10-K