NKE | It Ain’t Over – By A Long Shot

Takeaway: Understanding the depth of the NKE ecosystem should offer up the best TREND investment opportunities we’ve seen in 16-years.

  • EPS Clean. $0.07 above Consensus. $0.02 above our estimate. Check
  • Revenue ahead of consensus by 1.25%, in line with our view that Futures and Revs are increasingly bifurcating = Futures as a false indicator. Check.
  • NKE got there the easy way, traded weaker GM for lower SG&A. un-Check.
  • Did not guide down – in fact was quite confident about 2H(May). Check. We’ve still got EPS growth ramping 1,000 above consensus – to 30%+. Check.
  • Inventories correcting on the Margin with margins looking better. Check.
  • Management sounded extremely confident, with a dose of humility and drive.  Check.
  • BUT…noted it is sidestepping Macro and that it is growing the market instead of focusing on share. Not sure about that. In fairness, it has happened no fewer than five times in 16 years. The business has been huge in bad economies, and horrible in great ones. There is an asymmetric characteristic here. You need faith here. I have it. But the market won’t. No Check. A Push at best.
  • Deploying more capital to reaccelerate product flow. Check.

I’m not going to beat my chest and say that ‘I called the quarter’. Yes, we got the earnings right – both revenue and EPS upside. But like the market, I was absolutely prepping for a potential wash-out. #accountabilitycheck. My contention was all the company had to do was deliver on EPS and not guide down – regardless of the quality. That happened.

But let’s be clear about one thing, and one thing only. This uncertainty around revenue and margin trajectory is far from over. In fact, I firmly believe that for the first time in 16 years, understanding the deep ins and outs of the Nike ecosystem will be a huge money-maker. Both long and short side. Maybe that’s a self-serving statement, but it’s not if it’s true. When a company changes up a 40-year paradigm in design, sourcing, and distribution – which will happen over the next 3-years (starting 2-quarters ago after nine years of investment), it is never a linear event. Going from 73% share to 50-60% share inside its largest wholesale account is never pretty – and there will be no shortage of negative banter from the retailers (the ones who are being left in the cold). The bifurcation between Futures and Revenue will accelerate, and Nike is likely to over deliver in 3 out of 4 quarters.

Our positioning today is unchanged from yesterday, but more confident over a TREND duration…

  1. Long Nike
  2. Long Dick’s Sporting Goods
  3. Long Flextronics? (Nike’s key partner in changing up sourcing and distribution).
  4. Short Foot Locker
  5. Short Finish Line
  6. Short Hibbett Sports
  7. Short Asian Manufacturing – Yue Yuen Yue Yen, et all.

We’re at $5.00 in earnings in the May19 FY. The Street is at $3.90 and is unlikely to change after this print. The TAIL did not matter yesterday. It matters a little today. But the money-maker will be on the ecosystem, long and short, over a TREND duration.

Let the fun begin.

Happy Holidays!

NKE | It Ain’t Over – By A Long Shot - 12 20 2016 NKE futures

NKE | It Ain’t Over – By A Long Shot - 12 21 2016 NKE SIGMA



Critical On-line Retail Data/Deck Dec 29th

If you can’t stand Amazon’s lack of disclosure about its category presence and market share in everything from Grocery to Sporting goods to Home, we’re going to do it for you. Black book on Thursday December 29th at 1pm. I might be a bit biased, but it’s gonna be a killer deck.

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EVENT | Amazon (AMZN)

Tuesday, January 17th at 1:00PM ET

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RH | The Anti-KSS, TGT, HBI, TIF, FL, HIBB, CRI, JCP, etc…

Our Positioning (McGough)

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LULU | Bridge Over Troubled Water

Investment Conclusion. This beat, and subsequent rally, does not come as a surprise to us, and is in line with our multiple comments over the past week to back off the short headed into the print. Unlike what we saw with TGT and KSS, however, this was a genuinely upbeat growth algorithm, with 7% comp leveraging to growth of 14% and 36% in Revenue and EBIT, respectively. LULU definitely gets a ‘golf clap’ there, and yes, this probably buys Potdevin another couple of quarters on the job. But to be clear, despite the upside ‘surprise’ this story is no less troubled. In fact, there was absolutely nothing that came from this print that alters our TAIL call that unless major investments are made in branding/product tiering, absence of a clearance channel in the face of a historically ‘full price’ business that is starting to go the promo route, and absence of the ability/talent/investment to build a wholesale model (which is critical to the next stage of LULU’s growth), we’re likely to see sales roll, (increasingly higher) occupancy delevered, share erosion, and ultimately – a management shakeup. We still contend that there’s $4.00 in earnings power in this company, but this management team will simply never unearth it.  Going forward, our estimates are below where the consensus is likely to end up after this print. Compares are still ‘easy’ into 2Q. As either a) we de-risk duration by moving closer to that time, b) the street extrapolates this quarter into 4Q/1Q and we prove to be well below the Street over the near term, or c) the stock pushes through $75 – then we’ll get much heavier on this position.

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HBI | Cash Flow Lightning Rod

All in, we think that HBI is meaningfully re-rated over the next 12 months on a much lower cash flow number. We’ll then be stuck with the following story…

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