OVERVIEW
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 throughNIKE -owned retail stores and through digital platforms (which we refer to collectively as our "NIKE Direct" operations), to retail accounts and to 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 through digital platforms and at retail. Since fiscal 2018, through the Consumer Direct Offense and our Triple Double strategy, we have focused on doubling the impact of innovation, increasing our speed and agility to market and growing our direct connections with consumers. InJune 2020 , we announced a new digitally empowered phase of the Consumer Direct Offense strategy: Consumer Direct Acceleration. This strategic acceleration will focus on three specific areas. First, creating the marketplace of the future through more premium, consistent and seamless consumer experiences that more closely align with what consumers want and need. This strategy will lead withNIKE Digital and our own stores, as well as through select strategic partners who share our marketplace vision. Second, we will align our product creation and category organizations around a new consumer construct focused on Men's, Women's and Kids'. This approach is intended to allow us to create product that better meets individual consumer needs, including more specialization of our category approach, while re-aligning and simplifying our offense to accelerate our largest growth opportunities. In particular, we expect to reinvest in our Women's and Kids' businesses and also simplify our operating model across the remainder of the Company to optimize effectiveness. Third, we will unify investments in data and analytics, demand sensing, insight gathering, inventory management and other areas against an end-to-end technology foundation to accelerate our digital transformation. We believe this unified approach will accelerate growth and unlock more efficiency for our business, while driving speed and responsiveness as we serve consumers globally. As a result of our strategic acceleration, management announced onJuly 22, 2020 , a series of leadership and operating model changes to streamline and speed up our execution. These changes will result in a net reduction of our global workforce and we expect to incur pre-tax charges of approximately$315 million , the majority of which relate to employee termination costs and, to a lesser extent, stock-based compensation expense. These amounts reflect the continued evaluation and variability of our original estimate of employee termination costs and required changes in assumptions used to calculate stock-based compensation expense. For the first six months of fiscal 2021, we incurred pre-tax charges of$218 million and expect all remaining actions to be substantially complete by the end of fiscal 2021. We expect future annual wage-related savings will be reinvested to execute against this next phase of our strategy. For more information related to our organizational realignment and related costs, see Note 14 - Restructuring within the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. COVID-19 UPDATE The COVID-19 pandemic continues to impact our business results and operations globally, causing us to transform the way we operate in order to better serve our consumers. Although uncertainty due to the pandemic continues to exist, our financial results for the second quarter and first six months of fiscal 2021 demonstrate our ability to navigate the dynamic situation. Despite physical retail traffic being below prior year levels, Revenues grew 9% and 4% for the second quarter and first six months of fiscal 2021, respectively, and 7% and 4% on a currency-neutral basis. Through our intentional supply and demand management, inventory levels have declined, and we ended the second quarter of fiscal 2021 with Inventories down 17% compared toMay 31, 2020 . We reduced discretionary spending while continuing to invest in our digital transformation. As a result, total selling and administrative expense declined 2% for the second quarter and 6% for the first six months of fiscal 2021. However, we expect Demand creation expense to increase in future periods as major sporting events and key sports moments resume following recovery from the pandemic, along with investments in strategic areas to drive growth. Our liquidity position remains strong and we ended the second quarter with$11.8 billion of Cash and equivalents and Short-term investments. OurNIKE Direct business continues to fuel our growth as we navigate through the pandemic, leveraging our digital assets with our store footprint to connect directly with the consumer. On a reported basis,NIKE Direct sales for the second quarter and first six months of fiscal 2021 were$4.3 billion and$8.0 billion , respectively, growing 30% and 22%, respectively, on a currency-neutral basis.NIKE Brand digital remained our fastest growing channel, with growth of 80% and 81% for the second quarter and first six months of fiscal 2021, respectively. During the second quarter of fiscal 2021, we experienced temporary store closures in geographies affected by rising COVID-19 cases; however, more than 80% of our owned stores were open as ofJanuary 4, 2021 , with some operating on reduced hours. Despite a substantial majority of stores being open during the quarter, we experienced a
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decline in comparable store sales in EMEA,North America and APLA, primarily due to reduced physical retail traffic, in part resulting from safety-related measures in response to COVID-19. We continue to monitor the ongoing and evolving situation, as well as guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, we expect that fiscal 2021 will continue to be a time of uncertainty across each of our geographies and we expect each market recovery will be dynamic. While our results for the second quarter and first six months of fiscal 2021 are positive, there remains the risk that COVID-19 could have material adverse impacts on our future revenue growth as well as our overall profitability and may lead to higher than normal inventory levels in various markets, revised payment terms with certain of our wholesale customers, higher sales-related reserves and a volatile effective tax rate driven by changes in the mix of earnings across the Company's jurisdictions. SECOND QUARTER OVERVIEW For the second quarter of fiscal 2021,NIKE, Inc. Revenues increased 9% to$11.2 billion compared to the second quarter of fiscal 2020. On a currency-neutral basis, Revenues increased 7%. Net income was$1,251 million and diluted earnings per common share was$0.78 for the second quarter of fiscal 2021, compared to Net income of$1,115 million and diluted earnings per common share of$0.70 for the second quarter of fiscal 2020. Income before income taxes increased 17% compared to the second quarter of fiscal 2020, primarily due to higher revenues and lower selling and administrative expense, partially offset by a decline in gross margin. TheNIKE Brand, which represents over 90% ofNIKE, Inc. Revenues, increased 9% compared to the second quarter of fiscal 2020. On a currency-neutral basis,NIKE Brand revenues grew 8%, driven by higher revenues across all geographies, footwear and apparel, as well as growth in most key categories, primarily Sportswear and the Jordan Brand. Revenues for Converse decreased 1% and 4% on a reported and currency-neutral basis, respectively, as double-digit growth in digital and growth inAsia were more than offset by declines inEurope andNorth America , primarily due to tighter supply and strategic distribution shifts. Our effective tax rate was 14.1% for the second quarter of fiscal 2021 compared to 10.7% for the second quarter of fiscal 2020, primarily due to changes in the proportion of earnings taxed in theU.S. and an increase in tax associated with the recent finalization ofU.S. tax regulations, partially offset by a more favorable impact from stock-based compensation. During the third quarter of fiscal 2020, we entered into definitive agreements to sell ourNIKE Brand businesses inBrazil ,Argentina ,Chile andUruguay and to shift to a distributor operating model. The transaction with Grupo SBF S.A. to purchase substantially all of ourNIKE Brand operations inBrazil closed onDecember 1, 2020 , subsequent to the end of the second quarter of fiscal 2021. Additionally, subsequent to the end of the second quarter of fiscal 2021, we mutually agreed with Grupo Axo to terminate the sale and purchase agreement for the transition ofNIKE's businesses inArgentina ,Chile andUruguay to a distributor partnership. However, as we remain committed to selling ourNIKE Brand businesses in all three countries to third-party distributors, the assets and liabilities of the entities will remain classified as held-for-sale on our Unaudited Condensed Consolidated Balance Sheets. For more information see Note 13 - Acquisitions and Divestitures within the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. USE OF NON-GAAP FINANCIAL MEASURES Throughout this Quarterly Report on Form 10-Q, we discuss non-GAAP financial measures, including references to wholesale equivalent revenues, currency-neutral revenues as well as TotalNIKE Brand earnings before interest and taxes (EBIT) andTotal NIKE, Inc. EBIT, which should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP"). References to wholesale equivalent revenues are intended to provide context as to the total size of ourNIKE Brand market footprint if we had noNIKE Direct operations.NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to ourNIKE Direct operations, which are charged at prices comparable to those charged to external wholesale customers. Currency-neutral revenues are calculated using actual exchange rates in use during the comparative prior year period to enhance the visibility of the underlying business trends excluding the impact of translation arising from foreign currency exchange rate fluctuations. EBIT is calculated as Net Income before Interest expense (income), net and Income tax expense in the Unaudited Condensed Consolidated Statements of Income. Management uses these non-GAAP financial measures when evaluating the Company's performance, including when making financial and operating decisions. Additionally, management believes these non-GAAP financial measures provide investors with additional financial information that should be considered when assessing our underlying business performance and trends. However, references to wholesale equivalent revenues, currency-neutral revenues and EBIT should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance withU.S. GAAP and may not be comparable to similarly titled non-GAAP measures used by other companies. 26 --------------------------------------------------------------------------------
Table of Contents RESULTS OF OPERATIONS THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30, (Dollars in millions, except per share data) 2020 2019 % CHANGE 2020 2019 % CHANGE Revenues$ 11,243 $ 10,326 9 %$ 21,837 $ 20,986 4 % Cost of sales 6,396 5,782 11 % 12,249 11,571 6 % Gross profit 4,847 4,544 7 % 9,588 9,415 2 % Gross margin 43.1 % 44.0 % 43.9 % 44.9 % Demand creation expense 729 881 -17 % 1,406 1,899 -26 % Operating overhead expense 2,538 2,443 4 % 4,836 4,753 2 % Total selling and administrative expense 3,267 3,324 -2 % 6,242 6,652 -6 % % of revenues 29.1 % 32.2 % 28.6 % 31.7 % Interest expense (income), net 70 12 - 135 27 - Other (income) expense, net 54 (41) - 40 (74) - Income before income taxes 1,456 1,249 17 % 3,171 2,810 13 % Income tax expense 205 134 53 % 402 328 23 % Effective tax rate 14.1 % 10.7 % 12.7 % 11.7 % NET INCOME$ 1,251 $ 1,115 12 %$ 2,769 $ 2,482 12 %
Diluted earnings per common share $ 0.78 $ 0.70
11 %$ 1.73 $ 1.56 11 % 27
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