Solid quarter out of Best Idea Long Nike, with EPS of $0.83 – a nickel ahead of our estimate – and $0.20 (32%) ahead of the consensus. Both Revenue and Gross Margins came in ahead. The elephant in the room was a 25% decline in China, its most profitable region. Bears were clearly expecting that based on the tone of questions we’ve fielded over the past month since Adidas' 3Q report. The company cited that it was due to issues around not getting enough inventory – but let’s be real. The company is also dealing with a weaker macro backdrop in China and a stronger local competitive set. That’s why it said it was stepping up its investment rate in China – to accelerate growth and share position. We've seen this movie before in 20+ years of covering this company (and working there in the interim). Nike losing share is almost always a transitory event, as it deploys capital to come out ahead. We think Nike is going to win this time around as well, and have growth accelerating to +25% next FY, which is likely well ahead of the consensus. While Asia was weak, Nike absolutely crushed it in North America, with revenue +12% and EBIT +21%. The results were fueled by a 40% improvement in Nike DTC, which we think is pushing ~2,000bp GM accretive vs wholesale (Nike claims it’s closer to 1,000bps). Nike has closed ~50% of doors it considers ‘marginal’, or non-brand-enhancing, during the pandemic, and it’s not yet done. To be clear, Nike’s most important customer is itself. Guidance looked good, with Nike maintaining FY revenue and taking up Gross Margins, though we have the company giving back some of the upside in higher brand investment in China. In the end, we’re coming out about 20% ahead of where we think the Street will shake out for 2H (yr ending May), and 12-15% ahead in the outer years. This stock carries a hefty multiple – but it should – trading at 35x earnings and 25x EBITDA. The growth, DTC, margin, balance sheet and return characteristics put this squarely in the top 5% of global retail/non-durable/luxury names. We think Nike’s worth every bit of its current multiple, which suggests about $220 in 18 months and $300 at the end of a TAIL duration on our above-consensus estimates. Best Idea Long.
Takeaway: Bears will flag China, but expect a big acceleration next year. DTC strategy completely on-track, as is roadmap to 20% TAIL mgn and $300.
