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You might not see inflation Ben, but Nike does. There will be ‘ticker shock’ on the event, of course. But the alignment of the story over the course of the next 18 months is one of the best in Consumer. Entry points take center stage.

Let’s get a very important point out of the way real fast… First and foremost – like it or not – Nike’s key takeaway by Mr. Market will be from a Macro Trader/PM vantage point. They could care less about LeBron, NikeID, the new China logistics center, and even positive Futures trends.  They’re going to spank the stock margins.  There are a few Nike-specific items that added to the miss (more on that later), but a PM won’t know or care. The fact is, here’s a Consumer bellwether that’s seeing the long-awaited cost inflation. If it’s going to impact Nike, then what about the average-quality companies out there? What about the junk???   Guess what Bernanke? You might not see inflation, but Nike does.  

Adding to the bear case is that inventories came in hot (+18% on 7% sales growth).  A miss with lower margins and high inventories is usually the kiss of death for anyone in the supply chain – and especially should be this year. Good luck to any perma-bull trying to defend that sort of trend in this tape.

Unless…

But what’s keeping Nike fundamentally grinding forward is the fact – and it is a fact – that its Futures remain very solid. Orders were up a strong 11% in the US – still double digit despite hitting a point where last years’ compares get tough. 2-yr futures accelerated sequentially from 6 to 7.5% in North America.

Emerging markets accelerated (32.5% 2 yr!). China accelerated as well to a mid teens rate, which is nice to see given that it was a concern of ours coming out of 2Q. Basically…they’re doing everything they said they were going to do. The category realignment is absolutely working and they’re growing in all the right places – apparel, in particular.

As it relates to growth, management’s tone was so dang optimistic on the call that even someone like me (who has high growth expectations and knows the company a bit better than the average guy) did a double-take. For a conservative CFO like Don Blair to feel good enough to step up and say that he’s comfortable with the high end of long term plan of ‘high-single-digit’ growth for the next 5-quarters is pretty big, and that’s an understatement.

One thing I’ve always accused Nike of is not being aggressive enough when times are tough in turning the screws to its competition.  I think that they are FINALLY doing this. Not by price – that’s not their style. But with product innovation and special programs throughout regions and channel partners. To do this, however, you’ve got to have the inventory – especially when we are coming off such tight inventories over the past two years. The best companies are the ones that will grow. To grow, you need inventory. It’s as simple as that.

TIMING CONSIDERATIONS

So we’ve got a miss and high inventories.  But the hardest quarter for Nike is the one that the company just guided for (4Q – w 300bp decline in GM%). Then what? We anniversary excess airfreight costs in the Aug qtr, then we get the benefit of price increases and better utilization on new Asian capacity – which meaningfully eases COGS pressure. Then we cruise right on in to the Olympics – expectations for which will start to build before Nike’s 2Q12 (Nov 11).  And by the way, anyone want to find me a time period where Nike disappointed two quarters in a row?

In Consumer Discretionary, it’s not too easy to find places to hide. Some of us have the opportunity to avoid the space – or even short it. But if you’re looking for quality growth in Consumer, there’s not much to hang your hat on.

We can beat the company up all day for freight costs, oil, growth spending and inventories. But the reality is that…

a)      The long-term call is completely in-tact here.  $20bn company goes to $30bn over 5 years.

b)      The intermediate-term call looks good: Nike-led athletic cycle takes through the Olympics in Summer 2012.

c)       Near-Term: There are definitely question marks. Be smart about entry points – but we definitely think they should be entry – not exit.  Something to definitely keep on your screen Friday is $78.14, which is Keith’s Long-Term TAIL line of support.

We’re looking at $5 in earnings in FY12(May) and $5.75 a year after. Will the stock make you rich here? Probably not. But for a GARP name where the underlying story is very good, the company is taking share, and the balance sheet is like iron ($9.25 per share in cash) we think this is a pretty good spot to be.