Chapter Review Case 1.2 Nike: Somewhere between a Swoosh and a Slam Dunk Nike, Inc.'s principal business activity involves the design, development, and LO 1-3 - Explain the purpose, underlying worldwide marketing of athletic concepts, and format of the balance sheet, footwear, apparel, equipment, income statement, and statement of cash accessories, and services for serious flows, and the importance of accounting and recreational athletes. Nike boasts quality. that it is the largest seller of athletic footwear and apparel the world. Nike LO 1-4 - Obtain an overview of useful tools sells products to retail accounts, for analyzing a firm's profitability, growth, and through Nike-owned retail stores and risk, including financial ratios, common-size Internet websites, and through a mix of financial statements, and percentage change independent distributors and licensees financial statements, as well as how to use throughout the world. Nearly all of this information to forecast the future Nike's footwear and apparel products business activities of a firm, and to value a are produced in Asia (Vietnam, China, firm. and Indonesia) and elsewhere outside of the U.S., while equipment products are produced both in the U.S. and abroad. For more information, visit Nike's investor relations website page: www.investors.nike.com/Home/default.aspx. * This case uses Nike's financial statements and excerpts from its notes to review important concepts underlying the three principal financial statements (balance sheet, income statement, and statement of cash flows) and relations among them. The case also introduces tools for analyzing financial statements. Industry Economics Print Preview Product Lines Industry analysts debate whether the athletic footwear and apparel industry is a performance-driven industry or a fashion-driven industry. Proponents of the performance view point to Nike's dominant market position, which results in part from continual innovation in product development. Proponents of the fashion view point to the difficulty of protecting technological improvements from competitor imitation, the large portion of total expenses comprising advertising, the role of sports and other personalities in promoting athletic shoes, and the fact that a high percentage of athletic footwear and apparel consumers use the products for casual wear rather than athletic purposes. Growth There are only modest growth opportunities for footwear and apparel in the United States. Concern exists with respect to volume increases (how many pairs of athletic shoes do consumers want) and price increases (will consumers continue to pay prices for innovative athletic footwear that is often twice as costly as other footwear). Athletic footwear companies have diversified their revenue sources in two directions in recent years. One direction involves increased emphasis on international sales. With dress codes becoming more casual in Europe and East Asia, industry analysts view international markets as the major growth markets during the next several years. Increased emphasis on soccer (European football) in the United States aids companies such as Adidas that have reputations for quality soccer footwear. The second direction for diversification is sports and athletic apparel. The three leading athletic footwear companies capitalize on their brand-name recognition and distribution channels to create lines of sportswear and equipment that coordinate with their footwear. Team uniforms and matching apparel for coaching staffs and fans have become a major growth avenue. Marketing Print Preview Athletic footwear and sportswear companies sell their products to consumers through various independent department, specialty, and discount stores, as well as through online sales channels. Their sales forces educate retailers on new product innovations, store display design, and similar activities. The market shares of Nike and the other major brand- name producers dominate retailers' shelf space, and slower growth in sales makes it increasingly difficult for the remaining athletic footwear companies to gain market share. The slower growth also has led the major companies to increase significantly their advertising and payments for celebrity endorsements. Many footwear companies, including Nike, have opened their own retail stores, as well as factory outlet stores for discounted sales of excess inventory Athletic footwear and sportswear companies have typically used independent distributors to market their products in other countries. With increasing brand recognition and anticipated growth in international sales, these companies have recently acquired an increasing number of their distributors to capture more of the profits generated in other countries and maintain better control of international marketing. Nike Strategy Nike targets the serious athlete as well as the recreational athlete with performance-driven footwear, apparel, and equipment. The firm has steadily expanded the scope of its product portfolio from its primary products of high-quality athletic footwear for running, training, basketball, soccer, and casual wear to encompass related product lines such as sports apparel, bags, equipment, balls, eyewear, timepieces, and other athletic accessories. In addition, Nike has expanded its scope of sports, now offering products for swimming, baseball, cheerleading, football, golf, lacrosse, tennis, volleyball, skateboarding, and other leisure activities. In recent years, the firm has emphasized growth outside the United States. Nike also has grown by acquiring other apparel companies, including Cole Haan (dress and casual footwear), Converse (athletic and casual footwear and apparel), Hurley (apparel for action sports such as surfing, skateboarding, and snowboarding), and Umbro (footwear, apparel, and equipment for soccer). To maintain its technological edge, Nike engages in extensive research at its research facilities in Beaverton, Oregon. It continually alters its product line to introduce new Print Preview footwear, apparel, equipment, and evolutionary improvements in existing products. The following exhibits present information for Nike: Exhibit 1.24: Consolidated balance sheets for 2014, 2015, and 2016 Exhibit 1.25: Consolidated income statements for 2014, 2015, and 2016 Exhibit 1.26: Consolidated statements of cash flows for 2014, 2015, and 2016 Exhibit 1.27: Excerpts from the notes to Nike's financial statements Exhibit 1.28: Common-size and percentage change income statements Exhibit 1.29: Common-size and percentage change balance sheets Exhibit 1.24 Consolidated Balance Sheet for Nike, Inc. (amounts in millions) (Case 1.2) Print Preview At Fiscal Year End, May 31: 2014 2015 2016 $ 3,852 2,072 $ 3,138 2,319 3,358 3,241 $ 2,220 2,922 3,434 3,947 818 $13,341 2,834 4,337 4,838 1,489 $15,025 3,520 281 131 1,968 $15,587 3,011 281 131 2,587 $21,597 282 131 2,006 $18,594 2,439 $21,396 ASSETS Current assets: Cash and equivalents Short-term investments Accounts receivable, net Inventories Prepaid expenses and other current assets Total current assets Property, plant, and equipment, net Identifiable intangible assets, net Goodwill Deferred income taxes and other assets TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt Notes payable Accounts payable Accrued liabilities Income taxes payable Total current liabilities Long-term debt Deferred income taxes and other liabilities TOTAL LIABILITIES Shareholders' equity: Common stock at stated value: Class A convertible353 and 355 shares outstanding Class B-1,329 and 1,357 shares outstanding Capital in excess of stated value Accumulated other comprehensive income Retained earnings TOTAL SHAREHOLDERS' EQUITY TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7 167 1,930 2,491 432 $ 5,027 1,199 1,544 $ 7,770 $ 107 74 2,131 3,949 71 $ 6,332 1,079 1,479 $ 8,890 $ 44 1 2,191 3,037 85 $ 5,358 2,010 1,770 $ 9,138 3 5,865 85 4,871 $10,824 $18,594 3 6,773 1,246 4,685 $12,707 $21,597 3 7,786 318 4,151 $12,258 $21,396 Source: Nike, Inc., Form 10-K for the Fiscal Year ended May 31, 2016. Exhibit 1.25 Consolidated Income Statement for Nike, Inc. (amounts in millions except per share figures) (Case 1.2) Print Preview For the Fiscal Year Ended May 31: 2014 2015 2016 Revenues Cost of sales Gross profit Demand creation expense Operating overhead expense Operating Income Interest (expense) income, net Other income (expense), net Income before income taxes Income tax expense NET INCOME Earnings per common share: Basic Diluted Dividends declared per common share $ 27,799 15,353 $12,446 3,031 5,735 $ 3,680 (33) (103) $ 3,544 851 $ 2,693 $ 30,601 16,534 $14,067 3,213 6,679 $ 4,175 (28) 58 $ 4,205 932 $ 3,273 $ 32,376 17,405 $14,971 3,278 7,191 $ 4,502 (19) 140 $ 4,623 863 $ 3,760 $ 1.52 $ 1.49 $ 0.47 $ 1.90 $ 1.85 $ 0.54 $ 2.21 $ 2.16 $ 0.62 Source: Nike, Inc., Form 10-K for the Fiscal Year ended May 31, 2016. Exhibit 1.26 Consolidated Statements of Cash Flows for Nike (amounts in millions) (Case 1.2) Print Preview For the Fiscal Years Ended May 31: 2014 2015 2016 $ 2,693 $ 3,273 $ 3,760 518 (11) 177 68 56 606 (113) 191 43 424 649 (80) 236 13 98 (298) (505) Cash provided by operations: Net income Income charges (credits) not affecting cash: Depreciation Deferred income taxes Stock-based compensation Amortization and other Net foreign currency adjustments Changes in certain working capital components and other assets and liabilities: Decrease (increase) in accounts receivable (Increase) in inventories (Increase) in prepaid expenses and other current assets (Decrease) increase in accounts payable, accrued liabilities and income taxes payable Cash provided by operations Cash used by investing activities: Purchases of short-term investments Maturities of short-term investments Sales of short-term investments Investments in reverse repurchase agreements Additions to property, plant, and equipment Disposals of property, plant, and equipment Decrease increase) in other assets, net of other liabilities Cash used by investing activities (216) (621) (144) 60 (590) (210) (161) s 525 $ 3,013 1,237 $ 4,680 (889) $ 3,096 (5,386) 3,932 1,126 (4,936) 3,655 2,216 (150) (963) 3 (5,367) 2,924 2,386 150 (1,143) 10 6 $(1,034) (880) 3 (2) $(1,207) $ (175) 156 (60) (7) (63) (19) 981 (106) (67) (7) (17) 383 514 507 Cash used by financing activities: Net proceeds from long-term debt issuance Long-term debt payments, including current portion (Decrease) increase in notes payable Payments on capital lease obligations Proceeds from exercise of stock options and other stock issuances Excess tax benefits from share-based payment arrangements Repurchases of common stock Dividends-common and preferred Cash used by financing activities Effect of exchange rate changes on cash and equivalents Net (decrease) increase in cash and equivalents Cash and equivalents, beginning of year 132 (2,628) (799) $(2,914) (9) $(1,117) $ 3,337 218 (2,534) (899) $(2,790 (83) $ 1,632 $ 2,220 281 (3,238) (1,022) $(2,671) (105) $ (714) $ 3,852