If you’re a Nike bear (God help you) I dare you to try to poke holes in this quarter. The company guided to ~$0.40, the Street was at $0.51, we were at $0.79 and said we had a bias to the upside. Ultimately NKE beat on almost every line of the P&L, and printed $0.93. Every other research note out there is highlighting the revenue beat, gross margin strength and the fact that China hung in better than otherwise feared …that’s all fine and good. But let’s step back for a minute and respect how this company has simply blown through pre-covid operating levels with impunity. While competition was figuring out which way is up during the pandemic, Nike immediately pivoted and amped up its innovation and product organization, and drove it right through its consumer direct model – which has been incredibly accretive to both the top line and Gross Margin. I chalk this up to new CEO Donahoe. Parker was a very good CEO. But Donahoe is simply outstanding. Keep in mind that he started as CEO just weeks before the pandemic hit, and during that time we’ve seen Nike reorganize and streamline the company, turn around a 40+ year old misogynistic culture, amplify and accelerate its women’s business (a goal talked about for years yet never achieved), and accelerate the DTC model. Face it, the guy’s a stud. Perhaps the best and most obvious measure of NKE’s success is in the top line, which was up 95% this quarter and up 21% vs pre-pandemic. If that’s not enough for you, EBIT dollars were up 56% in the quarter vs two years ago – which is stunning.
Not to be outdone, the company took up top line guidance implying ~$50bn in sales next year, and ~$70bn by 2025, with 60% of that coming from the company’s Consumer-Direct model. Nike claims that e-comm is 1,000bps higher than wholesale, but we think its lowballing there by at least 500bps. The company also took DOWN capex (vs our model) to about 3% of sales, which frees up about $500-700mm annually in our model from our previous 4% spending levels. That will likely go towards more stock repo. In Nike’s 5-year plan, it also noted that gross margins should push 50% -- which is consistent with our model. Mind you, Nike books warehousing and logistics costs in COGS – which is a negative 500bp delta when comparing like for like margins vs other brands. That suggests a 55% gross margin level vs peers, which is borderline unheard of in this business.
At the same time NKE pushes its DTC model and cranks its revenue engine, mind you that Adidas is acting in a rational and focused manner as it relates to consistency of growth and controlling its brand through its own DTC model – the best focus we’ve seen out of that company in over two decades (we like that name a lot here as well). The point being that we have a global duopoly in a space with high barriers to entry that is acting rational and is staying in their own lanes for the first time I can remember in covering this space (which I’ve done for over 27 years).
So that begs the question as to what Nike is worth. We’ve got the company clocking in at a 20% EBIT margin in year 5 (with hefty levels of SG&A spending to fuel the growth engine) on $70bn in revenue. The level of brand control (more than 50% DTC and wholesale diminishing), coupled with the margin and return characteristics justifies every last bit of a 35-40x multiple for NKE from where we sit. We’ve got $7.75 in FY25 EPS, which suggest a $180-$200 stock in 12 months if we discount back to today’s dollars. We think that the upcoming year (May 22) Nike will put up 38% EPS growth and push $5.00 per share for the year. While consensus numbers will definitely come up this morning from the 13% growth the Street modeled before the print (we'd been over 30% all along), our sense is that we’re still coming out over 1,000bp ahead as it relates to EPS growth. The catalyst calendar still checks out.
Nike remains a Best Idea Long
