TIF | Watching and Waiting

Takeaway: Weak watch demand. Weak global demand at every price point. That's a bad omen for TIF ahead of 2Q, where we should see another guide down.

The Swiss Watch Exports numbers are the best indicator that we can find to gauge the global demand for luxury items - particularly jewelry. Of course watches have their very own demand constraints and TIF is underexposed to the category  -- but the iWatch, FitBit, and other connected fitness wrist wear we'd argue don't compete with items priced above $3,000, which oh by the way was down 19.5% for the month.


Here's what we think it means for TIF:


Looking at the trend in TIF comp sales vs. the global Swiss Watch exports numbers paints a pretty tight correlation between the two metrics, with the two most recent Swiss Watch export numbers showing a sequential deceleration in the YY trend. The only problem is that TIF Consensus estimates currently expect a reacceleration in comp trends sequentially on a 1yr and 2yr basis for 2Q16 and the balance of the year. With a positive comp bogey embedded in numbers for 4Q. We think that's a pipe dream.


All in, we think TIF takes numbers down again which will mark the eighth time in two years that the company readjusted guidance to the downside. We're at $3.23 in 2017 vs. the street at $3.92. And we think the TIF story from here is much more tied into weak consumer demand for the core product offering with a FX/tourism kicker. So what's a company putting up the worst comp numbers in retail (ex-Lumber Liquidators) worth? Because it's TIF, we'll give it a little bit of a luxury buffer - so low teens P/E multiple gets us to a $42 dollar stock on 2017 numbers. That's 30% downside from here.


TIF | Watching and Waiting - 7 21 2016 TIF chart1

DKS | Too Late? Nike Says No

Takeaway: Yeah, DKS has been a champ. But people are missing the magnitude and duration of how long this name could work.

Here’s what’s top of mind for us this morning.  


We were asked yesterday whether it’s too late to go long DKS. After all, the stock has been a monster – up 44% for the year-to-date, and 16% since Sports Authority filed on March 2nd.  In addition, the name has become a hedge fund hotel and no longer looks cheap at face value.  But still, we feel good about being involved on this one and even adding here. Would we rather add more on dips? Absolutely. But we’re not sure we’ll get ‘em.


First off, yes, the stock is up 44% ytd, but it’s flat versus a year ago – about in line with the market. That’s no reason to buy a stock, but it is an important consideration.


Our key thoughts are focused around the Sports Authority bankruptcy. No, that’s not exactly a proprietary idea. It explains away virtually all of the stock move from $34 to $50. But what we think is a unique thought is the dominoes that were set in motion by TSA’s demise, how vendors (esp Nike) will certainly respond, and most importantly, the duration over which this will benefit DKS. If you’re looking for a 2-3 quarter payback from TSA, and the stock, you probably got it. But the reality is that this benefit is likely to last 3-5 years, and should allow DKS to out-comp every peer except the internet, and retest a peak 9% margin level – which is 2 full points above the consensus. That translates to about $6 in earnings, versus the Street at $4.25. As lofty as this may sound, we’re likely looking at a 20x+ multiple on that number, or $120. Yes, that would make this a 3-year double.


We’re still doing the research to gain conviction in that number, but think that it’s more likely it gets there than where the Street is today.


The Nike Dynamic

People often forget the following facts. And they ARE facts.


1) First off, this is a generational shift in product distribution. There are not many ‘generational events’ to invest in out there.

2) Yes, DKS has been waiting for this to happen, but mark my words, it also helped cause it to happen (a la BBBY/Linens, and Best Buy/Circuit). We’ve been critical in the past about DKS’ business model, but never about Stack and his management team. Yes, it blew up its golf business. But as it relates to the core sporting goods business, there’s really no one better.

3) Nike made a tangible decision to invest in e-commerce as far back as 2005. That’s when its capex for DCs, warehousing and e-comm infrastructure started to grow, and when we started to see accelerated SG&A in e-comm headcount.

4) At that time – whether Nike outwardly admits it or not (or even realizes it) the company started to stuff the US wholesale channel to pay for its e-comm investments.

5) In the ensuing decade, its sales penetration inside Foot Locker, for example, went from 50% to 73%. Yes, 73% of FL’s inventory purchases were/are Nikes. There’s only one way for that number to go – and it’s down.

6) Sporadically over the same time period we saw the Sporting Goods channel begin to evaporate (‘08/09, and this year). Make no mistake, Nike absolutely positively NEEDS this channel for its US business to grow.

7) People are all jazzed up about the first round of Nike shoe walls that will be in place at DKS by end of year. They should be. But what they should be more excited about is the comp growth it will bring to DKS in the form of higher ASPs for the better part of 3-5 years. There’s a huge impact there on both sales and margins, as FL showed us in this economic recovery.


Keep in mind that this is a zero sum game. In other words, TSA had roughly $3bn in revenue. Half of that will evaporate, and at best we’re looking at about $500mm-$750mm in revenue directly from TSA. But the bigger kicker that people won’t count on is a similar contribution from better Nike product across the portfolio – and it should come at a higher margin via ASP and better traffic.


In the end, Foot Locker loses. Finish Line loses. Hibbett Sports loses. All will have 2 Nike-issues. 1) no longer seeing an increase in Nike (which is a negative) and 2) likely seeing a decline – especially FL.


Nike wins as it secures a better US distribution partner, though much of this will be robbing Peter to pay Paul.


DKS is the biggest winner, as quantified above.


Important Note

One of our key points on Nike is that the company will hit $11bn in e-comm/DTC revenue versus guidance/The Street at $7bn. THE KEY to Nike accelerating its progress will take the shape of some form of US channel conflict. We started to see that with FL on its last conference call. It should get meaning fully worse, which will cause Nike to slingshot the part of its business that actually should be growing – and that’s not brick and mortar.  The point here is that the anecdotal comments from retailers are likely to be increasingly anti-Nike. We’re fine with that. In fact, we want to see it. But it causes us to have a ‘buy on dips’ positioning as it relates to Nike. 

RH | CEO Putting Money Where Our Mouth Is

Takeaway: RH miss just became very improbable. But moreso we think CEO buy speaks to a tighter org chart, which outweighs any business initiative.

Conclusion: We like Gary Friedman’s (RH CEO) stock purchase for a couple of reasons – some obvious, some not…

1) He bought his stock with just two weeks left in the quarter when he knows 95% of his revenue for the period – remember that a purchase today won’t be recognized as revenue until the product is delivered – sometime in 3Q.

2) The purchase comes at a time when the market is holding a quarter of the float short despite the stock trading at all-time trough price AND valuation. Furthermore current value is a third that of Wayfair, which has yet to earn a red cent.

3) Keep in mind that Friedman could have purchased the stock a week after the print (mid-June) at virtually the same price as we see today. But he waited…likely to ensure that everything management said to the street is playing out as expected. In other words, business trends are likely at or above what the company guided.

4) Most important to us is probably the hardest to extrapolate from a stock trade, and that’s the organizational solidarity. That sounds boring and academic, but things like store openings, new business lines, new territory penetration, the Waterworks acquisition, category ‘newness’, and about a dozen other business drivers mean squat to us if the right people aren’t in the right jobs, and are empowered with the right capital budgets and incentives to execute on the company’s vision.  Here’s where we can go either way as it relates to the stock purchase. On one hand, it could be a gesture for internal constituents far more than Wall Street – specifically to give RH employees a confident message from their fearless leader and help stop additional attrition. The flip side is obvious…that Friedman finally has confidence in the team after watching the new roles he and the Board created, the promotions, and the layoffs affect the company at all levels of the org chart. Our inclination is that it is more the latter. Friedman is not one to cough up a cool million just to make people feel better. Our sense is that he himself is simply more confident about the org chart today than he did when he could have otherwise have made the purchase four weeks ago at a similar price.



The Facts: RH CEO, Gary Friedman, purchased 33k shares at an average price of $27.59 for a total outlay of $900k on Monday. This is the 2nd time that Gary has been active in the open market. The first time was back in September of 2014, following a reported comp and sales miss due in large part to the miss-execution of the Spring 2014 Source Book launch. In between there was a reported sale of $160k shares that will show up in most ownership screens, which was in fact a transfer of shares from Gary to his ex-wife as part of divorce proceedings. The circumstances behind this transaction couldn’t be more different given that we’ve seen $3.1bn in market cap evaporate over the past seven months before Gary stepped into buy shares vs. a 5% move from $82 to $77 the last time around. But, there were some limiting factors over the past few months which restricted management’s ability to step in and buy stock mainly – a) the company’s 2 month quiet period between FY15 year closing and reported numbers at the end of March, and b) the acquisition of Waterworks in the 1st quarter which all but chewed up the Senior Level transaction window.


Read-Throughs: This is the first positive data point we’ve seen come out of RH in 7 months. And the positive part of that is solely based on market inferences associated with Senior Level management making open market transactions. Now we are not saying this transaction is all for show, as Gary just threw down an additional ~$1mm bucks in a company where he has ~90% of his net worth invested does not equal a meaningless transaction. That plus the fact that we continue to be believers in the long term opportunity for the name.

But if we had to nitpick, we point to the fact that no one in the 2nd tier of Senior Management stepped in along with Gary to make a purchase. Heck, the only other insider to be active during the stock slide was one of the new board members, Keith Belling, who bought a $100k chunk back in late June.

Our rationale on that thought lies solely in the fact that much of the bear case for RH is tethered to the belief that a) RH doesn’t have the organizational depth to execute on its growth strategy, and b) Gary will blindly follow that strategy regardless of its merits. We at Hedgeye, are on the opposite side of that belief system, but we do think that a united front (as demonstrated by open market buy’s) would make a more meaningful signal to the market that the 2nd layer of depth fully backs the company’s often polarizing leader.

FL | Short The Looming Miss, Then Short It Again

Takeaway: After 11 straight quarters beating EPS, we think we will see a notable miss or guide down before 2016 is out.

For over a year we have been vocal on how the changing paradigm between Nike and Foot Locker has created a disconnect in FL's real long term (Tail – 3yrs or less) earnings power and the consensus expectations (For detail on the long term call see our February Black Book: CLICK HERE). Yes, we’ve seen some of that playout to date. Mostly in the stock price…off 16% in the past year vs. the XRT -13%, rather than the reported earnings numbers. But we think that starting now, there is a clear disconnect in the intermediate term (Trend – 3 months or more) consensus expectations and what we think are hittable earnings numbers. After 3 years of nearly bulletproof earnings prints (FL has gone 11 straight quarters meeting or exceeding street numbers), FL will see a significant miss or guide down before the books are closed on 2016.


We may not have to wait that long. From where we sit, the current Street expectations for FL’s 2Q16 (to be reported in mid-August) which call for a 3.6% comp to be leveraged into $0.91 in earnings (~10% earnings growth ) look overly optimistic based on the following data points:


1) The May comp was running negative at the time of the 1Q earnings call on 5/20 as management cited a shifted Jordan shoe launch as the cause. Well and good, but we haven’t seen any recovery in online traffic trends since that time which have actually softened since.

FL | Short The Looming Miss, Then Short It Again - 7 14 2016 FL Traffic Chart1


2) 2Q comp and merchandise margin compares get tougher sequentially from 1Q when the company missed comp by 160bps and gross margin by 30bps. Editor’s note – our 2% comp assumption implies a sequential acceleration of 40bps on a 2 year average and 10bps on the 3 year. The punchline here is that there are no more easy compares for FL.

FL | Short The Looming Miss, Then Short It Again - 7 14 2016 FL Comp Chart2


3) Any comp miss puts significant pressure on margins as FL needs a low mid-single digit comp to leverage occupancy and about the same to leverage SG&A. The FX SG&A tailwind is now completely gone, and management said clearly on the last call that SG&A leverage in 2Q will be difficult as the company invests in stores and its new corporate HQ. 


4) The Nike effect is in full swing. It started in late-May when Foot Locker management was as vocally bearish on Nike as it had been over the last 56 quarters – that’s 14 years. Then Nike reported a meaningful deceleration in it’s Basketball segment two weeks ago after a half decade of outsized growth. That’s meaningful context especially when we consider the fact that FL comps felt the Nike benefit as post-recession results went from -6% to HSD. Now as the Basketball tailwind rolls off, and FL turns more bearish on NKE, we’ve witnessed decelerating comps at FL from 7.8% to 2.9% in 1Q16. With NKE readjusting the price/value equation as evidenced by the KD9, that ASP tailwind that FL has relied upon for so long goes away, but the mall traffic problem still persists. Yet, the street is assuming that FL can re-accelerate growth in the back half of FY16 against tough compares.

FL | Short The Looming Miss, Then Short It Again - 7 14 2016 FL Comp NKE Basketball chart3


5) The 2Q earnings event is about a month away.  FL’s vague “double digit” earnings growth guidance has historically given it the flexibility to reiterate that guidance even on big beats.  Should FL miss 2Q expectations, that double digit growth rate looks like it will have to be revised down, unless FL believes it can significantly improve trends in the 2nd half of the year. Short interest has come down from the mid-teens peak earlier this year, and we think this short has plenty of room to run.

FL | Short The Looming Miss, Then Short It Again - 7 14 2016 FL SI Chart4


FL | Short The Looming Miss, Then Short It Again - 7 14 2016 FL SIGMA Chart5


FL | Short The Looming Miss, Then Short It Again - 7 14 2016 FL Estimates Chart6

NKE | Full Contact Chess

Takeaway: Nike just gave up a pawn, and perhaps a rook, while en route to victory in a critical game of full-contact athletic Chess.

  1. This print was not a surprise. We noted that more could go wrong than right with this release, and that’s exactly what we saw. Even though the earnings algorithm was very respectable, and far better than any direct or even fringe peers, the fact is that every metric that matters turned negative on the margin.
    1. Sales missed. Nike confirmed price pressure with basketball that retailers raised last month.
    2. Futures slowed sequentially, and missed expectations in every region.
    3. Gross Margins were uncharacteristically weak.
    4. Inventories were quite weak – eroding sequentially by 500bps relative to sales.
    5. SG&A remains elevated (Olympics).
    6. Guidance suggests an acceleration throughout the year – but isn’t that a stretch w/Brexit and 23% of Nike’s sales in Europe?
  2. “So…Hedgeye Retail geniuses, how in the world can you be bullish on this stock.” From a TREND perspective, we’re not. But if there is one single factor that people will miss in the quarter, it’s that the near-term stress to the model – particularly given that it involves friction with Nike’s US wholesale accounts (FL, FINL, HIBB, etc…) a channel Nike has increasingly stuffed over the course of this economic cycle – will lead to draconian change to Nike’s business model.
  3. Our TAIL call is that Nike will add $10bn in incremental DTC at a 20 point margin premium to what it has today. Let’s be real about this…making a transition like this – especially in the US – will not be without its stretch marks. Nike won’t do this – and by ‘this’ I mean taking FL, FINL down from 70% of its inventory purchases from Nike to something about 20 points lower – when its business is humming. It will do so when it has to start playing some defense, like it is today. We’ll see similar moves by Nike at most other retailers except Dick’s – which is the sole winner here aside from Nike.
  4. The punchline on Nike is that going from $2.00 in EPS to near $5.00, which is what we think will happen as it consolidates and builds a massive DTC business, is not a linear move over four years. There’ll be quarters along the way where the profit and growth algo looks pitiful. But that’s how Nike rolls, and it’s worked like a charm so far. Keep in mind that its capital investment to build this new business (and other business it’s not even talking about yet) are largely complete. That means when it kicks in it will be lightning fast, and ROIC-accretive almost immediately.
  5. The Stocks
    1. NKE: We’d watch Nike drift lower from TREND perspective as the tape gets muddied by channel shifts. For people looking beyond two quarters, we’d be buying on the weak days, because the TAIL call here is extraordinarily powerful.
    2. FL: We’re short it. There’s no way FL comes out of this smelling better than it does today. Sales should weaken, gross margins should decline (remember 20%+ Europe exposure), SG&A and capex will BOTH head higher at FL tries to build up a more successful e-comm business. Management is good at FL, and it will spend where it needs to – and after its Nike business went from 50% to 73% of revs over six years it really did not have to invest at all (hence unsustainably low SG&A). Now that changes.
    3. FINL: Ditto as what we said with FL – except the part about good management.
    4. HIBB: It’s probably too strong to say that this is ‘terminal’, but it’s close. Growing into more expensive and more competitive markets, no online presence, and maxed out with Nike – all while sporting the highest margins in the industry. We’re modeling that margins get cut in half. No joke. Short.
    5. DKS: The one winner as it takes advantage of a generational land-grab with three competitors going Ch11. In addition, Nike will look to DKS as its new poster child for the retailer getting the most incremental Nike product. DKS already set expectations low for this year. Downside is minimal, and upside is tangible. We like this one. 

NKE | Full Contact Chess - 6 28 2016 NKE financials


Basketball Energy ‘Really High’, Sales Not So Much

There was a considerable amount of real estate allocated on the call (particularly Q&A) to basketball, so forgive us in advance for beating a dead horse. We heard a lot from Nike management about Lebron James the athlete, and his win for the hometown Cleveland Cavaliers, but little about the Lebron product. Same goes for KD. As Nike echoed FL commentary on the premium product price resistance by what it didn’t say. And some of what it did say clearly validated the problem if you read between the lines. For example, look no further than the comment about the KD9 which sold out in its first limited release. The only problem is that the shoe retails at a 17% price discount to the KD8 at $150…close to the Kyrie and Chef Curry kicks price point. Definitely not where wholesalers expect Nike to be.


When it all shakes out, Nike’s basketball business was up 11% for the year. Nike Brand basketball was actually down 1% for the year, while Brand Jordan meaningfully drove the category in aggregate. For some odd reason, Nike started to disclose basketball excluding the Jordan brand – though one would think that the company would try to mask weakness in Nike basketball by lumping both together. We’ll give ‘em a golf clap for that one for transparency.  Though the 11% combined number is good at face value, keep in mind that it had been growing 20%+. Yes, Nike has the full portfolio to offset some of decelerating basketball growth, but the gap in ASP between a basketball shoe and a casual running silhouette has to hurt a little. The brunt of that, we think trickles down to its retail partners.


NKE | Full Contact Chess - 6 28 2016 NKE basketball


What It Means For Foot Locker, and other wholesale partners…

From 2009 through the 1st half of 2015, FL rode the Nike basketball wave as category growth went from LDD to high-teens, FL comps felt the lift from a recession hit (and pre-Hicks agenda) -6% to HSD. Now as the Basketball tailwind rolls off, and FL turns more bearish on NKE than it has been in 14 years, we saw comps decelerate at FL from 7.8% to 2.9% in 1Q16. With NKE readjusting the price/value equation as evidenced by the KD9, that ASP tailwind that FL has relied upon for so long goes away, but the mall traffic problem still persists. Yet, the street is assuming that FL can re-accelerate growth in the back half of FY16 as comp compares continue to remain elevated. With Nike’s, results today, especially in this category we give more credence to the negative 2QTD comp commentary by FL, and are more bearish on its ability to shift the tides through the balance of the quarter.


NKE | Full Contact Chess - 6 28 2016 NKE FL


This Isn’t Good For Foot Locker (or others) Either

This is as glaring a statement as Nike has ever made to its traditional wholesale partners. Yea, it buttered up the likes of Dick’s Sporting Goods and Foot Locker with statements on the call, but those are just words. The numbers here speak for themselves…mainly the acceleration of DTC as a % of total Nike Brand growth from ~20% in 2012 to 70% in FY16. In YY growth rates that’s the difference between 15% wholesale growth in 2012 and 2.8% growth in 2016. That point was hammered home in the most recent quarter when DTC grew 20%, and wholesale was flat. Maybe, the TSA bankruptcy and other disruptions offer a 1-2% buffer to the wholesale number this quarter, but the trend is overwhelmingly anti-wholesale.

Yes, there is plenty of talk about the outsized growth from AdiBok and UA footwear – but to keep things in perspective, for every 1% share in Nike NA footwear the company pulls away from the wholesale channel, AdiBok and UA would need to grow their corresponding businesses at 6% and 14% respectively.


NKE | Full Contact Chess - 6 28 2016 NKE DTC


Gross Margin Masking the DTC Benefit

By our math, the gross benefit in the quarter from outsized DTC growth (+20.4% vs. wholesale flat) should have been in the range of 50bps. That assumes an e-comm GM of about 70% and store GM of 50%. Unfortunately NKE doesn’t operate in a bubble and the combination of Fx and inventory management issues tampered the benefit, and will continue to do so through the first half of 2017. We still think the opportunity exists for Nike to continue to blow through historical peaks on its way to a 52% gross margin. But, over the near term there will continue to be volatility as NKE continues to learn from its new distribution paradigm. Some of the forces are outside the company’s control (Fx), but the inventory bloat accentuated by a sales to inventory spread of -6% looks like some severe growing pains caused by owning more of the distribution.


NKE | Full Contact Chess - 6 28 2016 NKE SIGMA


Soft Guidance

Nike guided as softly as a lunarlon insole, taking down 1Q expectations up and down the P&L. Top-line growth estimates disappointed at mid-single digits vs. 9% expected, gross margin assumed down 100bps vs. 80bps of leverage expected, and SG&A up mid to high teens vs. expectations +14%. NA is the biggest contributor to the downward top-line growth revisions (some attributable to NA sporting goods bankruptcies), capped off by FX pressure and unforecastable European softness due to the announced Brexit. SG&A makes sense given the push with the Euro Cup and Brazil Olympics, but we’re more than a bit surprised by the soft gross margin guide as the DTC engine continues to crank.


Looking at the full year, guidance implies growth accelerates in the back half. Overall numbers are relatively in line with consensus expectations with revenue up high single digits, gross margin +30-50bps, and SG&A up high single digits, with gross margin being main divergence, a bit lighter than the expected +70bps. This would imply FY2017 earnings per share growth in the high single digit range, below the prior initial guidance of low teens growth given on the 3Q call when TSA issues were known.  We criticized UA for having to guide down on Sports Authority after reiterating 2016 on it weeks before, but perhaps Nike could have been more proactive when it became apparent its #4 wholesale partner was going away, who appears to have never been mentioned on a conference call.

NKE | More Can Go Wrong Than Go Right

Takeaway: Nike will be a huge stock…over a 3yr duration. All of that said, no killer story is linear We'll take the under on the headline.

Let's be clear about something...we think Nike will be a huge stock, but that's over a multi-year (3-Yr) duration as the company simply annihilates both its own guidance and consensensus expectations as it adds $10bn in DTC revenue, $10bn in wholesale sales, and on top of that, a whopping $12-$13bn in Gross profit.  Yes, do the math, that's an incremental gross margin of 62.5% -- something that this industry has not seen since Converse started selling Chuck Taylor's in the early 1920s. Check out our comments below where we articulate the reasons behind this change, and why this has been in the works for the better past of 12 years, but is finally manifesting now.


The NKE story has become extremely complex, but the basic building blocks of what we like can be placed in the following buckets:

a) Investing at a greater rate than ever in its product engine resulting in an arsenal that even its strongest competitors can’t replicate.

b) Changing up the manufacturing paradigm for the first time in 40 years (initially what most of us know as FlyKnit – but this will change soon), which not only creates margin and working capital opportunities, but also gets Nike even closer to market (i.e. it will get 2-3 months out in an industry that is locked into a 5-6 month order window).

c) Dropping its attitude of deference and respect for the traditional footwear retailing channel, and getting the right product into the hands of the right consumers regardless of the poor growth and real estate decisions made by Nike’s traditional wholesale channel over the past 20 years.


Put these together, and we think that you’re looking at an incremental $10bn in sales at a 70% gross margin (vs $33bn in sales at a 47% margin today). When all is said and done, we think that gets you to almost $5 in EPS in four years versus the $2.00 and change it will earn this year.


All of that said, no killer story is linear... (unless it's one of those linear 'race to the bottom' stories). There are a few things we definitely think pose risk to the quarter, futures, and guidance.


1. FL – About a month ago, Foot Locker management was the most bearish it’s been on Nike in roughly 56 quarters…yes, that’s 14 years. At first it was the discussion about how Basketball was down mid-single digits in the quarter. And mind you, basketball is 40% of the revenue, and Nike has a 95%+ share of FL basketball. That’s about 38% of FL revenue base that was under pressure. But then we heard CEO Johnson talk of the ‘big turn’ at Adidas, and how he would like more product from both Adidas and Under Armour. Of course, some if this is directly tied to Nike’s decision to push its own DTC agenda, but anytime we hear talk of price resistance at the high end of the Nike price spectrum we listen.


2. Concessions to the Sporting Goods channel to stabilize DKS – The sporting goods channel is facing the liquidation of 20mm square feet of retail space between TSA and Sport Chalet in the coming months, that will put clear price and sales pressure on Nike’s key distribution partner Dick’s. Nike does not want the customer accounting for $1.4bn in retail sales under financial pressure. There’s no doubt that the vendors, especially Nike, Under Armour and Adidas, are helping Dick’s out. Ed Stack absolutely played this down when asked on the last conference call, but the vendors would throw a fit if Stack commented on this – especially in detail – so he just dodged it. Is Dick’s getting better product? Yes. You may have not seen it yet, but you will. Is Dick’s getting a better price on existing product? Probably not. But is likely to get better terms on it, which will help its cash conversion cycle. The fact that Brands are growing faster with their own Direct business is irrelevant. They need at least one strong National retailer in this space.  In the end, it’s a net gain for Dick’s and a net loss for the brands, including Nike.


3. Inventories getting better in US – Inventory clean-up is well past complete at NKE (see NA SIGMA chart below), which has been a drag on margins for the better of 6 months. The supply chain, looks relatively healthy, with the sales to inventory spread at DKS going from -6% to -1% sequentially in 1Q16 and FL posting a positive sales to inventory spread. The only laggard is, you guessed it, FINL which reported a 300bps deceleration in that metric at -7%. That bodes well for the margin equation in 4Q and FY17, which already has the tailwind from the higher margin DTC business growing ahead of wholesale distribution.


NKE | More Can Go Wrong Than Go Right - 6 28 2016 CHART1


4. Brexit – Just when it appeared that currency may inflect to a topline tailwind in 2016, the UK’s decision to leave the EU sent the Euro back down to the level seen 3 months prior, and the Pound to all-time lows relative to the dollar, down 15% yy. The UK and Ireland are Nike’s largest territory in Western Europe which grew 14% in 3Q16. The region in total accounted for ~20% of sales and 30% of EBIT in FY15. Growth is now at risk since it is likely that economic growth will deteriorate in the coming years as Brexit slows both immigration and foreign investment.  Even if growth for Nike continues, the FX impact could essentially mean no growth on a reported basis for the next 12 months. At the very least it’s a convenient excuse for management to talk down earnings expectations over the near term.


As it relates to futures, our sense is that an uptick will be viewed by most as Olympic-related, or unsustainable otherwise. If they're down, then the market machine will blame Price Resistance at the high end, UA and Curry, and most of all, the huge momentum we're seeing out of Adidas.  We'll take the under on the headline.