Listening to Nike management on this conference call, you’d think that the company just blew away the quarter and put up bullet proof numbers. But that wasn’t the case. These guys are masters of spin control. There was a lot I didn’t like about this Nike quarter – notable (i.e. unwelcomed) given that this a Best Idea Long. Revenue came in line with our model, despite a shortfall in China (we were expecting a sequential acceleration in China, and the opposite happened due to the impact of lockdowns). It looks like that ‘invite only’ Old Wall cocktail hour earlier in the quarter, after which several analysts took down numbers, did the trick. Such an unethical move by a JV IR team – albeit in this case, an effective move. EMEA strength more than made up the China shortfall – so the global portfolio is working. But the $0.90 print after normalizing the tax rate and stripping out the charge to close Russia puts actual EPS closer to $0.84 – yes, above the consensus of $0.80, but well below our $0.96. To be clear, Nike is one of our highest accuracy models – we’re almost NEVER off by that much. The culprit was gross margins, which came in down 80bps despite guidance for a 150bp improvement. This was driven by a massive GM hit in China, which affected the consolidated Gross Margin by over 200bps. While the company was scant on details, it sounds like it had too much of the wrong product in China. To its credit, Nike flushed it out of the system quickly and decisively – which is something that the best brands do instead of sitting on it and making the problem worse. That way, the company can start its new Fiscal Year on offense. The good news there is that product is finally flowing again, as supply is above 2019 levels. The negative impact is likely transitory, and was included in the company’s guidance of GM down 50bps for FY23. As we see digital accelerate in FY23, and as the company comps against record high logistics costs in 2022, we should see Nike go back into gross margin-expansion mode. As it relates to the stock, the quarter is likely a push. Negatives noted…but revenue guidance for the upcoming year is a very robust low-double-digit rate – again, product finally flowing again – and should see better incremental margins (long pricing power) even with a more normalized promotional cadence during the year at retail. We’re still reviewing our model, but are initially coming out well ahead of the guide on revenue and GM for the quarter and the year. We’ll follow up with a more detailed update after our model is complete, and we can compare to where the consensus lands to get a better sense of the TRADE and TREND call. Longer term (TAIL), we still think this model is going to push 20% EBIT margins and $7.50 in EPS power, which is far ahead of the Street. There’s nothing we heard Nike articulate (or obfuscate) that causes us to back off of those numbers. We’ll be back later this week with more details.
Takeaway: We didn’t like this quarter as much as Nike mgmt did. That said, challenges are transitory. The core growth and margin story appears intact.
