Nike Inc. (NKE) is a global company that designs, develops, markets and sells athletic footwear, apparel, equipment, accessories, and services. Although primarily designed for athletic use, many of its products are worn for casual or leisure activities. The majority of Nike's products are manufactured by independent contractors, and are sold either direct-to-consumers through Nike retail outlets and digital platforms, or through independent distributors, licensees, and sales representatives.

Nike, which is based on Oregon, has a large number of major global rivals, including Adidas AG (ADDYY), ASICS Corp. (7936), Lululemon Athletica Inc. (LULU), Puma SE (PUMSY), and Under Armour Inc. (UAA).

Key Takeaways

  • Nike designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories.
  • Most of Nike's sales are generated by selling footwear to wholesale customers in North America.
  • Both Nike's direct-to-consumer sales business and Greater China operations have seen the fastest growth.
  • Nike has temporarily closed about half of its stores in China due to coronavirus, and says this will materially affect its Greater China business segment.

Nike’s Financials

Nike posted net income of $4.0 billion on $39.1 billion of revenue during its FY 2019, which ended May 31, 2019. Net income grew by 108.4% in FY 2019 compared to a decline of 54.4% in FY 2018. Revenue accelerated, rising by 7.5% compared to 6.0% in FY 2018.

Nike's net income growth in FY 2019 was abnormally inflated because of the large decline in net income in FY 2018. That decline was largely due to one-time tax expenses related to the Tax Cuts and Job Act enacted in late 2017, causing Nike's effective income tax rate to soar from 13.2% in FY 2017 to 55.3% in FY 2018. Lower U.S. federal and state taxes due to the tax cuts helped to reduce the company's effective tax rate to 16.1% in FY 2019. That tax rate was still higher than in FY 2017 due to higher foreign and deferred tax charges.

The acceleration in revenue growth continued during the first six months of FY 2020. In Q2 of FY 2020, Nike posted year-over-year (YOY) revenue growth of 8.6% for the six-month period ended November 30 as net income grew by 28.0%.

Nike’s Business Segments

Nike breaks its financial metrics into three categories: NIKE Brand; Converse; and Corporate. The NIKE Brand also is further broken down into geographical segments: North America; Europe, Middle East & Africa; Greater China; Asia Pacific & Latin America; and Global Brand Divisions. The NIKE Brand segment comprises 95.1% of the company's total revenue and 96.9% of the company's total EBIT.

Nike also breaks out revenue, but not profits, for its major product lines and distribution channels. The share of revenue generated by each of Nike's product lines, for example, is: Footwear (66.1%); Apparel (29.8%); Equipment (3.6%); and Other. A negligible amount is attributable to Other, which includes revenue from licensing businesses of the Global Brand Divisions and Converse segments, and to foreign currency hedge gains and losses accounted for in the Corporate segment. Footwear revenue rose by 8.8% in FY 2019, making it the fastest growing product line.

Nike reports both revenue and EBIT, its primary measure for evaluating operating performance, for its geographic business segments. The data reported in the pie charts above and in the breakdowns below exclude segments with negative revenue or negative profits.

NIKE Brand: North America

Nike's North America segment posted $15.9 billion in revenue in FY 2019, comprising nearly 41% of total revenue. EBIT came in at $3.9 billion, comprising almost 40% of the total. The segment's annual revenue and EBIT growth for the period was 7.0% and 9.0%, respectively.

NIKE Brand: Europe, Middle East & Africa

Nike's Europe, Middle East & Africa segment posted $9.8 billion in revenue during FY 2019, comprising about 25% of total revenue. EBIT was $2.0 billion, just over 20% of the total. Revenue and EBIT growth were 6.2% and 25.7%, respectively.

NIKE Brand: Greater China

Nike's Greater China segment posted $6.2 billion in revenue in FY 2019, nearly 16% of total revenue. EBIT was $2.4 billion, comprising about 24% of the total. Revenue and EBIT growth for the period were 20.9% and 31.5%, respectively.

NIKE Brand: Asia Pacific & Latin America

Nike's Asia Pacific & Latin America segment posted $5.3 billion in revenue during FY 2019, more than 13% of total revenue. EBIT was $1.3 billion, also about 13% of the total. Annual revenue and EBIT growth were 1.7% and 11.3%, respectively.

NIKE Brand: Global Brand Divisions

Nike's Global Brand Divisions segment revenue is primarily attributable to NIKE Brand's licensing businesses that are not part of any of the geographic segments. The division posted $42 million in revenue during FY 2019, making up a scant 0.1% of total revenue. The segment posted a $3.3 billion loss before interest and taxes as revenue fell 52.3%.

Converse

Nike's Converse segment is engaged in the design, distribution, licensing and sale of casual sneakers, apparel and accessories under the following trademarks: Converse, Chuck Taylor, All Star, Star Chevron, and Jack Purcell. The segment posted $1.9 billion in revenue during FY 2019, comprising about 5% of the total. It reported $303 million in EBIT, more than 3% of the total. Revenue grew 1.1% while EBIT declined.

Corporate

Nike's Corporate segment revenue primarily consists of foreign currency hedge gains and losses related to revenues generated by Nike's other operating segments. The segment posted a loss before interest and taxes of $1.8 billion.

Nike also breaks down the share of revenue from its distribution channels: Sales to Wholesale Customers (68.2%); Sales through Direct to Consumer (i.e. NIKE Direct) (31.5%); and a negligible amount from the rest. Direct to Consumer was the fastest growing distribution channel in FY 2019, rising 12.7%.

Nike’s Recent Developments

Nike announced in early February that it had temporarily closed about half of its stores in China due to threats posed by the coronavirus. The company also noted that it had reduced operating hours and had been experiencing lower-than-anticipated traffic in stores that remained open. Nike said it expected these developments to have a material impact on operations in Greater China, its fastest growing geographic segment.

Nike also recently announced changes to its leadership team. Executive Vice President and Chief Financial Officer (CFO) Andy Campion will become Chief Operating Officer (COO); and Matthew Friend, current CFO of Operating Segments and Vice President of Investor Relations, will become CFO.