Keith shorted Nike today in the Hedgeye portfolio as he did not believe that the positive call one pundit made last night was worth its salt. We’re seeing all the right moves by the company to lead in both market share and profitability in this space, which should accelerate growth 2-3 quarters out. Unfortunately, Nike’s latest miss might not prove to be a one-off event. The absolute growth, and rationale behind it, is fine with us, but we have a mismatch between Nike’s communication and the Street’s expectations.
Let’s look at the modeling trajectory for the next five quarters. Nike uncharacteristically left its guidance wide open for interpretation. Don Blair (CFO) is not one to use words loosely. But saying ‘next year sales up hsd or better, GM% down, and leverage SG&A, but not enough to offset weaker GM’ might be fine for annual guidance – but to give virtually zero color on the timing by quarter given all the moving parts is tough (especially after having just spanked the Street with a 300bp 4Q GM hit). Am I faulting the company for its guidance practice? No. I’m not a big fan of the quarterly guidance game. But a ‘no guidance’ policy also has its consequences. It allows the Street’s models to fall out of synch with financial reality. That’s what we’re got today.
NKE: HEDGEYE MODELING ASSUMPTIONS
Nike’s stock works when it is beating earnings. Period. I’m at $4.85 vs. the Street at $4.76 next year. That $0.11 delta is great, but the reality is that I’m $0.24 ahead in 4Q. For the four quarters leading up to May12 I’m below.
So…something’s gotta change. Either my model – which I have no reason to do today – or wait for the Street to ‘fine tune’ its expectations.
Our concern, of course, is that this redistribution comes alongside F4Q11 earnings in June.
More importantly, it is that this is a market that will give Consumer Discretionary stocks zero benefit of the doubt – especially while lesser companies are on the tape printing more respectable numbers.
The key here is that our thesis for the retail space overall calls for a severe breakdown in earnings by the end of June. Nike’s trajectory should accelerate when the rest of the pack lags.
But it’s a long time til the end of QE2 in June.
If you can be nimble, the be nimble. Lighten up, or protect yourself on the downside.
There'll be a time to buy this stock this year. But this simply is not it.
