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 throughNIKE -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 Offense, we are focusing on our Triple Double strategy, with the objective of doubling the impact of innovation, increasing our speed to market and growing our direct connections with consumers. For the second quarter of fiscal 2020,NIKE, Inc. Revenues increased 10% to$10.3 billion compared to the second quarter of fiscal 2019. On a currency-neutral basis, Revenues increased 13%. Net income was$1.1 billion and diluted earnings per common share was$0.70 for the second quarter of fiscal 2020, compared to Net income of$847 million and diluted earnings per common share of$0.52 for the second quarter of fiscal 2019. Income before income taxes increased 25% compared to the second quarter of fiscal 2019, driven by revenue growth, gross margin expansion and selling and administrative expense leverage. TheNIKE Brand, which represents over 90% ofNIKE, Inc. Revenues, delivered 10% revenue growth. On a currency-neutral basis,NIKE Brand revenues grew 12%, driven by higher revenues across all geographies, footwear and apparel, as well as growth in nearly all key categories, primarily Sportswear and the Jordan Brand. Revenues for Converse increased 13% and 15% on a reported and currency-neutral basis, respectively, mainly driven by double-digit growth inAsia andEurope , as well as through digital globally. Our effective tax rate was 10.7% for the second quarter of fiscal 2020 compared to 15.0% for the second quarter of fiscal 2019, primarily due to a more favorable impact from stock-based compensation. Diluted earnings per common share reflects a 2% decline in the weighted average diluted common shares outstanding, driven by our share repurchase program. OnOctober 29, 2019 , we signed a definitive agreement to sell the assets and liabilities of our wholly-owned subsidiary brand, Hurley. As ofNovember 30, 2019 , the related assets and liabilities were classified as held-for-sale on our Unaudited Condensed Consolidated Balance Sheets. The transaction closed onDecember 6, 2019 , subsequent to the end of the second quarter of fiscal 2020. The impacts of the divestiture are not material to the Company. While foreign currency markets remain volatile, in part due to geopolitical dynamics leading to a strongerU.S. Dollar, we continue to see opportunities to drive future growth and profitability. We remain committed to effectively managing our business to achieve our financial goals over the long-term by executing against the operational strategies outlined above. 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 TotalNIKE Brand earnings before interest and taxes (EBIT) andTotal NIKE, Inc. EBIT, 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 inthe United States of America ("U.S. GAAP"). References to wholesale equivalent revenues are intended to provide context as to the total size of ourNIKE Brand market footprint if we had noNIKE Direct operations.NIKE Brand wholesale equivalent revenues consist of (1) sales to external wholesale customers and (2) internal sales from our wholesale operations to ourNIKE Direct operations, which are charged at prices comparable to those charged to external wholesale customers. 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. 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 and EBIT should not be considered in isolation or as a substitute for other financial measures calculated and presented in accordance withU.S. GAAP and may not be comparable to similarly titled non-GAAP measures used by other companies.
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Table of Contents RESULTS OF OPERATIONS THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30, (Dollars in millions, except per share data) 2019 2018 % CHANGE 2019 2018 % CHANGE Revenues$ 10,326 $ 9,374 10 %$ 20,986 $ 19,322 9 % Cost of sales 5,782 5,269 10 % 11,571 10,820 7 % Gross profit 4,544 4,105 11 % 9,415 8,502 11 % Gross margin 44.0 % 43.8 % 44.9 % 44.0 % Demand creation expense 881 910 -3 % 1,899 1,874 1 % Operating overhead expense 2,443 2,232 9 % 4,753 4,331 10 % Total selling and 3,324 3,142 6 % 6,652 6,205 7 % administrative expense % of revenues 32.2 % 33.5 % 31.7 % 32.1 % Interest expense (income), net 12 14 - 27 25 - Other (income) expense, net (41 ) (48 ) - (74 ) 5 - Income before income taxes 1,249 997 25 % 2,810 2,267 24 % Income tax expense 134 150 -11 % 328 328 0 % Effective tax rate 10.7 % 15.0 % 11.7 % 14.5 % NET INCOME$ 1,115 $ 847 32 %$ 2,482 $ 1,939 28 % Diluted earnings per common$ 0.70 $ 0.52 35 %$ 1.56 $ 1.19 31 % share 27
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