FINA NCIA L STA TEMEN T – NIKE

Dillon Gravenstine

Professor D’Angelo

Business 101-18H

17 October 2014

Gravenstine 2

INTRODUCTION TO NIKE:

Nike develops, markets, sells, and designs athletic gear, apparel, and

equipment to men and women. It is headquartered in Beaverton, Oregon. Nike is a

brand name in the sports world. It creates innovative and stylish equipment and

apparel for many sports such as football, baseball, golf, lacrosse, and many more.

Nike is part of the Consumer Goods sector and is in the Textile – Apparel

Footwear & Accessories industry. Nike sells its products to footwear stores,

sporting goods stores, and department stores just to name a few. Nike’s main

competitors include Adidas, Sketchers, and New Balance.

*Information found on Yahoo Finance

FINANCIAL DATA FOR NIKE

All numbers are in thousands of US Dollars

*Information obtained from Yahoo Finance

Formulas used:

Percent Change = ((2014 # - 2013 #) ÷ (2013 #)) × 100

Actual Change = (2014 # - 2013 #)

Financial Data 31-May-14 31-May-13 Percentage Change (%) Actual Change

Sales $27,799,000.00 $25,313,000.00 9.8% $2,486,000

Cost of Sales $15,353,000.00 $14,279,000.00 7.5% $1,074,000

Gross Profit $12,446,000.00 $11,034,000.00 12.8% $1,412,000

Net Income (loss) $2,693,000.00 $2,472,000.00 13.7% $442,000

Cash $2,220,000.00 $3,337,000.00 -33.5% -$1,117,000

Inventory $3,947,000.00 $3,484,000.00 13.3% $463,000

Total Current Assets $13,696,000.00 $13,630,000.00 0.5% $66,000

Total Assets $18,594,000.00 $17,545,000.00 6.0% $1,049,000

Long Term Debt $1,199,000.00 $1,210,000.00 -0.9% -$11,000

Total Equity $10,824,000.00 $11,081,000.00 -2.3% -$257,000

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COMPARISON OF NIKE’S 2013 & 2014 INCOME STATEMENT AND

BALANCE SHEET

*Information found on Yahoo Finance

$0.00

$5,000,000.00

$10,000,000.00

$15,000,000.00

$20,000,000.00

$25,000,000.00

$30,000,000.00

Dollars in the thousands ($)

Financial Data

Nike: Income Statement/Balance Sheet for May 2013/2014 Comparison

31-May-14

31-May-13

Gravenstine 4

OBSERVATIONS AND QUESTIONS

Nike is a very healthy company. The improving economy helped Nike beat their earnings

from the year before. One highlight was their net income being up 13.7%, in one year, which

is impressive. It can be attributed to Nikes marketing techniques, quality of its goods, and

confident consumers.

The only major negative flaw that Nike had was their 33.5% decrease in cash. The

decrease can be attributed to many things, but the major reason was because of an increase

in stock buybacks. They bought more than $2 billion dollars worth of their own stock. This

is a good way of increasing earnings per share and increasing stock price. As long as Nike

continues to have a steady growth in revenue they can continue to buyback stock.

Some questions that could be asked are what will Nike do to continue to grow their

revenue and net income? What kinds of new products or markets are they targeting to

increase profits?

Another question is how much stock are they going to buyback this year? Are they going

to increase dividends? Can they increase their cash flow so they can increase buybacks and

dividends?

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NIKE BALANCE SHEET

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NIKE INCOME STATEMENT

Report an IssueFri, Oct 17, 2014, 1:25AM EDT - U.S. Markets open in 8 hrs 5 minsEnter Symbol Look Up

Dow 0.15% Nasdaq 0.05%

NKE

NKE 1.86

NKE 1.86

Income Statement Get Income Statement for: GO

View: Annual Data | Quarterly Data All numbers in thousands

Period Ending May 31, 2014 May 31, 2013 May 31, 2012

Total Revenue 27,799,000 25,313,000 23,331,000

Cost of Revenue 15,353,000 14,279,000 13,183,000

Gross Profit 12,446,000 11,034,000 10,148,000

Operating Expenses

Research Development - - -

Selling General and Administrative 8,766,000 7,796,000 7,079,000

Non Recurring - - -

Others - - -

Total Operating Expenses - - -

Operating Income or Loss 3,680,000 3,238,000 3,069,000

Income from Continuing Operations

Total Other Income/Expenses Net (103,000) 15,000 (54,000)

Earnings Before Interest And Taxes 3,544,000 3,256,000 3,011,000

Interest Expense - - -

Income Before Tax 3,544,000 3,256,000 3,011,000

Income Tax Expense 851,000 805,000 754,000

Minority Interest - - -

Net Income From Continuing Ops 2,693,000 2,451,000 2,257,000

Non-recurring Events

Discontinued Operations - 21,000 (46,000)

Extraordinary Items - - -

Effect Of Accounting Changes - - -

Other Items - - -

Net Income 2,693,000 2,472,000 2,211,000

Preferred Stock And Other Adjustments - - -

Net Income Applicable To Common Shares 2,693,000 2,472,000 2,211,000

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Currency in USD.

Nike, Inc. (NKE) - NYSE

87.04 1.86(2.18%) Oct 16, 4:01PM EDT

After Hours : 87.10 0.06 (0.07%) Oct 16, 5:45PM EDT

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FINANCIAL STATEMENT ANALYSIS FOR NIKE

All numbers are in thousands of US Dollars except common stock shares

Information found on Yahoo Finance, *Hoovers.com, **YCharts.com

Formulas used: (*Information can be found in Understanding Business Textbook)

Current Ratio = (Current Assets) ÷ (Current Liabilities)

Inventory Turnover = (Cost of Goods Sold ÷ Inventory)

Total Debt to Total Equity = (Total Liabilities) ÷ (Owners Equity)

Return on Equity = (Net Income after taxes) ÷ (Total Owner’s Equity)

Net Profit Margin = (Net Income) ÷ (Sales)

Quick Ratio = (Current Assets –Inventories) ÷ (Current Liabilities)

Gross Margin = (Sales – Cost of Sales) ÷ Sales

Basic Earnings per Share = (Net income after taxes) ÷ (Number of Common Stock Shares Outstanding)

Financial Ratios

Calculations for 2014 2014

Calculations for 2013 2013

2014 Industry Average

Total Debt to

Total Equity Ratio $7,770,000.00 0.72 $6,464,000.00 0.58 0.60

$10,824,000.00

$11,081,000.00

Return on

Equity $2,693,000.00 24.90% $2,472,000.00 22.30% 18.80%

$10,824,000.00 $11,081,000.00

Net Profit Margin $2,693,000.00 9.70% $2,472,000.00 9.80% 8.50%

$27,799,000.00

$25,313,000.00

Quick Ratio $9,749,000.00 1.94 $10,146,000.00 2.56 1.00*

$5,027,000.00 $3,962,000.00

Gross Margin $12,446,000.00 44.77% $11,034,000.00 43.59% 32.70%*

$27,799,000.00

$25,313,000.00

Basic Earnings Per

Share $2,693,000.00

$3.10 per

share $2,472,000.00

$2.76 per

share N/A

870.00M Shares** 894.00M Shares** Current

Ratio $13,696,000.00 2.72 $13,630,000.00 3.44 2.34*

$5,027,000.00 $3,962,000.00

Inventory Turnover $15,353,000.00 3.89X $14,279,000.00 4.10X 3.70X*

$3,947,000.00 $3,484,000.00

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NIKE VS. THE INDUSTRY AVERAGE

*Information found on Yahoo Finance

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

Return on Equity Net Profit Margin

PERCENTAGES

FINANCIAL RATIOS

Financial Ratios for Nike vs. the Industry Average

2014

2013

2014 Industry Average

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OBSERVATIONS AND QUESTIONS FOR NIKE’S FINANCIAL RATIOS

Nike’s ratios all beat the industry average. Their return on equity rose more than 2 basis

points. This can be attributed to better economic conditions and consumer confidence.

However, a difficulty will be beating or staying close to that almost 25% return once the

economy starts to weaken. Nike’s earnings per share grew by $0.34, which is very

impressive. They bought back a lot of stock, which helped raise the earnings per share

because it meant there were less shares outstanding.

There were a few negatives that stood out in Nike’s ratios. Most importantly Nike’s net

profit margin decreased. They need to maximize profitability or they will not succeed.

Another negative was that Nike’s total debt to equity rose. They are still under 1, but no one

likes to see a rise in debt unless it is necessary debt. As long as they keep their debt in check

and they have enough cash Nike will not be in trouble. There was also a decrease in Nike’s

current ratio. This was due to the large decrease in cash that occurred from 2013 to 2014.

Their ratio is still well above the industry average so their short-term financial health is in

check.

A question that could be asked about Nike’s ratios are how does Nike plan on beating

their high return on equity next year? What is their strategy for increased competition?

Also, how will Nike continue to raise their earnings per share? Will they continue to

buyback stock? How much of the rise in earnings per share from 2013 to 2014 was because

of buybacks? And how much was because of actual business?

INTERPRETIVE ANALYSIS

1. What is meant by liquidity? Did the company experience and increase or a

decrease in liquidity over the two-year period evaluated? What effect do the

liquidity figures have on the company’s long term and/or short-term

performance?

Liquidity refers to how quickly an asset can be turned into cash. Nike did experience a decrease in liquidity, in both its current and quick ratios. The reason

for the decrease in the current ratio was because Nike had a large increase in current liabilities and a small increase in current assets. The quick ratio decrease

was due to a large decrease in cash that Nike experienced from 2013 to 2014. The decrease in cash along with an increase in current liabilities caused the quick ratio

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to decrease. The liquidity figures mostly affect short-term performance because it is calculated using Nike’s “current” numbers, such as current assets and current

liabilities. The short term affects for Nike could include bankruptcy or having to take out high-interest loans because cash is king and if the company does not have

cash to pay its bills it will be in trouble.

2. What is meant by profitability? Did the company experience an increase or

decrease in profitability over the two-year period evaluated? What effect do

these figures have on the company’s long term and/or short-term

performance?

Profitability is a company’s ability to earn a profit on the products it sells. It

measures how effectively the company is using its resources to create profits. Nike experienced a slight decrease in profitability during the two-year period. Their

earnings per share did grow because of growth of net income and large share buybacks. Their net profit margin was down .1% in 2014 compared to 2013.

Finally their return on equity grew over 2 basis points from 2013 to 2014. Owner’s equity decreased, but net income increased. The slight decrease in profitability can

be attributed to Nike not increasing their profit margin. The profit margin was lower because of Nike’s inability to make the most money out of the goods it sold.

These figures can impact both long term and short-term performance. A short-term affect of profitability can include an increase or decrease in stock price once Nike’s

earnings are released. The long-term affects can be the company could be failing or expanding depending on which way their earnings are going. Meaning if Nike has one bad quarter that will negatively affect them in the short-term. However, in the

long-term it could have just been the winter weather affecting that quarter so as long as the next few quarters show better earnings and growth Nike is not in

trouble. Also, Nike needs to find a way to increase its margins in the coming years because no investor wants to see a decrease in net profit margin. That is why it is

so important to watch the profitability ratios because they help determine the health of Nike’s ongoing business.

3. What is meant by leverage?? Did the company experience a change in its leverage over the two year period evaluated? What impact do these figures have on the company’s overall long term and short-term performance?

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Leverage is debt. The leverage ratio determines the percentage of how much the company relies on borrowed money to fund its operations. Nike experienced an

increase in total debt to total equity from 2013 to 2014. This means that Nike borrowed funds because they needed some extra cash for their business practices.

It was actually a very smart strategic move to borrow now because of the extremely low interest rates. However, it always causes worry when money is

borrowed because it must be paid back. The long-term affect of using leverage is that if Nike does not have cash available when their loans are due, they could

default. Also, if Nike’s debt to equity level keeps rising then lenders will not want to loan money to them because it would be less likely that the loan would be paid back. The short-term affects include if a loan needs to be paid back sooner than

expected then Nike will be giving up cash that it could have been using for acquisitions or expansion. Leverage is necessary and Nike has a comfortable

amount of it. However, it is important to keep a close eye on the leverage ratio because a company does not want bad credit.

4. How do inventory and inventory turnover affect the company’s decision making? Why do you think the company experienced an increase or decrease in inventory turnover? What are implications of carrying inventory on this company (consider costs, sales and trends).

Inventory and inventory turnover affect a company’s decision making

because Nike will only be profitable if it turns its inventory into profits. The more times that Nike turns over its inventory the more profitable it is. Nike will make decisions on ways to make sure their inventory sells fast and often because they

have goals to meet and the longer the inventory sits on the shelves the less it is worth. Nike experienced a slight decrease in inventory turnover because its cost of

goods sold increased. This happened because the companies that make the materials Nike uses to make its inventory must have raised their prices. Good

economic conditions will cause this the cost of goods to rise. Nike just has to be better at turning its inventory over in an environment where the costs of goods are

rising. The implications of carrying inventory are that the goods that are not sold lose value over time. The items that are in storage could also become obsolete or

out of style meaning it would be even harder to sell those items. They also are taking up space that could be used for new goods. It costs Nike money to keep

inventory, such as rent costs and the money it spent on making these goods. Nike has to watch the trends of what people are buying and how much they are buying

so they can plan accordingly when producing their goods.

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CONCLUSION:

Nike is a financially healthy and stable company. They are profitable, but they need to

increase their margins to increase profitability. One can expect to see Nike’s profit margins

increase as time goes on because Nike is a smart company and it will learn from its mistakes.

They are sponsors of many pro athletes and that marketing will help to increase their profits.

Nike has a moat around other competitors because no matter what, most people will always

prefer Nike over Sketchers, Adidas, or New Balance. Nike will always come out with a new

product that is better than its last product. It is certain that this new product will sell too

because of all the research Nike does to make sure it is giving consumers exactly what they

need and want. Nike will thrive in their industry because their products are better than

everyone else’s. Nike will succeed and it is definitely worth investing in and holding for the

long term.

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