1. In Item 7 of the 10K, review the section titled Operating Segments. Prepare a table that compares the percent change in “Total revenue” to the change in “Pre-tax income” from 2010 to 2011 for the six major regions (ignore the Global Brand Divisions segment). Note that generally earnings before interest and taxes changes by a larger percentage than revenue. For example, in Western Europe, revenue declined by 2% but earnings declined by 16%. (The exception to this general observation is the “Central and Eastern Europe” region where revenue and earnings moved in opposite directions—revenue increased but earnings before interest and taxes decreased). How can operating leverage help explain the greater percent change in earnings than the percent change in total revenues?
2. What might explain the decrease in income despite the increase in revenue for the Central and Eastern region?
3. Would you expect Nike’s operating leverage to be high or low? Explain. Which assets do you think contribute to Nike’s ability to leverage operating overhead?