1. Nike (NKE): Two weeks ago we moved Nike higher on conviction list as a Best Idea Long. Earnings are out this week (Thursday), so it’ll test the timing of our call. The multi-year call here is that the bulls are not bullish enough. Digital now stands at 21% of total sales by my math, and if you believe the management team (directionally, I do) it will be closer to 50% in 5-years. That’s a massive Gross Margin tailwind as Digital is 1,000bp gross margin accretive for Nike. In our model, we’ve got gross margins pushing 50% by 2025, driving EBIT margin to a new peak of 19% -- which is a stunning number for a company in this business. The consensus is bullish at 17% -- but not bullish enough. This name is expensive, and it should be. If you look at the upcoming quarter – to be reported on June 24th – the Street is sitting at $0.51 per share, and we’re 50% higher at $0.79. I know a host of junk-tailers have been beating by more than that, but this is the highest quality name in retail that is just killing it in the consumer marketplace. So 40x $6.70 (Street at $5.88) gets to $270 – discounted back to a 12-month value suggests a $195 stock in a year. While I think there are other recovery names that offer up a better return profile, I’ll definitely take Nike’s upside – especially given how I think the catalyst calendar will play out over the next year.
2. Barnes & Noble Education (BNED). This is an odd one for us. This weekend we all but added it to our Long Bias list, but pulled it in the final stages of our vetting in advance of the analyst meeting next week. Here are some callouts… When you first hear of Barnes & Noble you may think of an old dying bookstore put to its death, like many others, by the Amazon machine. However, BNED is not that Barnes & Noble. In 2015 Barnes & Noble books licensed its name to Barnes & Noble Education and subsequently BNED became an independent company trading on the New York Stock Exchange. Currently the company has over 1400 stores with 765 physical retail stores and 676 virtual bookstores and three reported business segments: Retail, Wholesale, and DSS (Digital Subscription Services). Its wholesale segment consists of distribution of books to their own stores and other clients while their DSS segment looks to enhance students learning through online academic solutions (think CHEGG). Combined these two segments made up 12% of reported revenue in 2019. The lion's share of this company, and where we think you get TREND reopening upside, is its retail segment which contributes the remaining part of the company's revenue. Their retail business consists of renting and selling textbooks to students, but more importantly it also consists of higher margin "general merchandise" sales which includes school branded apparel and other accessories (mugs, keychains, etc.). On that front, in December 2020 BNED signed an agreement with Fanatics and Lids which Fanatics and Lids made a joint $15mm strategic equity investment in BNED and the companies entered into a strategic partnership to expand and enhance omnichannel sports merchandise distribution. This partnership checks all the boxes with Fanatics taking advantage of BNED's industry leading footprint on college campuses and BNED takes advantage of Fanatics and Lids' products and selling capabilities. Given that colleges had such uneven responses to bringing students on campus last year due to the pandemic, this year things are looking a lot brighter for college kids going back to campus, and sports events are taking place with fans, you will have two classes of kids (last year's freshmen and this year's freshmen) who have the demand for both textbooks and school spirit. We think the return to college campuses will give this company a shot of adrenaline that they missed desperately last year and power them to improved revenue, margins and earnings power over a TREND duration. It’s notable that the softgoods margin in the Fanatics/Lids business is particularly high, and this is a company with razor thin EBIT margins (ie sub 2%). The point here is that this could the mother of all reopening plays as TREND earnings could easily triple vs current expectations. One thing to note is the company reports Q4 earnings on June 29th (which management has already implied will be less than satisfactory) and an investor day on June 30 which where we think the company will pump the reopening margin opportunity. We’re definitely not averse to taking a flier on this name ahead of the analyst meeting – though ‘taking a flier’ isn’t part of our process. We’d rather wait to hear what management has to say on the event. Stay tuned.
