NKE: It’s All on Nike U.S.

NKE will come through, again. 10% beat likely without futures rolling. Look for a major relaunch of Free. But given interconnected global risk, low short interest, key management stock sales, and the best sell-side sentiment since October ’08 (14 Buys and no Sells) Nike NEEDS the US to lead. The good news is that it is.


On some level, I think that NKE planned its May Fiscal Year just so they could keep shareholders walking on eggshells during holiday weak in addition to 2Q EPS. The eggshells aren’t warranted this time around. 


1) We’ve got Nike printing $0.96 in our model, which is 10% greater than the Street at $0.88. Importantly, this EPS algorithm starts with 10% sales growth levering to 28% in EPS growth; showing improvement in both Gross and SG&A simultaneously for the first time since 2Q08.


2) It would be very uncharacteristic of Nike to change guidance at this time of the year. The caveat is that if they smoke the quarter (our estimates count as at least a puff or two) Don Blair has all the ammo he needs to keep forward hurdles low; raw material costs, more air freight to keep up with strong demand, quadrupling in apparel R&D budget, to name a few.


3) Sustainability of Futures. The biggest question for everyone that cares about Nike – or anyone that even grazes some part of Nike’s supply chain – is whether or not Nike can sustain its North American growth. While this is usually not on the top of our list given how broad Nike’s portfolio has become. But let’s face some facts…the setup in Europe and Asia is not setting up to be pretty into 2011. Check out the charts below where you’ll find eroding consumer confidence pretty much everywhere. The US actually looks good by comparison. In other words… for one of the first times in years, Nike ABSOLUTELY needs the US to hold on tight.


Given the importance of North America, let’s dissect the 14% futures number we saw last quarter. 14% growth over the next 2 quarters is the equivalent of adding $289mm in new business (assuming that 85% of the base is on the Futures program). This number annualized is bigger than the ENTIRE US BUSINESS for over 90% of the footwear brands in the world. The good news is that the number is balanced over footwear and apparel. That definitely makes this number more easily digestible.


NKE: It’s All on Nike U.S. - NKE Fut 12 10

NKE: It’s All on Nike U.S. - NKE Fut 2 12 10

NKE: It’s All on Nike U.S. - NKE Fut 3 12 10


Precise quantification of this order number is tough. But here’s our best crack. When we add up comp and square footage growth by customer and by channel, we get to about $128m top line growth for the YEAR – or about 2.5%. Now…this excludes growth in Nike retail and Nike.com – both of which should take the aggregate growth rate on a reported basis for Nike up by another 2-3 points. So what we need is to justify doubling this growth rate again due to market share gains in order to get to 14%.


This is very much realistic. But here are a few considerations.


1) Free: I think that Nike has done an admirable job in hiding from the outside world how bothered they are by missing out on the Toning category. That’s not to say that they want to have been first to market with a ‘tush toner’.  But does anyone remember Nike Free? This is a technology that Nike debuted around 2005 – the same time that Adidas bought Reebok and immediately started to seed share to Nike (their combined share went from 17% to 6%).


So what are we left with? The toning category has taken off, the book “Born to Run” was on the NYT best sellers list.  (This focused on a group of hardcore runners and Mexican tribes who would run (often barefoot) as a way to minimize injury and maximize speed and safety.)  And all the while, Nike is left out in the cold even though they invented the technology to lead this category.


Translation = the tools, molds and other capital equipment to produce these shoes en masse have already been amortized. My sense therein is that we’re going to see a MAJOR re-launch of ‘Free’.


This should be showing up in Futures today. (and we probably saw some last qtr).


2) Endorsements: Yes, we’re in a solid R&D cycle. But with that comes an Athlete Endorsement. We already saw Nike outbid for the NFL contract. It dropped Tom Brady, who was then picked up by UA. It also goes down the curve to athletes like Allyson Felix, who Nike recently took from Adidas. To those that don’t know, Felix is one of the top sprinters in the world and is a solid brand statement (recently had a full billboard in Times Square).


3) Global Interconnected Risk: Not that many people ask me about the Macro side of Nike. But they should. While being the clear leader in a Global Duopoly with a fixed structural forex and sourcing advantage, the company is not immune to global turmoil. They have bucked it in the past – but we cannot give a free pass – even for a company like Nike.


4) Model Shift: We’ve been looking at Nike as a sheer top line growth story with improving Gross Margins. As we anniversary World Cup, the top line will still be there, though margins should be driven more by SG&A and FX hedges. Same result, but different path. The risk is whether Mr. Market will give the stock the same multiple in trading GM for SG&A/FX.


  Europe (Western): Largely stronger on a sequential basis

- Most significant consumer confidence ramp with four consecutive months of positive retail sales - the longest such streak in more than 5-years before turning slightly negative in October.


  Europe (Eastern/Central):

      - Russia rolling over slightly relatively to Q1


  Key issues/events across Europe:

      - Consumer Pullback from Austerity measures issued or discussed, many enacted for Jan. 1, 2011

      - Austerity measures in Ireland, UK, Spain, Portugal, Italy, France, Greece, Hungary, Romania

      - World Cup spill over early into the qtr 


  Euro - GDP:


NKE: It’s All on Nike U.S. - NKE Eur GDP 12 10


NKE: It’s All on Nike U.S. - NKE Eur Cons RSales 12 10


NKE: It’s All on Nike U.S. - NKE Ger Cons RSales 12 10


NKE: It’s All on Nike U.S. - NKE Russ Cons RSales 12 10


  China: Retail sales growth stable in low 20s while confidence is beginning to roll


NKE: It’s All on Nike U.S. - NKE China Cons RSales 12 10


  Japan: Rolling over hard relative to Q1

- stimulus measures and policy changes helped buoy the Japanese consumer in 3Q10, including a subsidy for energy-efficient cars and a tobacco tax hike scheduled for October 1st. Both programs pulled forward consumer demand to the tune of a 0.7 point contribution to 3Q10 GDP, after having no contribution from private consumption in 2Q10. In addition, Japan’s hottest summer in over a century fueled demand for cooling products. These tailwinds helped boost 3Q10 GDP growth to +3.9% QoQ SAAR and their absence will create a drag on growth in 4Q10 and potentially into 1Q11 – just around the time bearish 4Q10 economic data is being reported in globally. (11/30/10 Macro post )


NKE: It’s All on Nike U.S. - NKE Japan Cons RSales 12 10


  South America:

      - Brazil - retail sales started to slow heading into Nov though relatively flat with Q1


NKE: It’s All on Nike U.S. - NKE Brazil Cons RSales 12 10


  Fx: Nearly 1% drag on top-line in Q2


NKE: It’s All on Nike U.S. - NKE Fx 12 20 10




Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more