Item 7. Management’s Discussion and Analysis
ITEM 7. 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 Direct operations, which is comprised of both NIKE-owned retail stores and sales through our digital platforms (also referred to as "NIKE Brand Digital"), to wholesale accounts and to a mix of independent distributors, licensees and sales representatives in nearly 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 strategy, we are focused on creating the marketplace of the future with more premium, consistent and seamless consumer experiences, leading with digital and our owned stores, as well as select wholesale partners. In addition, our product creation and marketing organizations are aligned to a consumer construct focused on sports dimensions through Men's, Women's and Kids', which allows us to better serve consumer needs. We continue to invest in a new Enterprise Resource Planning Platform, data and analytics, demand sensing, insight gathering, and other areas to create an end-to-end technology foundation, which we believe will further accelerate our digital transformation. We believe this unified approach will accelerate growth and unlock more efficiency for our business, while driving speed and responsiveness as we serve consumers globally.
FINANCIAL HIGHLIGHTS
• In fiscal 2023, NIKE, Inc. achieved record Revenues of $51.2 billion, which increased 10% and 16% on a reported and currency-neutral basis, respectively
• NIKE Direct revenues grew 14% from $18.7 billion in fiscal 2022 to $21.3 billion in fiscal 2023, and represented approximately 44% of total NIKE Brand revenues for fiscal 2023
• Gross margin for the fiscal year decreased 250 basis points to 43.5% primarily driven by higher product costs, higher markdowns and unfavorable changes in foreign currency exchange rates, partially offset by strategic pricing actions
• Inventories as of May 31, 2023 were $8.5 billion, flat compared to the prior year, driven by the actions we took throughout fiscal 2023 to manage inventory levels
• We returned $7.5 billion to our shareholders in fiscal 2023 through share repurchases and dividends
• Return on Invested Capital ("ROIC") as of May 31, 2023 was 31.5% compared to 46.5% as of May 31, 2022. ROIC is considered a non-GAAP financial measure, see "Use of Non-GAAP Financial Measures" for further information.
For discussion related to the results of operations and changes in financial condition for fiscal 2022 compared to fiscal 2021 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2022 Form 10-K, which was filed with the United States Securities and Exchange Commission on July 21, 2022.
CURRENT ECONOMIC CONDITIONS AND MARKET DYNAMICS
• Consumer Spending: Our fiscal 2023 growth in Revenues reflects strong demand for our products despite ongoing uncertainty in the global economy. We will continue to closely monitor macroeconomic conditions, including potential impacts of inflation and rising interest rates on consumer behavior.
• Inflationary Pressures: Inflationary pressures, including higher product input, freight and logistics costs negatively impacted gross margin for fiscal 2023. The strategic pricing actions we have taken partially offset the impacts of these higher costs.
• Supply Chain Volatility: Supply chain challenges, macroeconomic conditions and the impact of the COVID-19 pandemic on the manufacturing of our product disrupted the flow of seasonal product in fiscal 2022 and the first quarter of fiscal 2023, resulting in elevated inventory levels at the end of the first quarter of fiscal 2023. Throughout fiscal 2023, we took action to reduce excess inventory by decreasing future inventory purchases and increasing promotional activity. These actions, along with the stabilization of inventory transit times in the second and third quarters of fiscal 2023, resulted in the normalization of the seasonal flow of product in the fourth quarter of fiscal 2023.
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• COVID-19 Impacts in Greater China: During the first and second quarters of fiscal 2023, we managed through continued temporary store closures and reduced retail traffic in Greater China, primarily due to COVID-19 related local government restrictions. At the beginning of the third quarter of fiscal 2023, the government mandated restrictions were lifted and we experienced improvement in physical retail traffic.
• Foreign Currency Impacts: As a global company with significant operations outside the United States, we are exposed to risk arising from foreign currency exchange rates. For fiscal 2023, fluctuations in foreign currency exchange rates negatively impacted our reported Revenues by approximately $2,859 million, reducing our revenue growth rate to 10% on a reported basis from 16% on a currency-neutral basis. Foreign currency impacts, net of hedges, also reduced our reported Income before income taxes by approximately $1,023 million. For further information, refer to "Foreign Currency Exposures and Hedging Practices".
The operating environment could remain volatile in fiscal 2024 as the risk exists that worsening macroeconomic conditions could have a material adverse impact on our future revenue growth as well as overall profitability. For more information refer to Item 1A Risk Factors, within Part I, Item 1. Business.
RECENT DEVELOPMENTS
During the first and second quarters of fiscal 2023, we completed the sale of our entity in Chile and our entities in Argentina and Uruguay to third-party distributors, respectively. Now that we have completed the shift from a wholesale and direct to consumer operating model to a distributor model within our Central and South America ("CASA") territory, we expect consolidated NIKE, Inc. and Asia Pacific & Latin America ("APLA") revenue growth will be reduced due to different commercial terms. However, over time we expect the future operating model to have a favorable impact on our overall profitability as we reduce selling and administrative expenses, as well as reduce exposure to foreign exchange rate volatility.
USE OF NON-GAAP FINANCIAL MEASURES
Throughout this Annual Report on Form 10-K, we discuss non-GAAP financial measures, which should be considered in addition to, and not in lieu of, the financial measures calculated and presented in accordance with U.S. GAAP. References to these measures 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 measures used by other companies. Management uses these non-GAAP 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.
Earnings Before Interest and Taxes ("EBIT") : Calculated as Net income before Interest expense (income), net and Income tax expense in the Consolidated Statements of Income. Total NIKE, Inc. EBIT for fiscal 2023 and fiscal 2022 is as follows:
YEAR ENDED MAY 31,
(Dollars in millions)
2023 2022
Net income $ 5,070 $ 6,046
Add: Interest expense (income), net (6) 205
Add: Income tax expense 1,131 605
Earnings before interest and taxes $ 6,195 $ 6,856
EBIT Margin : Calculated as total NIKE, Inc. EBIT divided by total NIKE, Inc. Revenues. Our EBIT Margin calculation for fiscal 2023 and fiscal 2022 is as follows:
YEAR ENDED MAY 31,
(Dollars in millions)
2023 2022
Numerator
Earnings before interest and taxes $ 6,195 $ 6,856
Denominator
Total NIKE, Inc. Revenues $ 51,217 $ 46,710
EBIT Margin 12.1% 14.7%
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Return on Invested Capital ("ROIC") : Represents a performance measure that management believes is useful information in understanding the Company's ability to effectively manage invested capital. Our ROIC calculation as of May 31, 2023 and 2022 is as follows:
FOR THE TRAILING FOUR QUARTERS ENDED
(Dollars in millions) MAY 31, 2023 MAY 31, 2022
Numerator
Net income $ 5,070 $ 6,046
Add: Interest expense (income), net (6) 205
Add: Income tax expense 1,131 605
Earnings before interest and taxes 6,195 6,856
Income tax adjustment (1)
(1,130) (624)
Earnings before interest and after taxes $ 5,065 $ 6,232
AVERAGE FOR THE TRAILING FIVE QUARTERS ENDED
MAY 31, 2023 MAY 31, 2022
Denominator
Total debt (2)
$ 12,491 $ 12,722
Add: Shareholders' equity 14,982 14,425
Less: Cash and equivalents and Short-term investments 11,394 13,748
Total invested capital $ 16,079 $ 13,399
RETURN ON INVESTED CAPITAL 31.5% 46.5%
(1) Equals Earnings before interest and taxes multiplied by the effective tax rate as of the respective quarter end.
(2) Total debt includes the following: 1) Current portion of long-term debt, 2) Notes Payable, 3) Current portion of operating lease liabilities, 4) Long-term debt and 5) Operating lease liabilities.
Currency-neutral revenues : Currency-neutral revenues enhance visibility to underlying business trends, excluding the impact of translation arising from foreign currency exchange rate fluctuations. Currency-neutral revenues are calculated using actual exchange rates in use during the comparative prior year period in place of the exchange rates in use during the current period.
Wholesale equivalent revenues : 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.
COMPARABLE STORE SALES
Comparable store sales : This key metric, which excludes NIKE Brand Digital 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 metric 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 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 metrics used by other companies.
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RESULTS OF OPERATIONS
(Dollars in millions, except per share data)
FISCAL 2023 FISCAL 2022 % CHANGE FISCAL 2021 % CHANGE
Revenues $ 51,217 $ 46,710 10 % $ 44,538 5 %
Cost of sales 28,925 25,231 15 % 24,576 3 %
Gross profit 22,292 21,479 4 % 19,962 8 %
Gross margin 43.5 % 46.0 % 44.8 %
Demand creation expense 4,060 3,850 5 % 3,114 24 %
Operating overhead expense 12,317 10,954 12 % 9,911 11 %
Total selling and administrative expense 16,377 14,804 11 % 13,025 14 %
% of revenues 32.0 % 31.7 % 29.2 %
Interest expense (income), net (6) 205 — 262 —
Other (income) expense, net (280) (181) — 14 —
Income before income taxes 6,201 6,651 -7 % 6,661 0 %
Income tax expense 1,131 605 87 % 934 -35 %
Effective tax rate 18.2 % 9.1 % 14.0 %
NET INCOME $ 5,070 $ 6,046 -16 % $ 5,727 6 %
Diluted earnings per common share $ 3.23 $ 3.75 -14 % $ 3.56 5 %
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CONSOLIDATED OPERATING RESULTS
REVENUES
(Dollars in millions)
FISCAL 2023 FISCAL 2022 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES (1)
FISCAL 2021 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES (1)
NIKE, Inc. Revenues:
NIKE Brand Revenues by:
Footwear $ 33,135 $ 29,143 14 % 20 % $ 28,021 4 % 4 %
Apparel 13,843 13,567 2 % 8 % 12,865 5 % 6 %
Equipment 1,727 1,624 6 % 13 % 1,382 18 % 18 %
Global Brand Divisions (2)
58 102 -43 % -43 % 25 308 % 302 %
Total NIKE Brand Revenues $ 48,763 $ 44,436 10 % 16 % $ 42,293 5 % 6 %
Converse 2,427 2,346 3 % 8 % 2,205 6 % 7 %
Corporate (3)
27 (72) — — 40 — —
TOTAL NIKE, INC. REVENUES $ 51,217 $ 46,710 10 % 16 % $ 44,538 5 % 6 %
Supplemental NIKE Brand Revenues Details:
NIKE Brand Revenues by:
Sales to Wholesale Customers $ 27,397 $ 25,608 7 % 14 % $ 25,898 -1 % -1 %
Sales through NIKE Direct 21,308 18,726 14 % 20 % 16,370 14 % 15 %
Global Brand Divisions (2)
58 102 -43 % -43 % 25 308 % 302 %
TOTAL NIKE BRAND REVENUES $ 48,763 $ 44,436 10 % 16 % $ 42,293 5 % 6 %
NIKE Brand Revenues on a Wholesale Equivalent Basis (1) :
Sales to Wholesale Customers $ 27,397 $ 25,608 7 % 14 % $ 25,898 -1 % -1 %
Sales from our Wholesale Operations to NIKE Direct Operations 12,730 10,543 21 % 27 % 9,872 7 % 7 %
TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES $ 40,127 $ 36,151 11 % 18 % $ 35,770 1 % 1 %
NIKE Brand Wholesale Equivalent Revenues by: (1),(4)
Men's $ 20,733 $ 18,797 10 % 17 % $ 18,391 2 % 3 %
Women's 8,606 8,273 4 % 11 % 8,225 1 % 1 %
NIKE Kids' 5,038 4,874 3 % 10 % 4,882 0 % 0 %
Jordan Brand 6,589 5,122 29 % 35 % 4,780 7 % 7 %
Others (5)
(839) (915) 8 % -3 % (508) -80 % -79 %
TOTAL NIKE BRAND WHOLESALE EQUIVALENT REVENUES $ 40,127 $ 36,151 11 % 18 % $ 35,770 1 % 1 %
(1) The percent change excluding currency changes and the presentation of wholesale equivalent revenues represent non-GAAP financial measures. For further information, see "Use of Non-GAAP Financial Measures".
(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.
(4) As a result of the Consumer Direct Acceleration strategy, announced in fiscal 2021, the Company is now organized around a consumer construct of Men's, Women's and Kids'. Beginning in the first quarter of fiscal 2022, unisex products are classified within Men's, and Jordan Brand revenues are separately reported. Certain prior year amounts were reclassified to conform to fiscal 2022 presentation. These changes had no impact on previously reported consolidated results of operations or shareholders' equity.
(5) Others include products not allocated to Men's, Women's, NIKE Kids' and Jordan Brand, as well as certain adjustments that are not allocated to products designated by consumer.
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FISCAL 2023 NIKE BRAND REVENUE HIGHLIGHTS
The following tables present NIKE Brand revenues disaggregated by reportable operating segment, distribution channel and major product line:
FISCAL 2023 COMPARED TO FISCAL 2022
• NIKE, Inc. Revenues were $51.2 billion in fiscal 2023, which increased 10% and 16% compared to fiscal 2022 on a reported and currency-neutral basis, respectively. The increase was due to higher revenues in North America, Europe, Middle East & Africa ("EMEA"), APLA and Greater China, which contributed approximately 7, 6, 2 and 1 percentage points to NIKE, Inc. Revenues, respectively.
• NIKE Brand revenues, which represented over 90% of NIKE, Inc. Revenues, increased 10% and 16% on a reported and currency-neutral basis, respectively. This increase was primarily due to higher revenues in Men's, the Jordan Brand, Women's and Kids' which grew 17%, 35%,11% and 10%, respectively, on a wholesale equivalent basis.
• NIKE Brand footwear revenues increased 20% on a currency-neutral basis, due to higher revenues in Men's, the Jordan Brand, Women's and Kids'. Unit sales of footwear increased 13%, while higher average selling price ("ASP") per pair contributed approximately 7 percentage points of footwear revenue growth. Higher ASP was primarily due to higher full-price ASP, net of discounts, on a wholesale equivalent basis, and growth in the size of our NIKE Direct business, partially offset by lower NIKE Direct ASP.
• NIKE Brand apparel revenues increased 8% on a currency-neutral basis, primarily due to higher revenues in Men's. Unit sales of apparel increased 4%, while higher ASP per unit contributed approximately 4 percentage points of apparel revenue growth. Higher ASP was primarily due to higher full-price ASP and growth in the size of our NIKE Direct business, partially offset by lower NIKE Direct ASP, reflecting higher promotional activity.
• NIKE Direct revenues increased 14% from $18.7 billion in fiscal 2022 to $21.3 billion in fiscal 2023. On a currency-neutral basis, NIKE Direct revenues increased 20% primarily driven by NIKE Brand Digital sales growth of 24%, comparable store sales growth of 14% and the addition of new stores. For further information regarding comparable store sales, including the definition, see "Comparable Store Sales". NIKE Brand Digital sales were $12.6 billion for fiscal 2023 compared to $10.7 billion for fiscal 2022.
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GROSS MARGIN
FISCAL 2023 COMPARED TO FISCAL 2022
For fiscal 2023, our consolidated gross profit increased 4% to $22,292 million compared to $21,479 million for fiscal 2022. Gross margin decreased 250 basis points to 43.5% for fiscal 2023 compared to 46.0% for fiscal 2022 due to the following:
*Wholesale equivalent
The decrease in gross margin for fiscal 2023 was primarily due to:
• Higher NIKE Brand product costs, on a wholesale equivalent basis, primarily due to higher input costs and elevated inbound freight and logistics costs as well as product mix;
• Lower margin in our NIKE Direct business, driven by higher promotional activity to liquidate inventory in the current period compared to lower promotional activity in the prior period resulting from lower available inventory supply;
• Unfavorable changes in net foreign currency exchange rates, including hedges; and
• Lower off-price margin, on a wholesale equivalent basis.
This was partially offset by:
• Higher NIKE Brand full-price ASP, net of discounts, on a wholesale equivalent basis, due primarily to strategic pricing actions and product mix; and
• Lower other costs, primarily due to higher inventory obsolescence reserves recognized in Greater China in the fourth quarter of fiscal 2022.
TOTAL SELLING AND ADMINISTRATIVE EXPENSE
(Dollars in millions)
FISCAL 2023 FISCAL 2022 % CHANGE FISCAL 2021 % CHANGE
Demand creation expense (1)
$ 4,060 $ 3,850 5 % $ 3,114 24 %
Operating overhead expense 12,317 10,954 12 % 9,911 11 %
Total selling and administrative expense $ 16,377 $ 14,804 11 % $ 13,025 14 %
% of revenues 32.0 % 31.7 % 30 bps 29.2 % 250 bps
(1) Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, complimentary product, television, digital and print advertising and media costs, brand events and retail brand presentation.
FISCAL 2023 COMPARED TO FISCAL 2022
Demand creation expense increased 5% for fiscal 2023, primarily due to higher advertising and marketing expense and higher sports marketing expense. Changes in foreign currency exchange rates decreased Demand creation expense by approximately 4 percentage points.
Operating overhead expense increased 12%, primarily due to higher wage-related expenses, NIKE Direct variable costs, strategic technology enterprise investments and other administrative costs. Changes in foreign currency exchange rates decreased Operating overhead expense by approximately 3 percentage points.
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OTHER (INCOME) EXPENSE, NET
(Dollars in millions)
FISCAL 2023 FISCAL 2022 FISCAL 2021
Other (income) expense, net $ (280) $ (181) $ 14
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.
FISCAL 2023 COMPARED TO FISCAL 2022
Other (income) expense, net increased from $181 million of other income, net in fiscal 2022 to $280 million in the current fiscal year, primarily due to a net favorable change in foreign currency conversion gains and losses, including hedges, and the one-time charge related to the deconsolidation of our Russian operations recognized in the prior year. This increase was partially offset by net unfavorable activity related to our strategic distributor partnership transition within APLA, including the loss recognized upon the completion of the sale of our entities in Argentina and Uruguay to a third-party distributor in the second quarter of fiscal 2023.
For more information related to our distributor partnership transition within APLA, see Note 18 — Acquisitions and Divestitures within the accompanying Notes to the 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 an unfavorable impact on our Income before income taxes of $1,023 million for fiscal 2023.
INCOME TAXES
FISCAL 2023 FISCAL 2022 % CHANGE FISCAL 2021 % CHANGE
Effective tax rate 18.2 % 9.1 % 910 bps 14.0 % (490) bps
FISCAL 2023 COMPARED TO FISCAL 2022
Our effective tax rate was 18.2% for fiscal 2023, compared to 9.1% for fiscal 2022, primarily due to decreased benefits from stock-based compensation and a non-cash, one-time benefit in the prior year related to the onshoring of certain non-U.S. intangible property ownership rights.
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 that includes, among other provisions, changes to the U.S. corporate income tax system, including a fifteen percent minimum tax based on "adjusted financial statement income," which is effective for NIKE beginning June 1, 2023. Based on our current analysis of the provisions, we do not expect these tax law changes to have a material impact on our financial statements; however, we will continue to evaluate their impact as further information becomes available.
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OPERATING SEGMENTS
As discussed in Note 15 — Operating Segments and Related Information in the accompanying Notes to the Consolidated Financial Statements, 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.
The breakdown of Revenues is as follows:
(Dollars in millions)
FISCAL 2023 FISCAL 2022 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES (1)
FISCAL 2021 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES (1)
North America $ 21,608 $ 18,353 18 % 18 % $ 17,179 7 % 7 %
Europe, Middle East & Africa 13,418 12,479 8 % 21 % 11,456 9 % 12 %
Greater China 7,248 7,547 -4 % 4 % 8,290 -9 % -13 %
Asia Pacific & Latin America (2)
6,431 5,955 8 % 17 % 5,343 11 % 16 %
Global Brand Divisions (3)
58 102 -43 % -43 % 25 308 % 302 %
TOTAL NIKE BRAND $ 48,763 $ 44,436 10 % 16 % $ 42,293 5 % 6 %
Converse 2,427 2,346 3 % 8 % 2,205 6 % 7 %
Corporate (4)
27 (72) — — 40 — —
TOTAL NIKE, INC. REVENUES $ 51,217 $ 46,710 10 % 16 % $ 44,538 5 % 6 %
(1) The percent change excluding currency changes represents a non-GAAP financial measure. For further information, see "Use of Non-GAAP Financial Measures".
(2) For additional information on the transition of our NIKE Brand businesses within our CASA territory to a third-party distributor, see Note 18 — Acquisitions and Divestitures of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report.
(3) Global Brand Divisions revenues include NIKE Brand licensing and other miscellaneous revenues that are not part of a geographic operating segment.
(4) 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 is Earnings Before Interest and Taxes ("EBIT"). As discussed in Note 15 — Operating Segments and Related Information in the accompanying Notes to the Consolidated Financial Statements, certain corporate costs are not included in EBIT.
The breakdown of EBIT is as follows:
(Dollars in millions)
FISCAL 2023 FISCAL 2022 % CHANGE FISCAL 2021 % CHANGE
North America $ 5,454 $ 5,114 7 % $ 5,089 0 %
Europe, Middle East & Africa 3,531 3,293 7 % 2,435 35 %
Greater China 2,283 2,365 -3 % 3,243 -27 %
Asia Pacific & Latin America 1,932 1,896 2 % 1,530 24 %
Global Brand Divisions (4,841) (4,262) -14 % (3,656) -17 %
TOTAL NIKE BRAND (1)
$ 8,359 $ 8,406 -1 % $ 8,641 -3 %
Converse 676 669 1 % 543 23 %
Corporate
(2,840) (2,219) -28 % (2,261) 2 %
TOTAL NIKE, INC. EARNINGS BEFORE INTEREST AND TAXES (1)
$ 6,195 $ 6,856 -10 % $ 6,923 -1 %
EBIT margin (1)
12.1 % 14.7 % 15.5 %
Interest expense (income), net (6) 205 — 262 —
TOTAL NIKE, INC. INCOME BEFORE INCOME TAXES $ 6,201 $ 6,651 -7 % $ 6,661 0 %
(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.
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NORTH AMERICA
(Dollars in millions)
FISCAL 2023 FISCAL 2022 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2021 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES
Revenues by:
Footwear $ 14,897 $ 12,228 22 % 22 % $ 11,644 5 % 5 %
Apparel 5,947 5,492 8 % 9 % 5,028 9 % 9 %
Equipment 764 633 21 % 21 % 507 25 % 25 %
TOTAL REVENUES $ 21,608 $ 18,353 18 % 18 % $ 17,179 7 % 7 %
Revenues by:
Sales to Wholesale Customers $ 11,273 $ 9,621 17 % 18 % $ 10,186 -6 % -6 %
Sales through NIKE Direct 10,335 8,732 18 % 18 % 6,993 25 % 25 %
TOTAL REVENUES $ 21,608 $ 18,353 18 % 18 % $ 17,179 7 % 7 %
EARNINGS BEFORE INTEREST AND TAXES $ 5,454 $ 5,114 7 % $ 5,089 0 %
FISCAL 2023 COMPARED TO FISCAL 2022
• North America revenues increased 18% on a currency-neutral basis, primarily due to higher revenues in Men's and the Jordan Brand. NIKE Direct revenues increased 18%, driven by strong digital sales growth of 23%, comparable store sales growth of 9% and the addition of new stores.
• Footwear revenues increased 22% on a currency-neutral basis, primarily due to higher revenues in Men's and the Jordan Brand. Unit sales of footwear increased 17%, while higher ASP per pair contributed approximately 5 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher full-price ASP and growth in NIKE Direct, partially offset by lower NIKE Direct ASP, reflecting higher promotional activity as well as lower available inventory supply in the prior period and a lower mix of full-price sales.
• Apparel revenues increased 9% on a currency-neutral basis, primarily due to higher revenues in Men's. Unit sales of apparel increased 7%, while higher ASP per unit contributed approximately 2 percentage points of apparel revenue growth. Higher ASP per unit was primarily due to higher full-price ASP and growth in NIKE Direct, partially offset by lower NIKE Direct ASP, reflecting higher promotional activity.
Reported EBIT increased 7% due to higher revenues and the following:
• Gross margin contraction of 310 basis points primarily due to higher product costs, reflecting higher input costs and inbound freight and logistics costs and product mix, lower margins in NIKE Direct due to higher promotional activity and a lower mix of full-price sales. This was partially offset by higher full-price ASP, net of discounts, largely due to strategic pricing actions and product mix.
• Selling and administrative expense increased 15% due to higher operating overhead and demand creation expense. The increase in operating overhead expense was primarily due to higher wage-related costs and higher NIKE Direct variable costs, in part due to new store additions. Demand creation expense increased primarily due to higher sports marketing expense and an increase in digital marketing.
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EUROPE, MIDDLE EAST & AFRICA
(Dollars in millions)
FISCAL 2023 FISCAL 2022 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2021 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES
Revenues by:
Footwear $ 8,260 $ 7,388 12 % 25 % $ 6,970 6 % 9 %
Apparel 4,566 4,527 1 % 14 % 3,996 13 % 16 %
Equipment 592 564 5 % 18 % 490 15 % 17 %
TOTAL REVENUES $ 13,418 $ 12,479 8 % 21 % $ 11,456 9 % 12 %
Revenues by:
Sales to Wholesale Customers $ 8,522 $ 8,377 2 % 15 % $ 7,812 7 % 10 %
Sales through NIKE Direct 4,896 4,102 19 % 33 % 3,644 13 % 15 %
TOTAL REVENUES $ 13,418 $ 12,479 8 % 21 % $ 11,456 9 % 12 %
EARNINGS BEFORE INTEREST AND TAXES $ 3,531 $ 3,293 7 % $ 2,435 35 %
FISCAL 2023 COMPARED TO FISCAL 2022
• EMEA revenues increased 21% on a currency-neutral basis, due to higher revenues in Men's, the Jordan Brand, Women's and Kids'. NIKE Direct revenues increased 33%, driven primarily by strong digital sales growth of 43% and comparable store sales growth of 22%.
• Footwear revenues increased 25% on a currency-neutral basis, due to higher revenues in Men's, the Jordan Brand, Women's and Kids'. Unit sales of footwear increased 9%, while higher ASP per pair contributed approximately 16 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher full-price ASP and growth in NIKE Direct.
• Apparel revenues increased 14% on a currency-neutral basis, primarily due to higher revenues in Men's. Unit sales of apparel increased 2%, while higher ASP per unit contributed approximately 12 percentage points of apparel revenue growth. Higher ASP per unit was primarily due to higher full-price ASP and growth in NIKE Direct, partially offset by lower NIKE Direct ASP, reflecting higher promotional activity.
Reported EBIT increased 7% due to higher revenues and the following:
• Gross margin contraction of 60 basis points primarily due to higher product costs reflecting higher input costs, inbound freight and logistics costs and product mix, higher other costs and unfavorable changes in standard foreign currency exchange rates. This was partially offset by higher full-price ASP, net of discounts, primarily due to strategic pricing actions and product mix.
• Selling and administrative expense increased 4% due to higher operating overhead and demand creation expense. Operating overhead expense increased primarily due to higher wage-related expenses and other administrative costs, partially offset by favorable changes in foreign currency exchange rates. Demand creation expense increased primarily due to higher advertising and marketing expense, partially offset by favorable changes in foreign currency exchange rates.
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GREATER CHINA
(Dollars in millions)
FISCAL 2023 FISCAL 2022 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2021 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES
Revenues by:
Footwear $ 5,435 $ 5,416 0 % 8 % $ 5,748 -6 % -10 %
Apparel 1,666 1,938 -14 % -7 % 2,347 -17 % -21 %
Equipment 147 193 -24 % -18 % 195 -1 % -6 %
TOTAL REVENUES $ 7,248 $ 7,547 -4 % 4 % $ 8,290 -9 % -13 %
Revenues by:
Sales to Wholesale Customers $ 3,866 $ 4,081 -5 % 2 % $ 4,513 -10 % -14 %
Sales through NIKE Direct 3,382 3,466 -2 % 5 % 3,777 -8 % -12 %
TOTAL REVENUES $ 7,248 $ 7,547 -4 % 4 % $ 8,290 -9 % -13 %
EARNINGS BEFORE INTEREST AND TAXES $ 2,283 $ 2,365 -3 % $ 3,243 -27 %
FISCAL 2023 COMPARED TO FISCAL 2022
• Greater China revenues increased 4% on a currency-neutral basis, primarily due to higher revenues in the Jordan Brand, partially offset by lower revenues in Men's and Women's. NIKE Direct revenues increased 5%, due to comparable store sales growth of 9% and the addition of new stores, partially offset by digital sales declines of 4%.
• Footwear revenues increased 8% on a currency-neutral basis, primarily due to higher revenues in the Jordan Brand and Men's. Unit sales of footwear increased 7%, while higher ASP per pair contributed approximately 1 percentage point of footwear revenue growth. Higher ASP per pair was primarily due to higher NIKE Direct ASP and a higher mix of full-price sales, largely offset by a lower mix of NIKE Direct sales.
• Apparel revenues decreased 7% on a currency-neutral basis, primarily due to lower revenues in Men's and Women's. Unit sales of apparel decreased 8%, while higher ASP per unit contributed approximately 1 percentage point of apparel revenue growth. Higher ASP per unit was primarily due to a higher mix of full price sales, partially offset by lower off-price ASP.
Reported EBIT decreased 3% due to lower revenues and the following:
• Gross margin expansion of approximately 140 basis points, primarily due to higher inventory obsolescence reserves recognized in the fourth quarter of fiscal 2022, favorable changes in standard foreign currency exchange rates and higher full-price ASP, net of discounts, in part due to product mix. This was partially offset by higher product costs reflecting higher input costs and product mix.
• Selling and administrative expense was flat due to increased operating overhead expense offset by lower demand creation expense. The increase in operating overhead expense was primarily due to higher wage-related expenses and other administrative costs, partially offset by favorable changes in foreign currency exchange rates. Demand creation expense decreased primarily due to lower retail brand presentation costs, lower digital marketing and favorable changes in foreign currency exchange rates, partially offset by higher advertising and marketing expense.
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ASIA PACIFIC & LATIN AMERICA
(Dollars in millions)
FISCAL 2023 FISCAL 2022 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2021 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES
Revenues by:
Footwear $ 4,543 $ 4,111 11 % 19 % $ 3,659 12 % 17 %
Apparel 1,664 1,610 3 % 13 % 1,494 8 % 12 %
Equipment 224 234 -4 % 4 % 190 23 % 28 %
TOTAL REVENUES $ 6,431 $ 5,955 8 % 17 % $ 5,343 11 % 16 %
Revenues by:
Sales to Wholesale Customers $ 3,736 $ 3,529 6 % 14 % $ 3,387 4 % 8 %
Sales through NIKE Direct 2,695 2,426 11 % 22 % 1,956 24 % 30 %
TOTAL REVENUES $ 6,431 $ 5,955 8 % 17 % $ 5,343 11 % 16 %
EARNINGS BEFORE INTEREST AND TAXES $ 1,932 $ 1,896 2 % $ 1,530 24 %
As discussed previously, our NIKE Brand business in Brazil transitioned to a distributor operating model during fiscal 2021. We completed the sale of our entity in Chile and our entities in Argentina and Uruguay to third-party distributors in the first and second quarters of fiscal 2023, respectively. The impacts of closing these transactions are included within Corporate and are not reflected in the APLA operating segment results. This completed the transition of our NIKE Brand businesses within our CASA marketplace, which now reflects a full distributor operating model. For more information see Note 18 — Acquisitions and Divestitures within the accompanying Notes to the Consolidated Financial Statements.
FISCAL 2023 COMPARED TO FISCAL 2022
• APLA revenues increased 17% on a currency-neutral basis due to higher revenues across nearly all territories, led by Southeast Asia and India, Korea and Japan. The increase was partially offset by a decline in our CASA territory. Within our CASA territory, the transition of our Chile, Argentina and Uruguay entities to a third-party distributor operating model reduced APLA revenue growth by approximately 5 percentage points. Revenues increased primarily due to growth in Men's, Women's and the Jordan Brand. NIKE Direct revenues increased 22%, driven by digital sales growth of 23% and comparable store sales growth of 28%.
• Footwear revenues increased 19% on a currency-neutral basis, primarily due to higher revenues in Men's, Women's and the Jordan Brand. Unit sales of footwear increased 16%, while higher ASP per pair contributed approximately 3 percentage points of footwear revenue growth. Higher ASP per pair was primarily due to higher full-price ASP and growth in NIKE Direct, partially offset by lower NIKE Direct ASP.
• Apparel revenues increased 13% on a currency-neutral basis, primarily due to higher revenues in Men's. Unit sales of apparel increased 9%, while higher ASP per unit contributed approximately 4 percentage points of apparel revenue growth. Higher ASP per unit was primarily due to higher full-price and off-price ASPs, partially offset by lower NIKE Direct ASP.
Reported EBIT increased 2% due to higher revenues and the following:
• Gross margin contraction of approximately 190 basis points primarily due to higher product costs, reflecting product mix and higher input costs, as well as unfavorable changes in standard foreign currency exchange rates. This was partially offset by higher full-price ASP, net of discounts, due to product mix and strategic pricing actions.
• Selling and administrative expense increased 8% due to higher operating overhead and demand creation expense. Operating overhead expense increased primarily due to higher wage-related expenses and an increase in NIKE Direct variable costs, partially offset by favorable changes in foreign currency exchange rates. Demand creation expense increased primarily due to higher sports marketing expense and higher advertising and marketing expense, partially offset by favorable changes in foreign currency exchange rates.
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GLOBAL BRAND DIVISIONS
(Dollars in millions)
FISCAL 2023 FISCAL 2022 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2021 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES
Revenues $ 58 $ 102 -43 % -43 % $ 25 308 % 302 %
Earnings (Loss) Before Interest and Taxes $ (4,841) $ (4,262) -14 % $ (3,656) -17 %
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.
FISCAL 2023 COMPARED TO FISCAL 2022
Global Brand Divisions' loss before interest and taxes increased 14% for fiscal 2023 primarily due to a 12% increase in selling and administrative expense from higher operating overhead expense largely driven by higher wage-related costs and strategic technology enterprise investments.
CONVERSE
(Dollars in millions)
FISCAL 2023 FISCAL 2022 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES FISCAL 2021 % CHANGE % CHANGE EXCLUDING CURRENCY CHANGES
Revenues by:
Footwear $ 2,155 $ 2,094 3 % 8 % $ 1,986 5 % 6 %
Apparel 90 103 -13 % -7 % 104 -1 % -3 %
Equipment 28 26 8 % 16 % 29 -10 % -16 %
Other (1)
154 123 25 % 25 % 86 43 % 42 %
TOTAL REVENUES $ 2,427 $ 2,346 3 % 8 % $ 2,205 6 % 7 %
Revenues by:
Sales to Wholesale Customers $ 1,299 $ 1,292 1 % 7 % $ 1,353 -5 % -4 %
Sales through Direct to Consumer 974 931 5 % 8 % 766 22 % 22 %
Other (1)
154 123 25 % 25 % 86 43 % 42 %
TOTAL REVENUES $ 2,427 $ 2,346 3 % 8 % $ 2,205 6 % 7 %
EARNINGS BEFORE INTEREST AND TAXES $ 676 $ 669 1 % $ 543 23 %
(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.
FISCAL 2023 COMPARED TO FISCAL 2022
• Converse revenues increased 8% on a currency-neutral basis for fiscal 2023 due to revenue growth in North America, Western Europe and licensee markets, partially offset by declines in Asia. Combined unit sales within the wholesale and direct to consumer channels increased 1% while ASP increased 6%, driven by strategic pricing actions in Western Europe and North America.
• Direct to consumer revenues increased 8% on a currency-neutral basis, led by strong digital sales growth in North America.
• Wholesale revenues increased 7% on a currency-neutral basis, as growth in North America and Western Europe was partially offset by declines in Asia due to marketplace dynamics in China.
Reported EBIT increased 1% due to higher revenues and the following:
• Gross margin expansion of approximately 50 basis points as higher full-price ASP, net of discounts, lower other costs, and growth in licensee revenues were partially offset by higher product costs, lower margins in direct to consumer in part reflecting increased promotional activity, and unfavorable changes in standard foreign currency exchange rates.
• Selling and administrative expense increased 7% due to higher operating overhead and demand creation expense. Operating overhead expense increased primarily as a result of higher wage-related expenses. Demand creation expense increased as a result of higher advertising and marketing costs, partially offset by lower retail brand presentation costs.
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CORPORATE
(Dollars in millions)
FISCAL 2023 FISCAL 2022 % CHANGE FISCAL 2021 % CHANGE
Revenues $ 27 $ (72) — $ 40 —
Earnings (Loss) Before Interest and Taxes $ (2,840) $ (2,219) -28 % $ (2,261) 2 %
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.
FISCAL 2023 COMPARED TO FISCAL 2022
Corporate's loss before interest and taxes increased $621 million during fiscal 2023, primarily due to the following:
• an unfavorable change of $371 million primarily related to higher wage and other professional services expenses, reported as a component of consolidated Operating overhead expense;
• an unfavorable change of $352 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;
• an unfavorable change of $45 million largely due to net unfavorable activity related to our strategic distributor partnership transition within APLA, including the loss recognized upon completion of the sale our entities in Argentina and Uruguay to a third-party distributor in the second quarter of fiscal 2023. This was partially offset by the one-time charge related to the deconsolidation of our Russian operations recognized in the prior year, with the net amount of these activities reported as a component of consolidated Other (income) expense, net; and
• a favorable change in net foreign currency gains and losses of $174 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.
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 centrally on a portfolio basis to address those risks material to NIKE, Inc. We manage these exposures by taking advantage of natural offsets and currency correlations existing within the portfolio and, where practical and material, by hedging a portion of the remaining exposures using derivative instruments such as forward contracts and options. As described below, the implementation of the NIKE Trading Company ("NTC") and our foreign currency adjustment program enhanced our ability to manage our foreign exchange risk by increasing the natural offsets and currency correlation benefits existing within our portfolio of foreign exchange exposures. 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 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.
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Refer to Note 4 — Fair Value Measurements and Note 12 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional description of outstanding derivatives at each reported period end.
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 — NIKE's product costs are exposed to fluctuations in foreign currencies in the following ways:
1. Product purchases denominated in currencies other than the functional currency of the transacting entity:
a. Certain NIKE entities purchase product from the NTC, a wholly-owned sourcing hub that buys NIKE branded products from third-party factories, predominantly in U.S. Dollars. The NTC, whose functional currency is the U.S. Dollar, then sells the products to NIKE entities in their respective functional currencies. NTC sales to a NIKE entity with a different functional currency results in a foreign currency exposure for the NTC.
b. Other NIKE entities purchase product directly from third-party factories in U.S. Dollars. These purchases generate a foreign currency exposure for those NIKE entities with a functional currency other than the U.S. Dollar.
In both purchasing scenarios, a weaker U.S. Dollar reduces inventory costs incurred by NIKE whereas a stronger U.S. Dollar increases its cost.
2. Factory input costs: NIKE operates a foreign currency adjustment program with certain factories. The program is designed to more effectively manage foreign currency risk by assuming certain of the factories' foreign currency exposures, some of which are natural offsets to our existing foreign currency exposures. Under this program, our payments to these factories are adjusted for rate fluctuations in the basket of currencies ("factory currency exposure index") in which the labor, materials and overhead costs incurred by the factories in the production of NIKE branded products ("factory input costs") are denominated.
As an offset to the impacts of the fluctuating U.S. Dollar on our non-functional currency denominated product purchases described above, a strengthening U.S. Dollar against the foreign currencies within the factory currency exposure indices reduces NIKE's U.S. Dollar inventory cost. Conversely, a weakening U.S. Dollar against the indexed foreign currencies increases our inventory cost.
• 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 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 Statements of Income.
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.
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Certain currency forward contracts used to manage the foreign exchange exposure of non-functional currency denominated monetary assets and liabilities subject to remeasurement are not formally designated as hedging instruments. Accordingly, changes in fair value of these instruments are recognized in Other (income) expense, net and are intended to offset the foreign currency impact of the remeasurement of the related non-functional currency denominated asset or liability being hedged.
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. In the translation of our Consolidated Statements of Income, a weaker U.S. Dollar in relation to foreign functional currencies benefits our consolidated earnings whereas a stronger U.S. Dollar reduces our consolidated earnings. The impact of foreign exchange rate fluctuations on the translation of our consolidated Revenues was a detriment of approximately $2,859 million, $295 million and a benefit of approximately $893 million for the years ended May 31, 2023, 2022 and 2021, respectively. The impact of foreign exchange rate fluctuations on the translation of our Income before income taxes was a detriment of approximately $824 million, $87 million and a benefit of approximately $260 million for the years ended May 31, 2023, 2022 and 2021, respectively.
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 generally accepted accounting principles in the United States of America ("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 an unfavorable impact of approximately $1,023 million and a favorable impact of approximately $132 million and $19 million on our Income before income taxes for the years ended May 31, 2023, 2022 and 2021, respectively.
NET INVESTMENTS IN FOREIGN SUBSIDIARIES
We are also exposed to the impact of foreign exchange fluctuations on our investments in wholly-owned foreign subsidiaries denominated in a currency other than the U.S. Dollar, which could adversely impact the U.S. Dollar value of these investments and therefore the value of future repatriated earnings. We have, in the past, hedged and may, in the future, hedge net investment positions in certain foreign subsidiaries to mitigate the effects of foreign exchange fluctuations on these net investments. These hedges are accounted for as net investment hedges in accordance with U.S. GAAP. There were no outstanding net investment hedges as of May 31, 2023 and 2022. There were no cash flows from net investment hedge settlements for the years ended May 31, 2023, 2022 and 2021.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW ACTIVITY
Cash provided (used) by operations was an inflow of $5,841 million for fiscal 2023, compared to $5,188 million for fiscal 2022. Net income, adjusted for non-cash items, generated $6,354 million of operating cash inflow for fiscal 2023, compared to $6,848 million for fiscal 2022. The net change in working capital and other assets and liabilities resulted in a decrease to Cash provided (used) by operations of $513 million for fiscal 2023 compared to a decrease of $1,660 million for fiscal 2022. For fiscal 2023, the net change in working capital compared to the prior year was impacted by unfavorable changes in Accounts payable, offset by favorable impacts from Inventories and Accounts receivable. These changes were, in part, due to reduced inventory purchases in the current period and timing of wholesale shipments. Further impacting these changes was a lower available supply of inventory in the prior year due to supply chain constraints.
Cash provided (used) by investing activities was an inflow of $564 million for fiscal 2023, compared to an outflow of $1,524 million for fiscal 2022, primarily driven by the net change in short-term investments. For fiscal 2023, the net change in short-term
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investments (including sales, maturities and purchases) resulted in a cash inflow of $1,481 million compared to a cash outflow of $747 million for fiscal 2022. Additionally, we continue to invest in our infrastructure to support future growth, specifically focused around digital capabilities, our end-to-end technology foundation, our corporate facilities and improvements across our supply chain.
Cash provided (used) by financing activities was an outflow of $7,447 million for fiscal 2023 compared to an outflow of $4,836 million for fiscal 2022. The increased outflow in fiscal 2023 was driven by higher share repurchases of $5,480 million for fiscal 2023 compared to $4,014 million for fiscal 2022, the repayment of $500 million of senior notes that matured in fiscal 2023, as well as lower proceeds from stock option exercises, which resulted in a cash inflow of $651 million in fiscal 2023 compared to $1,151 million in fiscal 2022.
In fiscal 2023, we purchased a total of 50.0 million shares of NIKE's Class B Common Stock for $5.5 billion (an average price of $110.32 per share). In August 2022, we terminated the previous four-year, $15 billion share repurchase program approved by the Board of Directors in June 2018. Under this program, we repurchased 6.5 million shares for a total approximate cost of $710.0 million (an average price of $109.85 per share) during the first quarter of fiscal 2023 and 83.8 million shares for a total approximate cost of $9.4 billion (an average price of $111.82 per share) during the term of the program. Upon termination of the four-year, $15 billion program, we began purchasing shares under the new four-year, $18 billion share repurchase plan authorized by the Board of Directors in June 2022. As of May 31, 2023, we had repurchased 43.5 million shares at a cost of approximately $4.8 billion (an average price of $110.38 per share) under this new program. We continue to expect funding of share repurchases will come from operating cash flows. The timing and the amount of share repurchases will be dictated by our capital needs and stock market conditions.
CAPITAL RESOURCES
On July 21, 2022, we filed a shelf registration statement (the "Shelf") with the U.S. Securities and Exchange Commission (the "SEC") which permits us to issue an unlimited amount of debt securities from time to time. The Shelf expires on July 21, 2025.
On March 11, 2022, we entered into a five-year committed credit facility agreement with a syndicate of banks which provides for up to $2 billion of borrowings, with the option to increase borrowings up to $3 billion in total with lender approval. The facility matures on March 11, 2027, with options to extend the maturity date up to an additional two years. This facility replaces the prior $2 billion five-year credit facility agreement entered into on August 16, 2019, which would have matured on August 16, 2024. Refer to Note 5 — Short-Term Borrowings and Credit Lines for additional information.
On March 10, 2023, we entered into a 364-day committed credit facility agreement with a syndicate of banks which provides for up to $1 billion of borrowings, with the option to increase borrowings up to $1.5 billion in total with lender approval. The facility matures on March 8, 2024, with an option to extend the maturity date by 364 days. This facility replaces the prior $1 billion 364-day credit facility agreement entered into on March 11, 2022, which matured on March 10, 2023. Refer to Note 5 — Short-Term Borrowings and Credit Lines for additional information.
We currently have long-term debt ratings of AA- and A1 from Standard and Poor's Corporation and Moody's Investor Services, respectively. As it relates to our committed credit facilities entered into on March 11, 2022 and March 10, 2023, if our long-term debt ratings were to decline, the facility fees and interest rates would increase. Conversely, if our long-term debt ratings were to improve, the facility fees and interest rates would decrease. Changes in our long-term debt ratings would not trigger acceleration of maturity of any then-outstanding borrowings or any future borrowings under the committed credit facilities. Under these facilities, we have agreed to various covenants. These covenants include limits on the disposal of assets and the amount of debt secured by liens we may incur. In the event we were to have any borrowings outstanding under these facilities, failed to meet any covenant and were unable to obtain a waiver from a majority of the banks in the applicable syndicate, any borrowings would become immediately due and payable. As of May 31, 2023, we were in full compliance with each of these covenants, and we believe it is unlikely we will fail to meet any of these covenants in the foreseeable future.
Liquidity is also provided by our $3 billion commercial paper program. As of and for the fiscal years ended May 31, 2023 and 2022, we did not have any borrowings outstanding under our $3 billion program.
We may continue to issue commercial paper or other debt securities depending on general corporate needs.
To date, we have not experienced difficulty accessing the capital or credit markets; however, future volatility may increase costs associated with issuing commercial paper or other debt instruments or affect our ability to access those markets.
As of May 31, 2023, we had Cash and equivalents and Short-term investments totaling $10.7 billion, primarily consisting of commercial paper, corporate notes, deposits held at major banks, money market funds, 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 May 31, 2023, the weighted-average days to maturity of our cash equivalents and short-term investments portfolio was 98 days.
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We believe that existing Cash and 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.
Our material cash requirements as of May 31, 2023, were as follows:
• Debt Obligations — Refer to Note 5 — Short-Term Borrowings and Credit Lines and Note 6 — Long-Term Debt in the accompanying Notes to the Consolidated Financial Statements for further information.
• Operating Leases — Refer to Note 17 — Leases in the accompanying Notes to the Consolidated Financial Statements for further information.
• Endorsement Contracts — As of May 31, 2023, we had endorsement contract obligations of $7.6 billion, with $1.3 billion payable within 12 months, representing approximate amounts of base compensation and minimum guaranteed royalty fees we are obligated to pay athlete, public figure, sport team and league endorsers of our products. Actual payments under some contracts may be higher than these amounts as these contracts provide for bonuses to be paid to the endorsers based upon athletic achievements and/or royalties on product sales in future periods. Actual payments under some contracts may also be lower as these contracts include provisions for reduced payments if athletic performance declines in future periods. In addition to the cash payments, we are obligated to furnish our endorsers with NIKE product for their use. It is not possible to determine how much we will spend on this product on an annual basis as the amount of product provided to the endorsers will depend on many factors and the contracts generally do not stipulate a minimum amount of cash to be spent on the product.
• Product Purchase Obligations — As of May 31, 2023, we had product purchase obligations of $6.4 billion, all of which are payable within the next 12 months. Product purchase obligations represent agreements (including open purchase orders) to purchase products in the ordinary course of business that are enforceable and legally binding and specify all significant terms. We generally order product at least four to five months in advance of sale based primarily on advanced orders received from external wholesale customers and internal orders from our direct to consumer operations. In some cases, prices are subject to change throughout the production process.
• Other Purchase Obligations — As of May 31, 2023, we had $3.3 billion of other purchase obligations, with $1.7 billion payable within the next 12 months. Other purchase obligations primarily include technology investments, construction, service and marketing commitments, including marketing commitments associated with endorsement contracts, made in the ordinary course of business. The amounts represent the minimum payments required by legally binding contracts and agreements that specify all significant terms, and may include open purchase orders for non-product purchases.
In addition to the above, we have long-term obligations for uncertain tax positions and various post-retirement benefits for which we are not able to reasonably estimate when cash payments will occur. Refer to Note 7 — Income Taxes and Note 11 — Benefit Plans in the accompanying Notes to the Consolidated Financial Statements for further information related to uncertain tax positions and post-retirement benefits, respectively.
As a part of the transition tax related to the Tax Cuts and Jobs Act, as of May 31, 2023, we had $644 million in estimated future cash payments, with $161 million payable within the next 12 months. These amounts represent the transition tax on deemed repatriation of undistributed earnings of foreign subsidiaries, which are reflected net of foreign tax credits we utilized.
Refer to Note 16 — Commitments and Contingencies in the accompanying Notes to the Consolidated Financial Statements for further information related to our off-balance sheet arrangements, bank guarantees and letters of credit.
OFF-BALANCE SHEET ARRANGEMENTS
As of May 31, 2023, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on our current and future financial condition, results of operations, liquidity, capital expenditures or capital resources. In connection with various contracts and agreements, we routinely provide indemnification relating to the enforceability of intellectual property rights, coverage for legal issues that arise and other items where we are acting as the guarantor. Currently, we have several such agreements in place. Based on our historical experience and the estimated probability of future loss, we have determined that the fair value of such indemnification is not material to our financial position or results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 — Summary of Significant Accounting Policies within the accompanying Notes to the Consolidated Financial Statements for recently adopted and issued accounting standards.
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CRITICAL ACCOUNTING ESTIMATES
Our previous discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. 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. Note 1 — Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements.
We believe the assumptions and judgments involved in the accounting estimates described below have the greatest potential impact on our Consolidated Financial Statements, so we consider these to be our critical accounting estimates. Management has reviewed and discussed these critical accounting estimates with the Audit & Finance Committee of the Board of Directors.
Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in the preparation of our Consolidated Financial Statements. Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.
SALES-RELATED RESERVES
Provisions for anticipated sales returns consist of both contractual return rights and discretionary authorized returns. Provisions for post-invoice sales discounts consist of both contractual programs and discretionary discounts that are expected to be granted at a later date.
Estimates of discretionary authorized returns, discounts and claims are based on (1) historical rates, (2) specific identification of outstanding returns not yet received from customers and outstanding discounts and claims and (3) estimated returns, discounts and claims expected but not yet finalized with customers. Actual returns, discounts and claims in any future period are inherently uncertain and may differ from estimates recorded. If actual or expected future returns, discounts or claims were significantly different than reserves established, a reduction or increase to net revenues would be recorded in the period in which such determination was made.
Refer to Note 14 — Revenues in the accompanying Notes to the Consolidated Financial Statements for additional information.
INVENTORY RESERVES
We make ongoing estimates relating to the net realizable value of inventories based upon our assumptions about future demand and market conditions. If we estimate the net realizable value of our inventory is less than the cost of the inventory recorded on our books, we record a reserve equal to the difference between the cost of the inventory and the estimated net realizable value. This reserve is recorded as a charge to Cost of sales. If changes in market conditions result in reductions to the estimated net realizable value of our inventory below our previous estimate, we would increase our reserve in the period in which we made such a determination.
HEDGE ACCOUNTING FOR DERIVATIVES
We use derivative contracts to hedge certain anticipated foreign currency and interest rate transactions as well as certain non-functional currency monetary assets and liabilities. When the specific criteria to qualify for hedge accounting has been met, changes in the fair value of contracts hedging probable forecasted future cash flows are recorded in Accumulated other comprehensive income (loss), rather than Net income, until the underlying hedged transaction affects Net income. In most cases, this results in gains and losses on hedge derivatives being released from Accumulated other comprehensive income (loss) into Net income sometime after the maturity of the derivative. One of the criteria for this accounting treatment is that the notional value of these derivative contracts should not be in excess of the designated amount of anticipated transactions. By their very nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When the designated amount of anticipated or actual transactions decline below hedged levels, or if it is no longer probable a forecasted transaction will occur by the end of the originally specified time period or within an additional two-month period of time thereafter, we reclassify the cumulative change in fair value of the over-hedged portion of the related hedge contract from Accumulated other comprehensive income (loss) to Other (income) expense, net during the quarter in which the decrease occurs. In rare circumstances, the additional period of time may exceed two months due to extenuating circumstances related to the nature of the forecasted transaction that are outside our control or influence.
Refer to Note 12 — Risk Management and Derivatives in the accompanying Notes to the Consolidated Financial Statements for additional information.
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INCOME TAXES
We are subject to taxation in the United States, as well as various state and foreign jurisdictions. The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. On an interim basis, we estimate our effective tax rate for the full fiscal year. This estimated annual effective tax rate is then applied to the year-to-date Income before income taxes excluding infrequently occurring or unusual items, to determine the year-to-date Income tax expense. The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs.
On a quarterly basis, we evaluate the probability a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to income tax matters in Income tax expense.
Refer to Note 7 — Income Taxes in the accompanying Notes to the Consolidated Financial Statements for additional information.
OTHER CONTINGENCIES
In the ordinary course of business, we are subject to various legal proceedings, claims and government investigations related to our business, products and actions of our employees and representatives, including contractual and employment relationships, product liability, antitrust, customs, tax, intellectual property and other matters. We record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If future adjustments to estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges during the period in which the actual loss or change in estimate occurred. In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable possibility the ultimate loss will materially exceed the recorded liability.
Refer to Note 16 — Commitments and Contingencies in the accompanying Notes to the Consolidated Financial Statements for additional information.
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