Sheerin Khan, Krystal Lam, Simone Walker, Megan Hsia

ACTG 11 - Professor Badger

November 16th, 2018
Nike Financial Analysis Project

1. Background Information

Nike is the world's leading supplier of athletic shoes and apparel and a major manufacturer

of sports equipment. They are most commonly known for their “swoosh” logo and “Just Do it”

slogan. The company was incorporated in 1968 in Beaverton, Oregon which is also where it is

headquartered today. The current Chief Executive Officer (CEO) of Nike is Mark Parker and the

current Chief Financial Officer (CFO) is Don Blair. The company operates world-wide. Its

manufacturing takes place primarily in China, Vietnam, and Indonesia and its highest volume of

sales is in North America. Nike also makes significant sales in Europe, the Middle East, and China.

In the past several years, there have been some changes in executive management and

employment. From 2017-2018, there was a small decrease in employees (from 74,400 to 73,100).

This could have been due to the several controversial issues surrounding Colin Kaepernick. Also in

the year 2018, Mark Parker the current chairman, president and CEO has signed a contract that will

allow him to hold out his position beyond the year 2020. In February 2016, Adam Sussman took

over as Chief Digital Officer. In the year 2015, Jim Scholefield took the position of Chief

Information Officer and Bob Hurley stepped down as CEO of Hurley, a previous acquisition of

Nike.

This company is in the retail industry. It’s focus is primarily on athletic apparel, athletic

accessorize, and sports equipment. Nike’s industry outlook is that they’d like to reach a $50 billion

revenue goal within the next 5 years. The company’s main competitors are Adidas, Under Armour

and New Balance. It is traded on the New York Stock Exchange (NYSE) and the ending date of

Nike’s most recent fiscal year was May 31st, 2018.

2. Financial Statements and Financial Statement Notes (15 points)

 Nike’s auditor has been PricewaterhouseCoopers LLP since 1974. In the opinion of

PricewaterhouseCoopers, Nike’s consolidated financial statements for the year ending May 31,

2018 are presented fairly and accurately in accordance to United States GAAP. PWC is registered

with the United States PCAOB and has performed audits in accordance to these standards which

includes assessing the internal controls over financial reporting in Nike ensuring there are no

misstatements. Therefore, PricewaterhouseCoopers believes that Nike has reported accurate

statements that accurately reflect the period according to specific guidelines.

One major trend that we notice is Nike’s net income decreasing by more than 50% from

2017 to 2018. This could indicate that Nike is spending more, therefore increasing their expenses

and decreasing net income. This could also mean that they have incurred a significant amount of

liabilities in 2017 that needed to be reported on the balance sheet and expensed over time starting

in 2018. Also in the notes, Nike makes note of “Demand Creation Expense”, which if we look at it

on the income statement, increased by about $200 million dollars from 2017 to 2018. This increase

could have been driven from an increase customer demand or Nike’s need to retain customer

satisfaction from an ethical perspective. However, in Note 9 - Income Taxes, Nike reports that due

to tax legislation changes (Tax Act) the rate is a blended U.S. federal statutory rate of 29%.

Additionally, because Nike is an international company as well, they decided to include the global

intangible low taxed income (GILTI) provision, included in the Tax Act, but not yet applicable to

the company at the time, as a current period expense, which is what has definitely contributed to

the significant tax expense for the current year and the significantly lowered net income.

2018 (in millions) 2017 ( in millions) 2016 (in millions)

Revenues $36,397 $34,350 $32,376

Gross Profit $15,956 $15,312 $14,971

Income from operations $4,955 $3,846 $3,399

2
Net Income $1,933 $4,240 $3,760
Nike’s cash flow from investing activities resulted in a positive cash flow in 2018. In 2016,

the company had negative cash flow for 1.034 billion, but increased to a positive cash flow of 276

million in 2018. Cash flows from operating activities was positive and increased from $3.4 billion

in 2016 to $4.95 billion in 2017, which is an increase of $1.55 billion. Cash flows from financing

activities have been negative for all three years. Compared to 2017, 2018’s cash used nearly

doubled to $4.835 billion.

The net change in cash and equivalents for the statement of cash flow does not show a

general trend in the past three years. In 2016, the net change in cash was a decrease of $714

million. However both 2017 and 2018 had positive cash flow, with a net change in cash of $660

million and $441 million consecutively.

As stated previously, cash flow from operations has been positively increasing. The

difference between 2018 to 2016’s cash used for operations was $1.566 billion, and each year has

been increasing slowly. Net income started off with $3.760 billion in 2016, to $4.240 billion in

2017, and $1.933 billion in 2018. Therefore, net income from 2016 to 2018 has generally

decreased, though it did increase a little from 2016 to 2017. The difference from 2018 to 2016 is

$1.827 billion. Both cash flow from operation to net income are different because operating cash

flow has been increased from 2016 to 2018 while net income has decreased from 2016 to 2018.

Nike does appear to be expanding through investing activities. Their cash flow from

investing activity went from negative cash flow in 2016 and 2017 to positive in 2018. Therefore,

the company is not spending more cash than receiving in 2018, which was different in 2017 and

2016. A positive cash flow indicates that cash inflows are higher than cash outflows. An example of

Nike’s expansion through investing activities is their acquisition of the consumer data analytics

company Zodiac Inc.

3
 Nike relies more heavily on equity financing. Over the three years, Nike has not increased

financing in notes payable, rather they have continued to decrease it. As a result, the company has

continued to repurchase common stock, increasing over the three years, which has also increased

the proceeds from exercising stock options account. They also pay out a significant amount of

dividends to their shareholders instead of retaining those earnings which is supported by lowered

net income on the income statement, lowered retained earnings compared to the past 4 years, as

reported on the statement of stockholders equity, and increasing numbers on the statement of cash

flows. For this report it should be noted that Nike did not report unearned/deferred revenue in the

two most recent years.

For revenue recognition, wholesale revenues are recorded by FOB shipping point and at

retail stores, the revenue will be recognized at the point of sale, and for online sales revenue will be

recognized when the product has been shipped to the customer. For sales discounts, returns and

miscellaneous claims, Nike will estimated and record the transaction as a reduction to revenue at

the point of the sale. These estimates are based on historical rates, specific identification of

outstanding claims and outstanding returns not yet received from customers and estimated

discounts, returns and claims expected.

There was no section within the notes about policies related to accounts receivable.

Inventories are stated at a the lower of cost and the net realizable value and are valued on

either an average or specific identification cost basis. “Inventory cost primarily consists of product

cost from the Company’s suppliers, as well as inbound freight, import duties, taxes, insurance and

logistics and other handling fees” (10-k, pg 51).

Property, Plant, and equipment are recorded at cost and the depreciation for these long-term

assets are determined on a straight-line basis for manufacturing, warehousing and product

distribution. All other assets are recorded in operating overhead expense.

4
 Nike implemented ASU 2014 - 09 in May of 2014. This way revenue recognition says that

the company should recognize revenue “in a ways that depicts the transfer of promised goods or

services to customers in an amount that reflect the consideration to which the entity expects to be

entitled in exchange for those good or services” (10-k, pg 55). With ASU 2014-09, Nike does not

expect that this adoption of this standard to have a great impact on the Company’s net Revenues.

The revenues for certain wholesale transactions and digital sales will be FOB shipping point

meaning that they will recognize revenue when the shipment of the product has been delivered to

the customer. In addition, Nike will also recognize sales discounts, return and miscellaneous claims

as accrued liabilities rather than as reductions the Accounts receivable, net; and the estimated cost

of inventory associated with the provision for sales returns will be recorded with prepaid expenses

and other current assets on the Consolidated Balance Sheets”(10-k, 54).

In February of 2018, Nike adopted ASU 2018-02 and as a result of this change in revenue

recognition “ Retained earnings decreased by $17 million, with a corresponding increase to

Accumulated other comprehensive income due to the reduction in the corporate tax rate from 35%

to 21%” (10-k, pg 54).

3. Earnings Announcement and Analyst Reports

On September 25, 2018, Nike announced a summary of their earnings for their first fiscal

quarter of 2019 ended August 31, 2018. It details that the main results of their earnings is that their

revenue increased 10% compared to their first fiscal year of 2018. Their income before taxes have

increased and so has their net income. Nike attributes these results to increases across all categories

of their business, such as the brand itself, increased revenues from Converse, Nike digital

platforms, and Nike retail, which were leveraged by selling and administration expenses and higher

revenues across all global geographic regions in which Nike conducts business.

5
 The analyst’s forecast of Nike’s EPS before their earnings announcement was $0.62 and

their forecast for Nike’s revenue for the most recent fiscal quarter was expected at $9,879 million.

The company met those expectations where Nike’s actual EPS was $0.67 and their revenue was

$9.9 billion dollars for the first fiscal quarter 2019.

In an analysis after the company’s earning announcement, Nike’s positive results for the

most recent fiscal quarter is a slight beat in revenue and a slightly more substantial beat in EPS.

The analyst admits to Nike’s lower than expected SG&A and specific timing of certain investments

as Nike is taking into consideration timing in terms of sports season kickoffs. The SG&A expense

is expected to hit 2Q more substantially. The company is also regaining lost market share. The

negative result identified by the analyst is Nike deciding to guide fiscal year 2019 sales growth to

the “lower end” of +HSD% due to volatility in the foreign exchange market.

The analyst’s forecasts for the next fiscal year are that revenue is projected to be $41,517

million, revenue growth is expected to be at 6.2%, earnings per share are expected to be $2.95 and

earnings per share growth is expected to be at 13.3%

As a result of the earnings announcement and Nike’s presented adjustments in terms of

expectations, the analysts are also decreasing their FY19 sales estimates as well as their 2Q sales

estimates. They have decreased their expected estimate of net sales for FY2020 to $41,527

decreased from $42,045 from before the release. Before the release, analysts predicted a $3.00 EPS

which was later decreased $0.05 after the earnings release. They also continued to expect high

single digit (HSD) % sales growth but that expectation was only “likely” and changed after the

earnings release in accordance the company’s adjustments to a lower end HSD% on sales. The

analysts are remaining cautious and valuation sensitive as they also did not like Nike’s valuation

before the earnings release. The analyst’s overall recommendation was to hold. They predict that

Nike’s stock will be selling at $85 and that the target price end date is September 25th of 2018.
6
 The day after the earnings announcement, Nike’s stock price slightly decreased. It later

slightly increased and about a week later decreased significantly. This is what we expected because

as a result of the earnings release, and Nike’s necessary adjustments to guide sales and sales growth

to a lower end HSD% cautious of the volatile foreign market, is concerning to investors who would

want to continue to see a trend of profitability and sales growth increases.

4. Ratio Analysis

Liquidity Ratios:

Current Ratio: 2018 - 2.506 ; 2017 - 2.934 ; 2016 - 2.804

This ratio explains if a company’s current assets are able to cover its current liabilities. All of the

current ratios for Nike in the past three years have all been above one meaning that they current

assets are able to meet their short-term obligations and cover their liabilities.

Quick ratio: 2018 - 1.448 ; 2017 - 1.801 ; 2016 - 1.623

The quick ratio sees how liquid assets are sufficient to cover current liabilities. For the year 2018,

Nike had 1.45 in cash and near-cash asset for every $1.00 in current liabilities. All the ratios were

above 1. This means that their cash assets were able to cover their current liabilities for the years

2018, 2017 and 2016.

Working capital: 2018 - $9,094 ; 2017 - $10,587 ; 2016 - $9,667

Working capital is used to see if the liquidity and sufficiency of the current assets are able to

outweigh the current liabilities. Each amount shows the liquid assets a company has available to

run it’s operations. In the years 2016-2018, Nike has had an average of approximately $9,700 in

working capital per year.

Receivable turnover: 2018 - 10.146 ; 2017 - 9.931 ; 2016 - 9.812

7
The receivables turnover ratio suggest that a company collects its accounts receivable about 10

times a year across all three years. This means that they are able to collect on their accounts

receivable over/about 10 times within the year.

Average collection period: 2018 - 35.975 days ; 2017 - 36.754 days ; 2016 - 37.199 days

Based on the receivable turnover ratio it will take Nike an average of 36 days to collect on their

accounts receivable across all three years.

Inventory turnover: 2018 - 3.963 ; 2017 - 3.849 ; 2016 - 3.794

This ratio explains how often Nike has to order inventory and how fast they are able to sell it to

their customers. On average, Nike’s inventory was acquired and sold to their customers about 4

times during a year across all three years

Average days in Inventory: 2018 - 92.102 days ; 2017 - 94.830 days; 2016 - 96.205 days

Over the three years shown, it takes an average of 94 days for inventory to be sold to customers

once it’s been ordered.

Solvency Ratios:

Debt to equity ratio: 2018 - 1.297 ; 2017 - 0.875 ; 2016 - 0.745

This ratio is used to measure a company’s financial leverage. For each $1.00 of stockholders’

equity, Nike had $0.745 of liabilities for the year 2016 and $0.875 in. In 2016 and 2017, Nike had

good financial leverage. However, in 2018 Nike lost that leverage when their total liabilities

increased and stockholders equity decreased.

Profitability Ratios:

Gross profit margin: 2018 - 42.84% ; 2017 - 44.58% ; 2016 - 46.24%

The gross profit margin is used to measure the company’s financial health. This is shown by a

percentage of sales. Over the three years shown, they gross profit margin is approximately 44%

which indicates that Nike is making about 44% in profit after paying off its cost of goods sold.
8
 Net profit margin: 2018 - 5.31% ; 2017 - 12.34% ; 2016 - 11.61%

This ratio presents the net income as a percentage of sales for a given year. For the year 2016, for

each $1.00 of sales generates a little over 11 cents of profit. This number increased to a little over

12 cents for the year 2017. The profit in 2018, dropped dramatically to just over 5 cents of profit on

each $1.00 of sales generated.

Total asset turnover: 2018 - $1.59 ; 2017 - $1.54 ; 2016 - $1.51

On average, each $1.00 of asset on Nike’s balance sheet will generate $1.51 of revenue(for the year

2016). The company is generating $1.54 of revenue on each $1.00 of asset in the year 2017 and

$1.59 for the year 2018. This total asset turnover ratio has been slowly and steadily increasing each

year due to the net sales revenue steadily increasing throughout the three years.

Return on assets: 2018 - 8.4% ; 2017 - 19.0% ; 2016 - 17.5%

The return on assets ratio says that for every $1.00 of assets reported on the balance sheet, the

company will earn about 8 cents in fiscal 2018. From 2016 to 2017 there was a slight increase in

the ratio, but the ratio decreased by a little more than half from 2017 to 2018.

Return on equity: 2018 - 0.174 ; 2017 - 0.344 ; 2016 - 0.301

The return on equity ratio shows the money made by investments made by the company’s

owners/investors. Investors expect to make around 17% less in 2018 than the previous year. This

indicates that the investors of Nike, in 2018, did not earn as much as the previous years. This is due

to the net income and the average amount of stockholders equity decreasing in 2018

Earnings Per Share: 2018 - 1.17 ; 2017 - 2.51 ; 2016 - 2.16

Earnings per share is a portion of a company’s profit that is allocated to each share of a common

stock. This is a good indicator of Nike’s profitability. Across the three years, Nike’s common

stockholders have profited on their investment but in 2018, they only made about 1.17 times on

their investment as opposed to the 2.51 and 2.16 in the previous years.
9
5. Investment and Lending Decisions

Based on our research of the company, our team’s investment recommendation would be to

hold Nike’s stock. A key factor in making this decision is the Earnings Per Share ratio. While

Nike’s common stockholders have been profitable, the amount they were profitable by did decrease

from 2.51 and 2.16 times their investment to only 1.17 times their investment. While this does not

mean that Nike’s profitability is declining severely, it does mean that the company’s upward trend

of profitability took a slight dip which is mildly concerning so we would hold stock. Another ratio

that demonstrates slight weakening of the company is the Return on Equity ratio. The ratio shows a

dip from .344 to .174 which demonstrates that in 2018 investors of Nike did not earn as much as

they have in previous years. This is primarily because of the decrease in net income and the

average amount of stockholders equity decreasing in 2018. The dip from .344 to .174 is rather large

but not too severe, so we would continue to hold our stock. Furthermore, from observing the

Return on Assets ratio we see that from 2016 to 2017 there was a slight increase in the ratio, but

then the ratio decreased by a little more than half from 2017 to 2018. This decrease from 19% in

10
Financial Statements for 2018 (including 2017)

11
12
13
14
Financial Statements for 2016:

15
Auditor's Report - PricewaterhouseCoopers LLP

16
Ratio Analysis Math
Current Ratio = current assets/ current liabilities

17
2018 2017 2016

$15,134/ $6,040 = 2.506 $16,061/ $5,474 = 2.934 $15,025/ $5,358 = 2.804

Quick ratio = (Cash and cash equivalents + Net Receivables + Marketable Securities)/ Current
Liabilities
2018 2017 2016

($4,249 + $3,498 +$996)/ ($3,808 + $3,677 + $2,371)/ ($3,138 + $3,241 + $2,319) /

$6,040 = 1.448 $5,474 = 1.801 $5,358 = 1.623

Working capital = Current assets - Current Liabilities

2018 2017 2016

$15,134 - $6,040 = $9,094 $16,061-$5,474 = $10,587 $15,025 - $5,358 = $9,667

Receivable turnover
=Net Credit Sales/ Average net receivables or Total net sales/ Average net receivables
2018 2017 2016

$36,397 / [(3,498+3677)/2] = $34,350 / [(3677+3241)/2]= $32,376 / [(3241+3358)/2]=

10.146 9.931 9.812

Average collection period = 365 / Receivable turnover ratio

2018 2017 2016

365 / 10.146 = 35.975 365 / 9.931 = 36.754 365 / 9.812 = 37.199

Inventory turnover = COGS / Average Inventory

2018 2017 2016

$20,441/[(5261+5055)/2]= $19,038/[(5055+4838)/2]= $17,405/[(4838+4337)/2]=

3.963 3.849 3.794

Average days in Inventory = 365 / Inventory turnover ratio

2018 2017 2016

365 /3.963 = 92.102 365 / 3.849 = 94.830 365 / 3.794 = 96.205

Debt to equity ratio = Total Liabilities / Total Stockholders Equity

2018 2017 2016

18
$12,724/$9,812 = 1.297 $10,852/$12,407= 0.875 $9,138/$12,258 = 0.745

Gross profit margin = Gross Profit / Net Sales revenue

2018 2017 2016

$15,956/ $36,397 = 42.84% $15,312/ $34,350 = 44.58% $14,971/ $32,376 = 46.24%

19
Net profit margin = Net Income / Net Sales Revenue
2018 2017 2016

$1,933/ $36,397 = 5.31% $4,240/ $34,350 = 12.34% $3,760/ $32,376 = 11.61%

Total asset turnover = Net Sales Revenue / Average total assets

2018 2017 2016

$36,397/ $22,897.5 = 1.59 $34,350/ $22,327.5 = 1.54 $32,376/ $21,496.5 = 1.51

Return on assets = Net Income / average total assets

2018 2017 2016

$1,933/ $22,897.5 = 8.4% $4240/ $22,327.5 = 19.0% $3,760 / $21,496.5 =17.5%

Return on equity = Net Income / Average total stockholders equity

2018 2017 2016

$1,933/ [(9,812+12,407)/2] = $4,240 /[(12,407+12,258)/2] = $3,760 / [(12,258+12,707)/2]

0.174 0.344 = 0.301

Earnings per share (note that firms report EPS on their income statements)
= Net Income / Weighted average number of shares outstanding
2018 2017 2016

$1,933/ 1652.14 = 1.17 $4,240 / 1689.24 = 2.51 $3,760 / 1740.74 =2.16

Works Cited

https://www.sec.gov/Archives/edgar/data/320187/000032018718000142/nke-
5312018x10k.htm#s94BF491D577D6C2986E4E66929FEE532

https://news.nike.com/leadership

https://www.sec.gov/Archives/edgar/data/320187/000032018718000142/nke-
5312018x10k.htm#s94BF491D577D6C2986E4E66929FEE532

https://www.statista.com/statistics/241692/nikes-sales-by-region-since-2007/

https://www.marketwatch.com/story/nike-preview-momentum-is-growing-but-is-it-enough-to-
reach-50-billion-sales-goal-2018-06-25

https://news.nike.com/news/nike-inc-reports-fiscal-2018-fourth-quarter-and-full-year-results

https://business.nmsu.edu/~dboje/nikestockstories.html
https://www.marketwatch.com/story/nike-acquires-2nd-company-in-a-month-for-its-customer-strategy-
2018-04-09

http://fortune.com/2018/09/14/nike-closes-another-record-high-wake-endorsement-colin-kaepernick/