As we expected, Nike handily beat the consensus, coming in $0.16 (23%) ahead of the Street, and $0.02 above our estimate. But we also expected Nike to throw a wet blanket on growth expectations over the next two quarters given the challenges in China, slowdown in Europe, and a shrinking wholesale footprint – particularly in North America. That didn’t happen. In fact, Nike took up the year by the 3Q beat – though we still think it will come in $0.10-$0.15 per share ahead of the implied $0.89 4Q (May) guide. The 2,100bp point spread between growth in Digital/DTC of 22% and wholesale at +1% continues to impress, which is accruing to both the top line and gross margins – the latter of which was up 105bp despite excess supply chain costs. Note that DTC currently stands at ~40% of Nike’s business, and should go up to 60%+ over a TAIL duration, which is hugely notable given our estimate that a digital sale is nearly 2,000bps margin accretive (Nike claims it’s closer to 1,000bps). All in, we remain ahead of consensus over TREND and TAIL durations and think that there is $7.25-$.7.50 in EPS power by FY25 – which we think is good for a $250 stock.
While the results at Nike were stellar, we think that the big read from this print is around the wholesale ecosystem. Specifically, Nike said (we’re paraphrasing) that it’s done cutting off wholesale accounts – after shedding 50% of its wholesale distribution globally over the past four years. It’s entering into the next phase of its growth plan, which is to drive growth through the remaining wholesale accounts that have made the cut. We can’t underscore how bullish this is for CAL and ASO -- both of which we’re long and trade at ~5x earnings due to ‘Nike risk’. These names should rally hard tomorrow. It’s also bullish for HIBB and DKS (which we’re short), and dare we suggest that it is bullish on the margin for FL (i.e. it is unlikely to get another cut by Nike). Nike will remain a traffic driver for these retailers for the foreseeable future, though it doesn’t mean they will preserve 2021 margin levels (particularly HIBB and FL, Nike expects re-investment in customer experience and brand presentation). This whole group has been decimated due to the ‘nobody is safe’ discount related to doing business with Nike. But now Nike is saying flat-out that it has already communicated all allocation changes to every account, suggesting that if you made the cut thus far, further reductions won’t happen. In fact, Nike is talking about collaboratively investing capital with wholesale accounts to link the digital and physical store experience and elevate the brand. Make no mistake, its own book is still the most important growth engine, but this is a stark turnaround in messaging from Nike brass about its wholesale strategy. We’d be particularly interested in owning CAL and ASO and would be buying aggressively – even if the stocks are up materially tomorrow.
