Nike 2013 Annual Report Download - page 20

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, through NIKE-owned retail stores and internet websites, which we
refer to as our “Direct to Consumer” 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,
accessories and service 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:
– Making our supply chain a competitive advantage;
– Reducing product costs through a continued focus on manufacturing
efficiency, product design and innovation; and
– Delivering innovative, premium products that command higher prices
while maintaining a strong consumer price-to-value proposition.
• 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,
• Increased return on invested capital and accelerated cash flows, and
• Consistent results through effective management of our diversified portfolio
of businesses.
Over the past ten years, we have achieved or exceeded all of these financial
goals. During this time, revenues and earnings per share for NIKE, Inc.,
inclusive of both continuing and discontinued operations, have grown 9% and
15%, respectively, on an annual compounded basis. Our return on invested
capital has increased from 18% to 24% and we expanded gross margins by
approximately 260 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 2013 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
the ongoing challenges in the global economy, we delivered record revenues
and earnings per share in fiscal 2013. Our revenues grew 8% to $25.3 billion,
net income from continuing operations increased 9% to $2.5 billion, and we
delivered diluted earnings per share of $2.69, an 11% increase from fiscal
2012.
Earnings before interest and income taxes for continuing operations
increased 8% for fiscal 2013, driven by revenue growth and improved gross
margin, which more than offset higher selling and administrative expense as a
percentage of revenue. The increase in revenues was driven by growth
across most 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-
F.I.T, 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 (such as
the NFL, FC Barcelona, Michael Jordan), high impact marketing around
global sporting events (such as the Olympics, European Football
Championships and NBA Finals) and digital marketing; and
• Strong category retail presentation online and at NIKE owned and retail
partner stores.
Revenues also improved for each of our Other Businesses (Converse, NIKE
Golf and Hurley).
Our gross margins improved largely due to the positive impact of higher
average selling prices, partially offset by higher product input costs, primarily
labor cost inflation, and foreign currency headwinds.
For fiscal 2013, 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 share grew at a higher rate than net income due
to a 2% decrease in the weighted average number of diluted common shares
outstanding, as a result of share repurchases during fiscal 2013.
On May 31, 2012, we announced our intention to divest of the Cole Haan and
Umbro businesses, which would allow us to better focus our resources on
driving growth in the NIKE, Jordan, Converse and Hurley brands. 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 we expect to face continued macroeconomic uncertainties in the global
economy, 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.
NIKE, INC. 2013 Annual Report and Notice of Annual Meeting 65
FORM 10-K