Question

UP Office Update To keep up-10-dal WILL BE A14 x fx Interest expense А в EF G с OSS Nike Inc. Clou 3 Common-Size Consolidated Income Statement Devic 5 12 months ended 31-May-18 31-May-17 O 6 Revenues 100.00% 100.00% Income Statement in thousands) 7 Cost of sales -56.16% -55.42% Under Armour Tags 8 Gross profit 43.84% 44.58% Net revenues 9 Demand creation expense -9.83% -9.73% Cost of Goods Sold 10 Operating overhead expense -21.80% -21.02% Gross profit 11 Selling and administrative expense -31.63% -30.75% Selling General and Admin Expenses 12 Operating income 12.21% 13.83% Restructuring and impairment charges 13 Interest Income 0.19% 0.08% Income from Operations 14 Interest expense -0.34% -0.25% Interest Expense, net 15 Interest Income (expense), net 0.15% 0.17% Other expense, net 16 Other income (expensel.net 0.18% 0.57% Income before Income Taxes 17 Income before income taxes 11.88% 14.22% Income tax expense (benefit) 18 Income tax expense -6.57% -1.88% Income from equity method investment 19 Net Income 5.31% 12.34% Net Income (loss) 20 Based on: 21 10 [filling date: 2019-07-23). 22 10-k (filing date 2018-07-25). 23 10 K (filing date: 2017-07-20). 24 10-K (Filing date: 2016-07-21). 25 10- (Filing date: 2015-07-23). 26 10-K (filing date: 2014-07-25). 31-Dec-18 100.00% 54.93% 45.07% 42.02% 3.53% -0.48% -0.65% -0.18% -1.31% -0.40% 0.02% -0.89% 31-Dec-17 100.00% 54.87% 45.13% 42.08% 2.49% 0.56% -0.69% -0.07% -0.21% 0.76% -0.97%

Answer 1

Comparison of the common size income statement of Nike and Under Armour (please note that the first image provides common size consolidated income statements of the two companies and no balance sheet is provided) shows that cost of sales is marginally higher for Nike when compared to Under Armour. For 2018 Nike’s cost of sales stood at 56.16% of sales while for Under Armour it was 54.93% (i.e. 123 basis points lower). This led to higher gross profit percentage for Under Armour than Nike.

Nike, however, has lower costs as a percentage of sales when looking at operating expense. Nike’s operating expenses stood at 31.63% of sales compared to Under Armour’s 42.02%. Thus Nike’s costs are lower by a significant 1,039 basis points). As such income before income taxes for Nike stood at 11.88% in 2018 (as a % of sales) compared to Under Armour’s figure of -1.31%. This also led to Nike’s net income being higher at 5.31% of sales in 2018 compared to Under Armour’s figure of -0.89% during the same period.