Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 through NIKE-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.
Through the Consumer Direct Acceleration we are focusing on creating the marketplace of the future through more premium, consistent and seamless consumer experiences, leading with NIKE Digital and our owned stores, as well as select strategic partners who share our marketplace vision. We have aligned our product creation and category organizations around a new consumer construct focused on Men’s, Women's, Kids' and the Jordan Brand and continue to invest in data and analytics, demand sensing, insight gathering, inventory management and other areas to create an end-to-end technology foundation, which will further accelerate our digital transformation.
During fiscal 2021, we substantially completed a series of leadership and operating model changes to streamline and speed up strategic execution of the Consumer Direct Acceleration. For the three and six months ended November 30, 2021 , we recognized an immaterial amount of related employee termination costs and, to a lesser extent, stock-based compensation expense . During the three months ended November 30, 2020, we recognized employee termination costs of $107 million and $30 million within Operating overhead expense and Cost of sales, respectively, and made cash payments of $67 million. For the six months ended November 30, 2020, we recognized employee termination costs of $145 million and $30 million within Operating overhead expense and Cost of sales, respectively, and made cash payments of $71 million. For all periods presented these costs were classified within Corporate. Additionally, the related stock-based compensation expense recorded within Operating overhead expense and Cost of sales was $30 million and $4 million, respectively, for the three months ended November 30, 2020, and $39 million and $4 million, respectively, for the six months ended November 30, 2 020.
For more information, see Note 13 — Restructuring within the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
COVID-19 UPDATE
The COVID-19 pandemic continues to create volatility in our business results and operations globally, causing us to transform the way we operate in order to better serve our consumers. Our second quarter and first six months of fiscal 2022 Revenues grew 1% and 8%, respectively, as we continued to manage the ongoing impacts of supply chain challenges across each of our geographies and Converse.
During the first quarter of fiscal 2022, the majority of NIKE Brand and Converse contract manufacturers in Vietnam and Indonesia were subject to government mandated shutdowns due to COVID-19. These closures have significantly impacted, and are expected to continue to significantly impact, our previously planned inventory production. As a result of these closures, we have lost approximately three months of production, impacting available product supply for this fiscal year. All impacted factories began re-opening in October and are currently operational. We expect it will take several months from re-opening for the factories to return to pre-closure production volumes, and there could be further impacts, including additional closures or employee absences, as a result of the emergence and spread of COVID-19 variants, as well as other factors outside of our control that could continue to cause further disruption to our planned inventory production. For fiscal 2021, 51% of NIKE Brand footwear and 30% of NIKE Brand apparel was manufactured in Vietnam, and 24% of NIKE Brand footwear and less than 12% of NIKE Brand apparel was manufactured in Indonesia.
In addition, our product availability was also impacted by extended inventory transit times in the second quarter and first six months of fiscal 2022, due primarily to port congestion, transportation delays as well as labor and container shortages. Our product availability was impacted most significantly in our wholesale channel. We also experienced higher transportation, logistics and fulfillment costs as a result of this dynamic environment, which partially offset gross margin expansion in the second quarter and first six months of fiscal 2022.
The combined impact of factory closures and extended inventory transit times disproportionately impacted our geographies during the second quarter of fiscal 2022. North America and EMEA, located further away from our sourcing base with longer transit times, entered the second quarter with elevated levels of inventory available to meet consumer demand as revenues grew 12% and 6% on a currency-neutral basis, respectively. By contrast, Greater China and APLA, located closer to our sourcing base
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with shorter transit times, entered the second quarter with a lower supply of available inventory, negatively impacting revenues during the second quarter of fiscal 2022 with revenues declining by 24% and 6% on a currency-neutral basis, respectively.
We expect the combination of factory closures and elevated transit times will continue to impact product availability, leading to inventory supply significantly lagging consumer demand for the remainder of the fiscal year. In addition, we expect transportation, logistics and fulfillment costs will continue to increase as we navigate these supply chain constraints. We also expect product costs to increase in the second half of fiscal 2022 due to higher input costs. To mitigate the impact across our business, our teams are continuing to leverage our operational playbook and taking actions where we can, including shifting production capacity to other countries, strategic use of air freight and employing a seasonless approach to products. Despite these short-term dynamics, our Consumer Direct Acceleration strategy continues to drive our business towards our long-term fiscal 2025 financial goals shared in our Annual Report on Form 10-K for the fiscal year ended May 31, 2021.
Our NIKE Direct business has continued its momentum in the second quarter, fueling our growth as we continue to navigate through the pandemic by leveraging our digital platforms with our store footprint to connect directly with our consumers. Despite continued inventory constraints and supply chain challenges, NIKE Direct grew 8% and 16% on a currency-neutral basis, for the second quarter and first six months of fiscal 2022, respectively. NIKE Brand Digital revenues grew 11% and 17% on a currency-neutral basis for the second quarter and first six months of fiscal 2022, respectively. During the second quarter of fiscal 2022, we experienced an increase in comparable store sales in North America and EMEA, partially offset by declines in Greater China and APLA due to supply chain challenges as well as ongoing marketplace dynamics and a COVID-19 resurgence in Greater China. As of January 3, 2022, approximately 98% of our owned stores were open with some operating on reduced hours.
During the quarter, we continued to invest in our digital transformation and brand campaigns as the world continues its return to sport. For the remainder of fiscal 2022, we will maintain our multi-year investment plans in order to transform our business for the future.
We continue to monitor the ongoing and dynamic impacts of COVID-19, 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. There have been and may continue to be developments outside of our control, including new COVID-19 variants, that require us to make adjustments to our operating plan, such as store operating hours and the timeline to return to normal production volumes in factories impacted by COVID-19. Such developments and other potential impacts of COVID-19, such as new or prolonged factory closures, higher inventory levels or inventory shortages in various markets, other adverse impacts on the global supply chain, revised payment terms with certain of our wholesale customers, higher sales-related reserves, factory cancellation costs and a volatile effective tax rate driven by changes in the mix of earnings across our jurisdictions, among other factors, could have material adverse impacts on our revenue growth as well as our overall profitability in future periods. As a result of these circumstances, COVID-19 related disruptions are making it more challenging to compare our performance, including our revenue growth and overall profitability, across quarters and fiscal years, and we expect the operating environment will remain volatile as COVID-19 variants continue to cause disruptions to our operations.
SECOND QUARTER OVERVIEW
For the second quarter of fiscal 2022, NIKE, Inc. Revenues increased 1% to $11.4 billion compared to the second quarter of fiscal 2021 and were flat on a currency-neutral basis. Net income was $1,337 million and diluted earnings per common share was $0.83 for the second quarter of fiscal 2022, compared to Net income of $1,251 million and diluted earnings per common share of $0.78 for the second quarter of fiscal 2021.
Income before income taxes increased 3% compared to the second quarter of fiscal 2021, due to gross margin expansion and higher revenues, partially offset by higher selling and administrative expense. The NIKE Brand, which represents over 90% of NIKE, Inc. Revenues, increased 1% compared to the second quarter of fiscal 2021. On a currency-neutral basis, NIKE Brand revenues were flat, as higher revenues in North America and EMEA were offset by declines in Greater China and APLA. Additionally, NIKE Brand currency-neutral revenue growth in apparel was offset by a decline in footwear primarily due to lower available inventory supply resulting from COVID-19 related factory closures and extended inventory transit times. Revenues for Converse increased 17% and 16% compared to the second quarter of fiscal 2021, on a reported and currency-neutral basis, respectively, led by performance in Direct to consumer in both Western Europe and North America.
Our effective tax rate was 10.9% for the second quarter of fiscal 2022, compared to 14.1% for the second quarter of fiscal 2021, primarily due to a change in our earnings mix, partially offset by a less favorable impact from stock-based compensation.
Consumer protection and data privacy laws have been coming into effect across the world, including recently introduced laws that became effective during the second quarter of fiscal 2022 in China, that provide for the comprehensive regulation of data and personal data processing activities across all industries and operations such as collecting, utilizing, processing, sharing and transferring data and personal information in and out of China. Uncertainty regarding the interpretation and application of these laws in practice may impact us and could impair our ability to execute on our operating plan and have adverse effects on our business and results of operations. Further, any non-compliance could subject us to, among other things, fines, legal proceedings, regulatory orders or damage to our reputation.
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During fiscal 2021, the transaction with Grupo SBF S.A. to purchase substantially all of our NIKE Brand operations in Brazil closed. We remain committed to selling our Argentina, Chile and Uruguay legal entities and granting distribution rights to third-party distributors. As such, the assets and liabilities of these entities have remained classified as held-for-sale on the Unaudited Condensed Consolidated Balance Sheets. For more information see Note 12 — 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 Total NIKE Brand earnings before interest and taxes (EBIT), Total NIKE, Inc. EBIT and EBIT Margin, 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 in the United States of America (“U.S. GAAP”). References to wholesale equivalent revenues are intended to provide context as to the total size of our NIKE Brand market footprint if we had no NIKE Direct operations. NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to our NIKE Direct operations, which are charged at prices comparable to those charged to external wholesale customers. Additionally, 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. EBIT Margin is calculated as EBIT divided by total NIKE, Inc. Revenues.
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, EBIT and EBIT margin should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance with U.S. GAAP and may not be comparable to similarly titled non-GAAP measures used by other companies.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
(Dollars in millions, except per share data) 2021 2020 % CHANGE 2021 2020 % CHANGE
Revenues $ 11,357 $ 11,243 1 % $ 23,605 $ 21,837 8 %
Cost of sales 6,144 6,396 -4 % 12,696 12,249 4 %
Gross profit 5,213 4,847 8 % 10,909 9,588 14 %
Gross margin 45.9 % 43.1 % 46.2 % 43.9 %
Demand creation expense 1,017 729 40 % 1,935 1,406 38 %
Operating overhead expense 2,742 2,538 8 % 5,396 4,836 12 %
Total selling and administrative expense 3,759 3,267 15 % 7,331 6,242 17 %
% of revenues 33.1 % 29.1 % 31.1 % 28.6 %
Interest expense (income), net 55 70 — 112 135 —
Other (income) expense, net (102) 54 — (141) 40 —
Income before income taxes 1,501 1,456 3 % 3,607 3,171 14 %
Income tax expense 164 205 -20 % 396 402 -1 %
Effective tax rate 10.9 % 14.1 % 11.0 % 12.7 %
NET INCOME $ 1,337 $ 1,251 7 % $ 3,211 $ 2,769 16 %
Diluted earnings per common share $ 0.83 $ 0.78 6 % $ 1.98 $ 1.73 14 %
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CONSOLIDATED OPERATING RESULTS
REVENUES
THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
(Dollars in millions)
2021 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES (1)
2021 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES (1)
NIKE, Inc. Revenues:
NIKE Brand Revenues by:
Footwear $ 6,780 $ 6,801 0 % -1 % $ 14,498 $ 13,569 7 % 5 %
Apparel 3,648 3,585 2 % 1 % 7,098 6,460 10 % 8 %
Equipment 382 347 10 % 9 % 847 718 18 % 15 %
Global Brand Divisions (2)
6 8 -25 % -5 % 13 12 8 % 13 %
Total NIKE Brand Revenues 10,816 10,741 1 % 0 % 22,456 20,759 8 % 6 %
Converse 557 476 17 % 16 % 1,186 1,039 14 % 11 %
Corporate (3)
(16) 26 — — (37) 39 — —
TOTAL NIKE, INC. REVENUES $ 11,357 $ 11,243 1 % 0 % $ 23,605 $ 21,837 8 % 6 %
Supplemental NIKE Brand Revenues Details:
NIKE Brand Revenues by:
Sales to Wholesale Customers $ 6,119 $ 6,423 -5 % -6 % $ 13,062 $ 12,787 2 % 0 %
Sales through NIKE Direct 4,691 4,310 9 % 8 % 9,381 7,960 18 % 16 %
Global Brand Divisions (2)
6 8 -25 % -5 % 13 12 8 % 13 %
TOTAL NIKE BRAND REVENUES $ 10,816 $ 10,741 1 % 0 % $ 22,456 $ 20,759 8 % 6 %
(1) The percent change excluding currency changes represents a non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" for further information.
(2) Global Brand Divisions revenues are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment.
(3) Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program.
SECOND QUARTER OF FISCAL 2022 COMPARED TO SECOND QUARTER OF FISCAL 2021
On a currency-neutral basis, NIKE, Inc. Revenues were flat for the second quarter of fiscal 2022, as higher revenues in North America, EMEA and Converse were offset by lower revenues in Greater China and APLA. Higher revenues in North America, EMEA and Converse contributed approximately 4, 1 and 1 percentage points to NIKE, Inc. Revenues, respectively, while lower revenues in Greater China and APLA reduced NIKE, Inc. Revenues by approximately 5 and 1 percentage points, respectively.
On a currency-neutral basis, NIKE Brand footwear revenues decreased 1% in the second quarter of fiscal 2022, driven primarily by lower revenues in Men's. Unit sales of footwear decreased 7%, while higher average selling price (ASP) per pair contributed approximately 6 percentage points of footwear revenue growth, primarily due to higher NIKE Direct ASP, as well as a higher mix of full-price sales, partially offset by lower full-price ASP, on a wholesale equivalent basis.
Currency-neutral NIKE Brand apparel revenues, for the second quarter of fiscal 2022, increased 1%, driven primarily by growth in NIKE Direct, partially offset by declines in our wholesale business. Unit sales of apparel decreased 6%, and higher ASP per unit contributed approximately 7 percentage points of apparel revenue growth. Higher ASP per unit was primarily due to higher NIKE Direct ASP, a higher mix of full-price sales and higher full-price ASP, primarily due to lower discounts, as well as higher off-price ASP.
On a reported basis, NIKE Direct revenues represented approximately 43% of our total NIKE Brand revenues for the second quarter of fiscal 2022 compared to 40% for the second quarter of fiscal 2021. Digital commerce sales were $2.7 billion for the second quarter of fiscal 2022 compared to $2.4 billion for the second quarter of fiscal 2021. On a currency-neutral basis, NIKE Direct revenues increased 8%, driven by digital commerce sales growth of 11%, comparable store sales growth of 3%, in part due to improved physical retail traffic in some of our geographies, and the addition of new stores. Comparable store sales, which exclude digital commerce sales, comprises revenues from NIKE-owned in-line and factory stores for which all three of the following requirements have been met: (1) the store has been open at least one year, (2) square footage has not changed by more than 15% within the past year and (3) the store has not been permanently repositioned within the past year. Comparable store sales includes revenues from stores that were temporarily closed during the period as a result of COVID-19. Comparable store sales represents a performance measure that we believe is useful information for management and investors in understanding the performance of our established NIKE-owned in-line and factory stores. Management considers this metric when making financial and operating decisions. The
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method of calculating comparable store sales varies across the retail industry. As a result, our calculation of this metric may not be comparable to similarly titled measures used by other companies.
FIRST SIX MONTHS OF FISCAL 2022 COMPARED TO FIRST SIX MONTHS OF FISCAL 2021
On a currency-neutral basis, NIKE, Inc. Revenues increased 6% for the first six months of fiscal 2022, driven by higher revenues in North America, EMEA, APLA and Converse, partially offset by lower revenues in Greater China. Higher revenues in North America, EMEA, APLA and Converse contributed approximately 5, 2, 1 and 1 percentage points to NIKE, Inc. Revenues, respectively, while lower revenues in Greater China reduced NIKE, Inc. Revenues by approximately 3 percentage points.
On a currency-neutral basis, NIKE Brand footwear revenues increased 5%, driven primarily by growth in NIKE Direct. Unit sales of footwear decreased 1%, while higher ASP per pair contributed approximately 6 percentage points of footwear revenue growth, primarily due to higher NIKE Direct ASP, as well as a higher mix of full-price sales, partially offset by lower full-price ASP.
Currency-neutral NIKE Brand apparel revenues increased 8%, driven by growth in Men's. Unit sales of apparel increased 1% and higher ASP per unit contributed approximately 7 percentage points of apparel revenue growth. Higher ASP per unit was primarily due to higher NIKE Direct and full-price ASPs, as well as a higher mix of full-price sales.
On a reported basis, NIKE Direct revenues represented approximately 42% of our total NIKE Brand revenues for the first six months of fiscal 2022 compared to 38% for the first six months of fiscal 2021. Digital commerce sales were $5.2 billion for the first six months of fiscal 2022 compared to $4.4 billion for the first six months of fiscal 2021. On a currency-neutral basis, NIKE Direct revenues increased 16%, driven by digital commerce sales growth of 17%, comparable store sales growth of 12%, in part due to improved physical retail traffic, and the addition of new stores.
GROSS MARGIN
THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
(Dollars in millions)
2021 2020 % CHANGE 2021 2020 % CHANGE
Gross profit $ 5,213 $ 4,847 8 % $ 10,909 $ 9,588 14 %
Gross margin 45.9 % 43.1 % 280 bps 46.2 % 43.9 % 230 bps
For the second quarter of fiscal 2022, our consolidated gross margin was 280 basis points higher than the prior year period and primarily reflected the following factors:
• Higher margin in our NIKE Direct business, primarily driven by low promotional activity in the current period reflecting limited available for sale inventory due to supply chain constraints compared to higher promotional activity in the prior year as we managed the impacts from COVID-19 (increasing gross margin approximately 170 basis points);
• Higher mix of full-price sales, on a wholesale equivalent basis, (increasing gross margin approximately 110 basis points);
• Lower other costs, in part due to higher restructuring-related costs related to our organizational realignment in the prior year, among other factors, (increasing gross margin approximately 50 basis points);
• Favorable changes in net foreign currency exchange rates, including hedges, (increasing gross margin approximately 40 basis points); and
• Lower NIKE Brand full-price product margins, on a wholesale equivalent basis. Specifically, higher product costs (decreasing gross margin approximately 60 basis points) largely due to increased freight and logistics costs as well as lower full-price ASP, net of discounts, (decreasing gross margin approximately 40 basis points) primarily due to a lower mix of Greater China sales.
For the first six months of fiscal 2022, our consolidated gross margin was 230 basis points higher than the prior year period and primarily reflected the following factors:
• Higher margin in our NIKE Direct business, primarily driven by low promotional activity in the current period reflecting limited available for sale inventory due to supply chain constraints compared to higher promotional activity in the prior year as we managed the impacts from COVID-19 (increasing gross margin approximately 170 basis points);
• Higher mix of full-price sales, on a wholesale equivalent basis, (increasing gross margin approximately 90 basis points);
• Lower other costs, in part due to higher restructuring-related costs related to our organizational realignment in the prior year, (increasing gross margin approximately 40 basis points); and
• Higher NIKE Brand product costs, on a wholesale equivalent basis, primarily due to increased freight and logistics costs (decreasing gross margin approximately 80 basis points).
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TOTAL SELLING AND ADMINISTRATIVE EXPENSE
THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
(Dollars in millions)
2021 2020 % CHANGE 2021 2020 % CHANGE
Demand creation expense (1)
$ 1,017 $ 729 40 % $ 1,935 $ 1,406 38 %
Operating overhead expense 2,742 2,538 8 % 5,396 4,836 12 %
Total selling and administrative expense $ 3,759 $ 3,267 15 % $ 7,331 $ 6,242 17 %
% of revenues 33.1 % 29.1 % 400 bps 31.1 % 28.6 % 250 bps
(1) Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, complimentary products, television, digital and print advertising and media costs, brand events and retail brand presentation.
SECOND QUARTER OF FISCAL 2022 COMPARED TO SECOND QUARTER OF FISCAL 2021
Demand creation expense increased 40% for the second quarter of fiscal 2022 primarily due to higher advertising and marketing spend against brand campaigns as we experienced marketplace closures in the prior year due to COVID-19, as well as continued investments in digital marketing to support heightened digital demand. Changes in foreign currency exchange rates increased Demand creation expense by approximately 1 percentage point.
Operating overhead expense increased 8% primarily due to higher strategic technology investments and an increase in wage-related expenses. Changes in foreign currency exchange rates had an insignificant impact on Operating overhead expense.
FIRST SIX MONTHS OF FISCAL 2022 COMPARED TO FIRST SIX MONTHS OF FISCAL 2021
Demand creation expense increased 38% for the first six months of fiscal 2022 primarily due to higher advertising and marketing spend against brand campaigns as we experienced marketplace closures in the prior year due to COVID-19, as well as continued investments in digital marketing to support heightened digital demand. Changes in foreign currency exchange rates increased Demand creation expense by approximately 2 percentage points.
Operating overhead expense increased 12% primarily due to an increase in wage-related expenses and higher strategic technology investments. Changes in foreign currency exchange rates increased Operating overhead expense by approximately 1 percentage point.
OTHER (INCOME) EXPENSE, NET
THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
(Dollars in millions)
2021 2020 2021 2020
Other (income) expense, net $ (102) $ 54 $ (141) $ 40
Other (income) expense, net comprises foreign currency conversion gains and losses from the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, as well as unusual or non-operating transactions that are outside the normal course of business.
For the second quarter of fiscal 2022, Other (income) expense, net changed from $54 million of other expense to $102 million of other income in the current year, primarily due to a favorable change in foreign currency conversion gains and losses, including hedges, as well as incremental charges, in the prior year, related to our planned, strategic distributor partnership transition within APLA.
For the first six months of fiscal 2022, Other (income) expense, net changed from $40 million of other expense to $141 million of other income in the current year, primarily due to incremental charges, in the prior year, related to our planned, strategic distributor partnership transition within APLA, coupled with a net favorable change in foreign currency conversion gains and losses, including hedges.
For more information related to our distributor partnership transition within APLA, see Note 12 — Acquisitions and Divestitures within the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
We estimate the combination of the translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency-related gains and losses included in Other (income) expense, net had favorable impacts of approximately $63 million and $167 million on our Income before income taxes for the second quarter and first six months of fiscal 2022, respectively.
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INCOME TAXES
THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
2021 2020 % CHANGE 2021 2020 % CHANGE
Effective tax rate 10.9 % 14.1 % (320) bps 11.0 % 12.7 % (170) bps
Our effective tax rate was 10.9% for the second quarter of fiscal 2022, compared to 14.1% for the second quarter of fiscal 2021, primarily due to a change in our earnings mix, partially offset by a less favorable impact from stock-based compensation.
Our effective tax rate was 11.0% for the first six months of fiscal 2022, compared to 12.7% for the first six months of fiscal 2021, primarily due to a more favorable impact from stock-based compensation and discrete items, such as the recognition of a reserve in the first quarter of fiscal 2021 related to Altera Corp. v. Commissioner , partially offset by a change in our earnings mix.
Refer to Note 5 — Income Taxes within the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements for additional information.
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OPERATING SEGMENTS
Our operating segments are evidence of the structure of the Company's internal organization. The NIKE Brand segments are defined by geographic regions for operations participating in NIKE Brand sales activity.
Each NIKE Brand geographic segment operates predominantly in one industry: the design, development, marketing and selling of athletic footwear, apparel and equipment. The Company's reportable operating segments for the NIKE Brand are: North America; Europe, Middle East & Africa (EMEA); Greater China; and Asia Pacific & Latin America (APLA), and include results for the NIKE and Jordan brands. The Company's NIKE Direct operations are managed within each geographic operating segment. Converse is also a reportable operating segment for the Company, and operates predominately in one industry: the design, marketing, licensing and selling of athletic lifestyle sneakers, apparel and accessories.
As part of our centrally managed foreign exchange risk management program, standard foreign currency exchange rates are assigned twice per year to each NIKE Brand entity in our geographic operating segments and Converse. These rates are set approximately nine and twelve months in advance of the future selling seasons to which they relate (specifically, for each currency, one standard rate applies to the fall and holiday selling seasons and one standard rate applies to the spring and summer selling seasons) based on average market spot rates in the calendar month preceding the date they are established. Inventories and Cost of sales for geographic operating segments and Converse reflect the use of these standard rates to record non-functional currency product purchases into the entity's functional currency. Differences between assigned standard foreign currency exchange rates and actual market rates are included in Corporate, together with foreign currency hedge gains and losses generated from our centrally managed foreign exchange risk management program and other conversion gains and losses.
The breakdown of Revenues is as follows:
THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
(Dollars in millions)
2021 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES (1)
2021 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES (1)
North America $ 4,477 $ 4,006 12 % 12 % $ 9,356 $ 8,231 14 % 13 %
Europe, Middle East & Africa 3,142 2,958 6 % 6 % 6,449 5,868 10 % 7 %
Greater China 1,844 2,298 -20 % -24 % 3,826 4,078 -6 % -13 %
Asia Pacific & Latin America 1,347 1,471 -8 % -6 % 2,812 2,570 9 % 10 %
Global Brand Divisions (2)
6 8 -25 % -5 % 13 12 8 % 13 %
TOTAL NIKE BRAND 10,816 10,741 1 % 0 % 22,456 20,759 8 % 6 %
Converse 557 476 17 % 16 % 1,186 1,039 14 % 11 %
Corporate (3)
(16) 26 — — (37) 39 — —
TOTAL NIKE, INC. REVENUES $ 11,357 $ 11,243 1 % 0 % $ 23,605 $ 21,837 8 % 6 %
(1) The percent change excluding currency changes represents a non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" for further information.
(2) Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment.
(3) Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program.
The primary financial measure used by the Company to evaluate performance of individual operating segments is EBIT, which represents Net income before Interest expense (income), net and Income tax expense in the Unaudited Condensed Consolidated Statements of Income. As discussed in Note 11 — Operating Segments in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements, certain corporate costs are not included in EBIT of our operating segments.
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The breakdown of earnings before interest and taxes is as follows:
THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
(Dollars in millions)
2021 2020 % CHANGE 2021 2020 % CHANGE
North America $ 1,235 $ 1,023 21 % $ 2,669 $ 2,325 15 %
Europe, Middle East & Africa 806 660 22 % 1,681 1,352 24 %
Greater China 569 891 -36 % 1,270 1,579 -20 %
Asia Pacific & Latin America 388 424 -8 % 869 704 23 %
Global Brand Divisions (1,071) (841) -27 % (2,058) (1,694) -21 %
TOTAL NIKE BRAND (1)
1,927 2,157 -11 % 4,431 4,266 4 %
Converse 132 87 52 % 336 255 32 %
Corporate
(503) (718) 30 % (1,048) (1,215) 14 %
TOTAL NIKE, INC. EARNINGS BEFORE INTEREST AND TAXES (1)
1,556 1,526 2 % 3,719 3,306 12 %
EBIT margin (1)
13.7 % 13.6 % 15.8 % 15.1 %
Interest expense (income), net 55 70 — 112 135 —
TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES $ 1,501 $ 1,456 3 % $ 3,607 $ 3,171 14 %
(1) Total NIKE Brand EBIT, Total NIKE, Inc. EBIT and EBIT margin represent non-GAAP financial measures. See "Use of Non-GAAP Financial Measures" for further information.
NORTH AMERICA
THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
(Dollars in millions) 2021 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES 2021 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES
Revenues by:
Footwear $ 2,852 $ 2,512 14 % 13 % $ 6,116 $ 5,469 12 % 12 %
Apparel 1,480 1,368 8 % 8 % 2,910 2,493 17 % 16 %
Equipment 145 126 15 % 16 % 330 269 23 % 23 %
TOTAL REVENUES $ 4,477 $ 4,006 12 % 12 % $ 9,356 $ 8,231 14 % 13 %
Revenues by:
Sales to Wholesale Customers $ 2,327 $ 2,354 -1 % -1 % $ 5,005 $ 5,073 -1 % -2 %
Sales through NIKE Direct 2,150 1,652 30 % 30 % 4,351 3,158 38 % 38 %
TOTAL REVENUES $ 4,477 $ 4,006 12 % 12 % $ 9,356 $ 8,231 14 % 13 %
EARNINGS BEFORE INTEREST AND TAXES $ 1,235 $ 1,023 21 % $ 2,669 $ 2,325 15 %
We believe there continues to be a meaningful shift in the way consumers shop for product and make purchasing decisions across each of our geographies. Consumers are demanding a constant flow of fresh and innovative product, and have an expectation for superior service and rapid delivery, all fueled by the shift toward digital and mono-brand experiences in NIKE Direct. We anticipate continued evolution within the retail landscape, driven by shifting consumer traffic patterns across digital and physical channels. Specifically in North America, we remain focused on building long-term momentum with our strategic wholesale customers, which offer a differentiated retail experience. Additionally, over the last three years we have significantly reduced the number of undifferentiated wholesale accounts. During fiscal 2021 and the first six months of fiscal 2022, we took further steps towards account and channel consolidation by reprioritizing product allocation to benefit NIKE Direct and our differentiated strategic wholesale customers. We expect we will continue to aggressively accelerate these changes over the next several fiscal years as we work to reprofile the shape of the marketplace and recapture wholesale revenue declines over time.
SECOND QUARTER OF FISCAL 2022 COMPARED TO SECOND QUARTER OF FISCAL 2021
On a currency-neutral basis, North America revenues for the second quarter of fiscal 2022 increased 12%, due primarily to higher revenues in Women's and the Jordan Brand, partially offset by a decline in Men's. NIKE Direct revenues increased 30%, driven by strong digital sales growth of 40%, comparable store sales growth of 16%, in part due to improved physical retail traffic, and the addition of new stores.
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Footwear revenues increased 13% on a currency-neutral basis, largely driven by higher revenues in Women's, partially offset by a decline in Men's. Unit sales of footwear increased 7%, while higher ASP per pair contributed approximately 6 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher NIKE Direct ASP, the favorable impact of growth in our NIKE Direct business and a higher mix of full-price sales, partially offset by lower full-price ASP.
On a currency-neutral basis, apparel revenues increased 8%, driven primarily by growth in NIKE Direct. Unit sales of apparel decreased 5%, while higher ASP per unit contributed approximately 13 percentage points of apparel revenue growth. The increase in ASP per unit was primarily driven by higher NIKE Direct ASP, as well as higher full-price ASP, primarily due to lower discounts, and a higher mix of full-price sales.
Reported EBIT increased 21% as higher revenues and gross margin expansion more than offset higher selling and administrative expense. Gross margin increased approximately 280 basis points primarily due to higher margins and the favorable impact of growth in our NIKE Direct business, as well as a higher mix of full-price sales and higher full-price ASP, net of discounts. This activity was partially offset by higher product costs primarily due to increased freight and logistics costs. Selling and administrative expense increased due to higher demand creation and operating overhead expense. Demand creation expense increased primarily as a result of higher advertising and marketing expense as well as digital marketing investments, partially offset by lower sports marketing costs. The increase in operating overhead expense reflected higher wage-related costs as well as an increase in strategic technology investments.
FIRST SIX MONTHS OF FISCAL 2022 COMPARED TO FIRST SIX MONTHS OF FISCAL 2021
On a currency-neutral basis, North America revenues for the first six months of fiscal 2022 increased 13%, due primarily to higher revenues in Women's. NIKE Direct revenues increased 38%, driven by strong digital sales growth of 41%, comparable store sales growth of 31%, in part due to improved physical retail traffic, and the addition of new stores.
Footwear revenues increased 12% on a currency-neutral basis, largely driven by higher revenues in Women's and the Jordan Brand, partially offset by a decline in Men's. Unit sales of footwear increased 5%, while higher ASP per pair contributed approximately 7 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher NIKE Direct ASP, the favorable impact of growth in our NIKE Direct business and a higher mix of full-prices sales, partially offset by lower full-price ASP.
On a currency-neutral basis, apparel revenues increased 16%, driven primarily by higher revenues in Men's. Unit sales of apparel increased 4%, while higher ASP per unit contributed approximately 12 percentage points of apparel revenue growth. The increase in ASP per unit was primarily driven by higher NIKE Direct ASP, the favorable impact of growth in our NIKE Direct business and higher full-price ASP, as well as a higher mix of full-price sales.
Reported EBIT increased 15% as higher revenues and gross margin expansion more than offset higher selling and administrative expense. Gross margin increased approximately 170 basis points primarily due to higher margins and the favorable impact of growth in our NIKE Direct business, as well as a higher mix of full-price sales. This activity was partially offset by higher product costs primarily due to increased freight and logistics costs. Selling and administrative expense increased due to higher demand creation and operating overhead expense. Demand creation expense increased primarily as a result of higher advertising and marketing expense, as well as higher digital marketing investments. The increase in operating overhead expense reflected higher wage-related costs as well as an increase in NIKE Direct strategic technology investments.
EUROPE, MIDDLE EAST & AFRICA
THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
(Dollars in millions) 2021 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES 2021 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES
Revenues by:
Footwear $ 1,806 $ 1,731 4 % 4 % $ 3,789 $ 3,533 7 % 4 %
Apparel 1,202 1,104 9 % 8 % 2,361 2,075 14 % 11 %
Equipment 134 123 9 % 7 % 299 260 15 % 11 %
TOTAL REVENUES $ 3,142 $ 2,958 6 % 6 % $ 6,449 $ 5,868 10 % 7 %
Revenues by:
Sales to Wholesale Customers $ 2,112 $ 1,985 6 % 6 % $ 4,336 $ 3,958 10 % 6 %
Sales through NIKE Direct 1,030 973 6 % 6 % 2,113 1,910 11 % 8 %
TOTAL REVENUES $ 3,142 $ 2,958 6 % 6 % $ 6,449 $ 5,868 10 % 7 %
EARNINGS BEFORE INTEREST AND TAXES $ 806 $ 660 22 % $ 1,681 $ 1,352 24 %
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SECOND QUARTER OF FISCAL 2022 COMPARED TO SECOND QUARTER OF FISCAL 2021
On a currency-neutral basis, EMEA revenues for the second quarter of fiscal 2022 increased 6%, driven by growth in our wholesale business and NIKE Direct. NIKE Direct revenues increased 6% primarily due to comparable store sales growth of 14%, in part due to improved physical retail traffic, and the addition of new stores, partially offset by a decline in digital sales of 1%.
Currency-neutral footwear revenues increased 4%, driven by growth in wholesale and NIKE Direct. Unit sales of footwear decreased 4%, while higher ASP per pair contributed approximately 8 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher NIKE Direct and full-price ASPs, as well as a higher mix of full-price sales.
Currency-neutral apparel revenues increased 8% due primarily to higher revenues in Men's. Unit sales of apparel increased 3%, while higher ASP per unit contributed approximately 5 percentage points of apparel revenue growth, primarily due to higher NIKE Direct ASP, a higher mix of full-price sales and higher full-price ASP.
Reported EBIT increased 22% as gross margin expansion and higher revenues more than offset higher selling and administrative expense. Gross margin increased approximately 670 basis points primarily due to higher NIKE Direct margins, favorable changes in standard foreign currency exchange rates, a higher mix of full-price sales and lower other costs. Selling and administrative expense increased due to higher demand creation and operating overhead expense. Higher demand creation expense was driven by higher advertising and marketing expenses as well as higher sports marketing costs. Higher operating overhead expense was primarily due to higher wage-related expenses.
FIRST SIX MONTHS OF FISCAL 2022 COMPARED TO FIRST SIX MONTHS OF FISCAL 2021
On a currency-neutral basis, EMEA revenues for the first six months of fiscal 2022 increased 7%, due primarily to higher revenues in Men’s. NIKE Direct revenues increased 8% primarily due to comparable store sales growth of 15%, in part due to improved physical retail traffic, and the addition of new stores, while digital sales was relatively flat compared to prior year.
Currency-neutral footwear revenues increased 4%, driven by growth in NIKE Direct and our wholesale business. Unit sales of footwear decreased 1%, while higher ASP per pair contributed approximately 5 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher NIKE Direct and full-price ASPs, as well as a higher mix of full-price sales.
Currency-neutral apparel revenues increased 11% due primarily to higher revenues in Men's. Unit sales of apparel increased 5%, while higher ASP per unit contributed approximately 6 percentage points of apparel revenue growth, primarily due to higher full-price and NIKE Direct ASPs, as well as a higher mix of full-price sales.
Reported EBIT increased 24% as higher revenues and gross margin expansion more than offset higher selling and administrative expense. Gross margin increased approximately 460 basis points primarily due to higher NIKE Direct margins, favorable changes in standard foreign currency exchange rates and a higher mix of full-price sales, partially offset by higher product costs primarily due to increased freight and logistics costs. Selling and administrative expense increased due to higher demand creation and operating overhead expense. Higher demand creation expense was driven by higher advertising and marketing expenses. Higher operating overhead expense was primarily due to higher wage-related expenses.
GREATER CHINA
THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
(Dollars in millions) 2021 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES 2021 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES
Revenues by:
Footwear $ 1,235 $ 1,567 -21 % -25 % $ 2,684 $ 2,818 -5 % -11 %
Apparel 564 681 -17 % -21 % 1,040 1,159 -10 % -16 %
Equipment 45 50 -10 % -15 % 102 101 1 % -6 %
TOTAL REVENUES $ 1,844 $ 2,298 -20 % -24 % $ 3,826 $ 4,078 -6 % -13 %
Revenues by:
Sales to Wholesale Customers $ 896 $ 1,159 -23 % -27 % $ 2,010 $ 2,123 -5 % -12 %
Sales through NIKE Direct 948 1,139 -17 % -21 % 1,816 1,955 -7 % -13 %
TOTAL REVENUES $ 1,844 $ 2,298 -20 % -24 % $ 3,826 $ 4,078 -6 % -13 %
EARNINGS BEFORE INTEREST AND TAXES $ 569 $ 891 -36 % $ 1,270 $ 1,579 -20 %
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SECOND QUARTER OF FISCAL 2022 COMPARED TO SECOND QUARTER OF FISCAL 2021
On a currency-neutral basis, Greater China revenues for the second quarter of fiscal 2022 decreased 24%, reflecting impacts from lack of available inventory supply and product launch timing due to factory closures and mandated store closures due to COVID-19, as well as ongoing marketplace dynamics. The decrease in revenues was primarily due to lower revenues in Men’s and Women's. NIKE Direct revenues decreased 21% due to digital sales declines of 27%, comparable store sales declines of 18%, in part due to reduced physical retail traffic and mandated store closures due to COVID-19, partially offset by the addition of new stores.
Currency-neutral footwear revenues decreased 25%, driven primarily by lower revenues in Men's. Unit sales of footwear decreased 20%, while lower ASP per pair reduced footwear revenues by approximately 5 percentage points, driven by lower NIKE Direct and full-price ASPs.
Currency-neutral apparel revenues decreased 21%, due primarily to lower revenues in Men's and Women's. Unit sales of apparel decreased 17%, while lower ASP per unit reduced apparel revenues by approximately 4 percentage points, primarily due to lower NIKE Direct ASP, as well as lower full-price ASPs, primarily due to higher discounts.
Reported EBIT decreased 36% due to lower revenues, gross margin contraction and higher selling and administrative expense. Gross margin decreased approximately 310 basis points reflecting lower full-price ASP, net of discounts, lower NIKE Direct margins, higher other costs and a lower mix of full-price sales, partially offset by lower product costs. Higher other costs were primarily due to higher inventory obsolescence and the unfavorable rate impact of fixed supply chain costs on a lower volume of shipments. Selling and administrative expense increased due to higher demand creation and operating overhead expense. Growth in demand creation expense was primarily due to higher advertising and marketing costs as well as higher digital marketing investments. Operating overhead expense increased largely due to higher wage-related costs, partially offset by lower administrative costs.
FIRST SIX MONTHS OF FISCAL 2022 COMPARED TO FIRST SIX MONTHS OF FISCAL 2021
On a currency-neutral basis, Greater China revenues for the first six months of fiscal 2022 decreased 13%, reflecting impacts from lack of available inventory supply and product launch timing due to factory closures, mandated store closures due to COVID-19 and ongoing marketplace dynamics. The decrease in revenues was primarily due to lower revenues in the Men’s and Women's. NIKE Direct revenues decreased 13% due to digital sales declines of 19%, comparable store sales declines of 12%, in part due to reduced physical retail traffic, partially offset by the addition of new stores.
Currency-neutral footwear revenues decreased 11%, driven primarily by lower revenues in Men's. Unit sales of footwear decreased 8%, while lower ASP per pair reduced footwear revenues by approximately 3 percentage points, driven by lower NIKE Direct and full-price ASPs, primarily due to higher discounts.
Currency-neutral apparel revenues decreased 16%, due primarily to lower revenues in Women's. Unit sales of apparel decreased 10%, while lower ASP per unit reduced apparel revenues by approximately 6 percentage points, primarily due to lower NIKE Direct and full-price ASPs, primarily due to higher discounts.
Reported EBIT decreased 20% due to lower revenues, gross margin contraction and higher selling and administrative expense. Gross margin decreased approximately 220 basis points reflecting lower full-price ASP, primarily due to higher discounts, higher other costs and lower NIKE Direct margins, partially offset by lower product costs. Higher other costs was primarily due to higher inventory obsolescence. Selling and administrative expense increased due to higher demand creation and operating overhead expense. Growth in demand creation expense was primarily due to higher advertising and marketing costs as well as digital marketing investments. Operating overhead expense increased largely due to higher wage-related costs.
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ASIA PACIFIC & LATIN AMERICA
THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
(Dollars in millions) 2021 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES 2021 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES
Revenues by:
Footwear $ 887 $ 991 -10 % -8 % $ 1,909 $ 1,749 9 % 9 %
Apparel 402 432 -7 % -5 % 787 733 7 % 8 %
Equipment 58 48 21 % 22 % 116 88 32 % 32 %
TOTAL REVENUES $ 1,347 $ 1,471 -8 % -6 % $ 2,812 $ 2,570 9 % 10 %
Revenues by:
Sales to Wholesale Customers $ 784 $ 925 -15 % -13 % $ 1,711 $ 1,633 5 % 5 %
Sales through NIKE Direct 563 546 3 % 6 % 1,101 937 18 % 19 %
TOTAL REVENUES $ 1,347 $ 1,471 -8 % -6 % $ 2,812 $ 2,570 9 % 10 %
EARNINGS BEFORE INTEREST AND TAXES $ 388 $ 424 -8 % $ 869 $ 704 23 %
As discussed previously, our NIKE Brand business in Brazil transitioned to a distributor operating model during fiscal 2021 and our NIKE Brand businesses in Argentina, Chile and Uruguay have remained classified as held-for-sale. The impacts of closing the Brazil transaction as well as classifying the Argentina, Chile, and Uruguay entities as held-for-sale in fiscal 2020 are included within Corporate and are not reflected in the APLA operating segment results. For more information see Note 12 — Acquisitions and Divestitures within the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
SECOND QUARTER OF FISCAL 2022 COMPARED TO SECOND QUARTER OF FISCAL 2021
On a currency-neutral basis, APLA revenues decreased 6% for the second quarter of fiscal 2022. The decline was due to lower revenues across nearly all territories, led by a decline of 67% due to our business model shift in Brazil to a distributor model in fiscal 2021, partially offset by higher revenues in SOCO (which comprises Argentina, Chile and Uruguay), which increased 33%. Revenues decreased primarily due to lower revenues in Men’s. NIKE Direct revenues increased 6%, primarily due to digital sales growth of 25%, partially offset by store closures and comparable store sales contraction of 1%, in part due to reduced physical retail traffic.
Currency-neutral footwear revenues decreased 8%, due primarily to lower revenues in Men's. Unit sales of footwear decreased 25%, while higher ASP per pair contributed approximately 17 percentage points of footwear revenue growth. Higher ASP per pair was driven by higher NIKE Direct, full-price and off-price ASPs, as well as a higher mix of full-price sales. Higher ASPs, in part, reflect inflationary conditions in our SOCO territory.
Currency-neutral apparel revenues decreased 5%, due primarily to lower revenues in Men's and Women's. Unit sales of apparel decreased 20%, while higher ASP per unit contributed approximately 15 percentage points of apparel revenue growth, driven by higher NIKE Direct, full-price and off-price ASPs, as well as a higher mix of full-price sales. Higher ASPs, in part, reflect inflationary conditions in our SOCO territory.
Reported EBIT decreased 8% for the second quarter of fiscal 2022, as lower revenues and higher selling and administrative expenses more than offset gross margin expansion. Gross margin increased approximately 460 basis points primarily due to lower product costs, higher margins and the favorable impact of growth in our NIKE Direct business, higher full-price ASP, primarily reflecting lower discounts, and a higher mix of full-price sales. Selling and administrative expense increased due to higher demand creation and operating overhead expense. Higher demand creation expense was primarily due to higher digital marketing investments to support heightened digital demand. The increase in operating overhead expense was primarily due to an increase in NIKE Direct strategic technology investments and lower bad debt recoveries.
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FIRST SIX MONTHS OF FISCAL 2022 COMPARED TO FIRST SIX MONTHS OF FISCAL 2021
On a currency-neutral basis, APLA revenues increased 10% for the first six months of fiscal 2022. Territory revenue growth was led by a 72% increase in SOCO, an 11% increase in Japan and a 23% increase in Mexico, partially offset by a decline of 56% due to our business model shift in Brazil to a distributor model in fiscal 2021. Revenues increased primarily due to higher revenues in Men’s. NIKE Direct revenues increased 19%, primarily due to digital sales growth of 41% and comparable store sales growth of 7%, partially offset by store closures.
Currency-neutral footwear revenues increased 9%, due primarily to higher revenues in Kids' and the Jordan Brand, partially offset by declines in Men's. Unit sales of footwear decreased 6%, while higher ASP per pair contributed approximately 15 percentage points of footwear revenue growth. Higher ASP per pair was driven by higher NIKE Direct ASP as well as higher full-price ASPs, primarily due to lower discounts, higher off-price ASP and a higher mix of full-price sales. Higher ASPs, in part, reflect inflationary conditions in our SOCO territory.
Currency-neutral apparel revenues increased 8%, due primarily to higher revenues in Men's. Unit sales of apparel decreased 6%, while higher ASP per unit contributed approximately 14 percentage points of apparel revenue growth, driven by higher full-price ASP, reflecting lower discounts, higher NIKE Direct ASP, as well as higher off-price ASP and a higher mix of full-price sales. Higher ASPs, in part, reflect inflationary conditions in our SOCO territory.
Reported EBIT increased 23% for the first six months of fiscal 2022, as higher revenues and gross margin expansion more than offset higher selling and administrative expense. Gross margin increased approximately 510 basis points primarily due to higher margins and the favorable impact of growth in our NIKE Direct business, lower other costs, higher full-price ASP, primarily due to lower discounts as well as lower product costs and a higher mix of full-price sales. The decrease in other costs was primarily due to the favorable rate impact of fixed supply chain costs on a higher volume of wholesale shipments, as well as lower inventory obsolescence. Selling and administrative expense increased due to higher demand creation and operating overhead expense. Higher demand creation expense was primarily due to higher digital marketing investments to support heightened digital demand. The increase in operating overhead expense was primarily due to an increase in NIKE Direct strategic technology investments, and lower bad debt recoveries.
GLOBAL BRAND DIVISIONS
THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
(Dollars in millions)
2021 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES 2021 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES
Revenues $ 6 $ 8 -25 % -5 % $ 13 $ 12 8 % 13 %
Earnings (Loss) Before Interest and Taxes $ (1,071) $ (841) -27 % $ (2,058) $ (1,694) -21 %
Global Brand Divisions primarily represent demand creation and operating overhead expense, including product creation and design expenses that are centrally managed for the NIKE Brand, as well as costs associated with NIKE Direct global digital operations and enterprise technology. Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment.
SECOND QUARTER OF FISCAL 2022 COMPARED TO SECOND QUARTER OF FISCAL 2021
Global Brand Divisions' loss before interest and taxes increased 27% for the second quarter of fiscal 2022 driven by higher operating overhead and higher demand creation expense. Higher operating overhead expense was primarily due to an increase in strategic technology investments and higher wage-related costs. Higher demand creation expense was primarily due to higher sports marketing costs as well as higher advertising and marketing expense.
FIRST SIX MONTHS OF FISCAL 2022 COMPARED TO FIRST SIX MONTHS OF FISCAL 2021
Global Brand Divisions' loss before interest and taxes increased 21% for the first six months of fiscal 2022 driven by higher operating overhead and higher demand creation expense. Higher operating overhead expense was primarily due to an increase in strategic technology investments and wage-related costs. Higher demand creation expense was primarily due to higher advertising and marketing expense.
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CONVERSE
THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
(Dollars in millions)
2021 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES 2021 2020 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES
Revenues by:
Footwear $ 485 $ 416 17 % 16 % $ 1,052 $ 929 13 % 11 %
Apparel 34 32 6 % 5 % 58 54 7 % 3 %
Equipment 5 7 -29 % -30 % 14 16 -13 % -17 %
Other (1)
33 21 57 % 54 % 62 40 55 % 54 %
TOTAL REVENUES $ 557 $ 476 17 % 16 % $ 1,186 $ 1,039 14 % 11 %
Revenues by:
Sales to Wholesale Customers $ 303 $ 259 17 % 17 % $ 672 $ 632 6 % 3 %
Sales through Direct to Consumer 221 196 13 % 12 % 452 367 23 % 21 %
Other (1)
33 21 57 % 53 % 62 40 55 % 54 %
TOTAL REVENUES $ 557 $ 476 17 % 16 % $ 1,186 $ 1,039 14 % 11 %
EARNINGS BEFORE INTEREST AND TAXES $ 132 $ 87 52 % $ 336 $ 255 32 %
(1) Other revenues consist of territories serviced by third-party licensees who pay royalties to Converse for the use of its registered trademarks and other intellectual property rights. We do not own the Converse trademarks in Japan and accordingly do not earn revenues in Japan.
SECOND QUARTER OF FISCAL 2022 COMPARED TO SECOND QUARTER OF FISCAL 2021
On a currency-neutral basis, Converse revenues increased 16% for the second quarter of fiscal 2022 driven by revenue growth in Western Europe and North America, partially offset by declines in Asia. Wholesale revenues increased 17%, while direct to consumer revenues increased 12%, driven primarily by growth in North America and Western Europe, partially offset by declines in Asia. Combined unit sales within the wholesale and direct to consumer channels increased 5% and ASP increased 9%, primarily due to higher full-price ASP, driven by lower discounts and growth in direct to consumer.
Reported EBIT increased 52%, driven by higher revenues and gross margin expansion partially offset by higher selling and administrative expense. Gross margin increased approximately 250 basis points primarily due to higher margins in our direct to consumer business and a higher mix of full price sales, partially offset by higher product costs primarily due to increased freight charges. Selling and administrative expense increased primarily due to higher demand creation expense driven by higher advertising and marketing expense.
FIRST SIX MONTHS OF FISCAL 2022 COMPARED TO FIRST SIX MONTHS OF FISCAL 2021
On a currency-neutral basis, Converse revenues increased 11% for the first six months of fiscal 2022 driven by revenue growth in North America and Western Europe, partially offset by declines in Asia. Wholesale revenues increased 3%, while direct to consumer revenues increased 21%, driven by growth in North America and Western Europe, partially offset by declines in Asia. Combined unit sales within the wholesale and direct to consumer channels decreased 2%, while ASP increased 12%, primarily due to higher full-price ASP, driven by lower discounts and growth in direct to consumer.
Reported EBIT increased 32%, driven by higher revenues and gross margin expansion partially offset by higher selling and administrative expense. Gross margin increased approximately 290 basis points primarily due to higher margins in our direct to consumer business, growth in licensee revenues and lower other costs, partially offset by higher product costs due to increased freight and duty charges. Selling and administrative expense increased primarily due to higher demand creation expense driven by higher advertising and marketing expense.
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CORPORATE
THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
(Dollars in millions)
2021 2020 % CHANGE 2021 2020 % CHANGE
Revenues $ (16) $ 26 — $ (37) $ 39 —
Earnings (Loss) Before Interest and Taxes $ (503) $ (718) 30 % $ (1,048) $ (1,215) 14 %
Corporate revenues primarily consist of foreign currency hedge gains and losses related to revenues generated by entities within the NIKE Brand geographic operating segments and Converse, but managed through our central foreign exchange risk management program.
The Corporate loss before interest and taxes primarily consists of unallocated general and administrative expenses, including expenses associated with centrally managed departments; depreciation and amortization related to our corporate headquarters; unallocated insurance, benefit and compensation programs, including stock-based compensation; and certain foreign currency gains and losses.
In addition to the foreign currency gains and losses recognized in Corporate revenues, foreign currency results in Corporate include gains and losses resulting from the difference between actual foreign currency exchange rates and standard rates used to record non-functional currency denominated product purchases within the NIKE Brand geographic operating segments and Converse; related foreign currency hedge results; conversion gains and losses arising from remeasurement of monetary assets and liabilities in non-functional currencies; and certain other foreign currency derivative instruments.
SECOND QUARTER OF FISCAL 2022 COMPARED TO SECOND QUARTER OF FISCAL 2021
Corporate's loss before interest and taxes decreased $215 million for the second quarter of fiscal 2022, primarily due to the following:
• a favorable change of $198 million, primarily due to higher restructuring-related costs related to our organizational realignment in the prior year;
• a favorable change in net foreign currency gains and losses of $51 million related to the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, reported as a component of consolidated Other (income) expense, net; and
• an unfavorable change of $34 million related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains and losses; these results are reported as a component of consolidated gross margin.
FIRST SIX MONTHS OF FISCAL 2022 COMPARED TO FIRST SIX MONTHS OF FISCAL 2021
Corporate's loss before interest and taxes decreased $167 million for the first six months of fiscal 2022, primarily due to the following:
• a favorable change of $165 million, primarily due to higher restructuring-related costs related to our organizational realignment, as well as charges related to our planned, strategic distributor partnership transition within APLA, both of which occurred in the prior year;
• a favorable change in net foreign currency gains and losses of $38 million related to the remeasurement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments, reported as a component of consolidated Other (income) expense, net; and
• an unfavorable change of $36 million related to the difference between actual foreign currency exchange rates and standard foreign currency exchange rates assigned to the NIKE Brand geographic operating segments and Converse, net of hedge gains and losses; these results are reported as a component of consolidated gross margin.
FOREIGN CURRENCY EXPOSURES AND HEDGING PRACTICES
OVERVIEW
As a global company with significant operations outside the United States, in the normal course of business we are exposed to risk arising from changes in currency exchange rates. Our primary foreign currency exposures arise from the recording of transactions denominated in non-functional currencies and the translation of foreign currency denominated results of operations, financial position and cash flows into U.S. Dollars.
Our foreign exchange risk management program is intended to lessen both the positive and negative effects of currency fluctuations on our consolidated results of operations, financial position and cash flows. We manage global foreign exchange risk
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centrally on a portfolio basis to address those risks material to NIKE, Inc. Our hedging policy is designed to partially or entirely offset the impact of exchange rate changes on the underlying net exposures being hedged. Where exposures are hedged, our program has the effect of delaying the impact of exchange rate movements on our Unaudited Condensed Consolidated Financial Statements; the length of the delay is dependent upon hedge horizons. We do not hold or issue derivative instruments for trading or speculative purposes. As of and for the three and six months ended November 30, 2021, there have been no material changes to the Company's hedging program or strategy from what was disclosed within the Annual Report on Form 10-K.
Refer to Note 4 — Fair Value Measurements and Note 8 — Risk Management and Derivatives in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements for additional description of outstanding derivatives at each reported period end. For additional information about our Foreign Currency Exposures and Hedging Practices refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended May 31, 2021.
TRANSACTIONAL EXPOSURES
We conduct business in various currencies and have transactions which subject us to foreign currency risk. Our most significant transactional foreign currency exposures are:
• Product Costs — Product purchases denominated in currencies other than the functional currency of the transacting entity and factory input costs from the foreign currency adjustments program with certain factories.
• Non-Functional Currency Denominated External Sales — A portion of our NIKE Brand and Converse revenues associated with European operations are earned in currencies other than the Euro (e.g., the British Pound) but are recognized at a subsidiary that uses the Euro as its functional currency. These sales generate a foreign currency exposure.
• Other Costs — Non-functional currency denominated costs, such as endorsement contracts, also generate foreign currency risk, though to a lesser extent.
• Non-Functional Currency Denominated Monetary Assets and Liabilities — Our global subsidiaries have various monetary assets and liabilities, primarily receivables and payables, including intercompany receivables and payables, denominated in currencies other than their functional currencies. These balance sheet items are subject to remeasurement which may create fluctuations in Other (income) expense, net within our consolidated results of operations.
MANAGING TRANSACTIONAL EXPOSURES
Transactional exposures are managed on a portfolio basis within our foreign currency risk management program. We manage these exposures by taking advantage of natural offsets and currency correlations that exist within the portfolio and may also elect to use currency forward and option contracts to hedge the remaining effect of exchange rate fluctuations on probable forecasted future cash flows, including certain product cost exposures, non-functional currency denominated external sales and other costs described above. Generally, these are accounted for as cash flow hedges, except for hedges of the embedded derivative components of the product cost exposures and other contractual agreements.
Certain currency forward contracts used to manage the foreign exchange exposure of non-functional currency denominated monetary assets and liabilities subject to remeasurement and embedded derivative contracts are not formally designated as hedging instruments and are recognized in Other (income) expense, net.
TRANSLATIONAL EXPOSURES
Many of our foreign subsidiaries operate in functional currencies other than the U.S. Dollar. Fluctuations in currency exchange rates create volatility in our reported results as we are required to translate the balance sheets, operational results and cash flows of these subsidiaries into U.S. Dollars for consolidated reporting. The translation of foreign subsidiaries' non-U.S. Dollar denominated balance sheets into U.S. Dollars for consolidated reporting results in a cumulative translation adjustment to Accumulated other comprehensive income (loss) within Shareholders' equity. The impact of foreign exchange rate fluctuations on the translation of our consolidated Revenues was a benefit of approximately $63 million and $445 million for the three and six months ended November 30, 2021, respectively, and a benefit of approximately $184 million and $73 million for the three and six months ended November 30, 2020, respectively. The impact of foreign exchange rate fluctuations on the translation of our Income before income taxes was a benefit of approximately $12 million and $129 million for the three and six months ended November 30, 2021, respectively, and a benefit of approximately $63 million and $34 million for the three and six months ended November 30, 2020, respectively.
Management generally identifies hyper-inflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100%. Management has concluded our Argentina subsidiary within our APLA operating segment is operating in a hyper-inflationary market. As a result, beginning in the second quarter of fiscal 2019, the functional currency of our Argentina subsidiary changed from the local currency to the U.S. Dollar. As of and for the three and six months ended November 30, 2021, this change did not have a material impact on our results of operations or financial condition, and we do not anticipate it will have a material impact in future periods based on current rates.
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MANAGING TRANSLATIONAL EXPOSURES
To minimize the impact of translating foreign currency denominated revenues and expenses into U.S. Dollars for consolidated reporting, certain foreign subsidiaries use excess cash to purchase U.S. Dollar denominated available-for-sale investments. The variable future cash flows associated with the purchase and subsequent sale of these U.S. Dollar denominated investments at non-U.S. Dollar functional currency subsidiaries creates a foreign currency exposure that qualifies for hedge accounting under U.S. GAAP. We utilize forward contracts and/or options to mitigate the variability of the forecasted future purchases and sales of these U.S. Dollar investments. The combination of the purchase and sale of the U.S. Dollar investment and the hedging instrument has the effect of partially offsetting the year-over-year foreign currency translation impact on net earnings in the period the investments are sold. Hedges of the purchase of U.S. Dollar denominated available-for-sale investments are accounted for as cash flow hedges.
We estimate the combination of translation of foreign currency-denominated profits from our international businesses and the year-over-year change in foreign currency related gains and losses included in Other (income) expense, net had a favorable impact of approximately $63 million and $167 million on our Income before income taxes for the three and six months ended November 30, 2021, respectively.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW ACTIVITY
Cash provided (used) by operations was an inflow of $3,868 million for the first six months of fiscal 2022, compared to $3,355 million for the first six months of fiscal 2021. Net income, adjusted for non-cash items, generated $3,704 million of operating cash inflow for the first six months of fiscal 2022, compared to $3,283 million for the first six months of fiscal 2021. The net change in working capital and other assets and liabilities resulted in an increase to Cash provided (used) by operations of $164 million for the first six months of fiscal 2022 compared to an increase of $72 million for the first six months of fiscal 2021. The net change in working capital compared to the prior year was primarily driven by favorable impacts to Cash provided (used) by operations from Accounts receivable of $1,464 million, partially offset by unfavorable impacts from Inventories of $1,053 million for the first six months of fiscal 2022, in part due to supply chain constraints which caused a lower supply of available inventory to meet consumer demand during the first six months of fiscal 2022.
Cash provided (used) by investing activities was an outflow of $1,105 million for the first six months of fiscal 2022, compared to $2,877 million for the first six months of fiscal 2021, primarily driven by the net change in short-term investments. For the first six months of fiscal 2022, the net change in short-term investments (including sales, maturities and purchases) resulted in a cash outflow of $776 million compared to a cash outflow of $2,789 million for the first six months of fiscal 2021.
Cash provided (used) by financing activities was an outflow of $1,846 million for the first six months of fiscal 2022 compared to $292 million for the first six months of fiscal 2021. The increased outflow in the first six months of fiscal 2022 was driven by our resumption of the share repurchase program in the fourth quarter of fiscal 2021, resulting in $1,723 million of share repurchases for the first six months of fiscal 2022 compared to no share repurchases in the first six months of fiscal 2021.
During the first six months of fiscal 2022, we repurchased 10.8 million shares of NIKE's Class B Common Stock for $1.7 billion (an average price of $158.45 per share) under the four-year, $15 billion share repurchase program approved by the Board of Directors in June 2018. As of November 30, 2021, we had repurchased 60.8 million shares at a cost of approximately $6.4 billion (an average price of $104.89 per share) under this program. We continue to expect funding of share repurchases will come from operating cash flows and excess cash. The timing and the amount of share repurchases will be dictated by our capital needs and stock market conditions.
CAPITAL RESOURCES
On July 23, 2019, we filed a shelf registration statement (the “Shelf”) with the U.S. Securities and Exchange Commission (SEC) which permits us to issue an unlimited amount of debt securities from time to time. The Shelf expires on July 23, 2022.
As of November 30, 2021, our committed credit facilities were unchanged from the information previously reported on Form 10-K for the fiscal year ended May 31, 2021. We currently have long-term debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. Any changes to these ratings could result in interest rate and facility fee changes. As of November 30, 2021, we were in full compliance with the covenants under our facilities and believe it is unlikely we will fail to meet any of the covenants in the foreseeable future. As of November 30, 2021 and May 31, 2021, no amounts were outstanding under our committed credit facilities.
Liquidity was also provided by our $3 billion commercial paper program. As of and for the three months ended November 30, 2021, we did not have any borrowings outstanding under our $3 billion program. We may continue to issue commercial paper or
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other debt securities depending on general corporate needs. We currently have short-term debt ratings of A1+ and P1 from Standard and Poor's Corporation and Moody's Investor Services, respectively.
To date, in fiscal 2022, we have not experienced difficulty accessing the credit markets; however, future volatility in the capital markets may increase costs associated with issuing commercial paper or other debt instruments or affect our ability to access those markets.
As of November 30, 2021, we had cash, cash equivalents and short-term investments totaling $15.1 billion, primarily consisting of commercial paper, corporate notes, deposits held at major banks, money market funds, U.S. government sponsored enterprise obligations, U.S. Treasury obligations and other investment grade fixed-income securities. Our fixed-income investments are exposed to both credit and interest rate risk. All of our investments are investment grade to minimize our credit risk. While individual securities have varying durations, as of November 30, 2021, the weighted average days to maturity of our cash equivalents and short-term investments portfolio was 62 days.
We believe that existing cash, cash equivalents, short-term investments and cash generated by operations, together with access to external sources of funds as described above, will be sufficient to meet our domestic and foreign capital needs in the foreseeable future.
We utilize a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where they are needed. We indefinitely reinvest a significant portion of our foreign earnings, and our current plans do not demonstrate a need to repatriate these earnings. Should we require additional capital in the United States, we may determine to repatriate indefinitely reinvested foreign funds or raise capital in the United States through debt. Given our existing structure, if we were to repatriate indefinitely reinvested foreign earnings, we would be required to accrue and pay withholding taxes in certain foreign jurisdictions.
OFF-BALANCE SHEET ARRANGEMENTS
As of November 30, 2021, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on our current or future financial condition, results of operations, liquidity, capital expenditures or capital resources.
CONTRACTUAL OBLIGATIONS
There have been no significant changes to the contractual obligations reported in our Annual Report on Form 10-K for the fiscal year ended May 31, 2021.
NEW ACCOUNTING PRONOUNCEMENTS
There have been no material changes in recently issued or adopted accounting standards from those disclosed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2021.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based upon our Unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.
We believe that the estimates, assumptions and judgments involved in the accounting policies described in the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section of our most recent Annual Report on Form 10-K have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Actual results could differ from the estimates we use in applying our critical accounting policies. We are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information previously reported under Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended May 31, 2021.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.