NKE and ADDYY (ADS-DE): Swapping places on Best Idea Long list (favoring Nike). Adidas had been higher on our Best Idea Long list, given our view that solid execution, margin improvement and outsized return of capital to shareholders would lead to superior earnings growth than Nike, and a narrowing of the 25% valuation discount ADDYY carries relative to Nike. But two things happened to make us more bullish on Nike. The first is that Nike is materially upping investment spend in China, which will make it tougher for Adidas to regain its footing in China without matching Nike’s demand creation expenses. We think Adidas will err on spending less, and will therefore see less of an improvement in top line throughout FY22. The second development is that with the consensus numbers coming in post Nike’s 2Q results, we’re tracking 15-20% ahead for the balance of the (May) FY22 year, and we’re 12-15% ahead for each year over a TAIL duration – driven by both better top line and Gross Margin. We think both names work in FY22, but if we had to pick one clear winner – it’d be Nike. We think it’s a $300 stock over a TAIL duration.
Going Short Oxford Industries (OXM). How can we NOT be short OXM, the owner of Tommy Bahama and Lily Pulitzer (each account for roughly half of cash flow). We’re extremely bearish on apparel in 2022, and while there’s nothing wrong with Tommy and Lily, the reality is that both brands are overearning this year, the consensus has margins remaining elevated at 15% in perpetuity (closer to 12% is the right number), the stock is trading near a peak multiple on the actual underlying earnings power, and short interest is at a historical trough of 3%. The right earnings power for this company is closer to $5 per share than the ~$8 that the Street is looking for over a TAIL duration. That’s good for a $50-$60 stock vs the current $96 (or 40%+ downside). The bull case here is around the company repurchasing a thin float – but we think in hindsight will prove OXM to be buying back stock at the peak.
