NKE | Let The Upward Revision Cycle Begin

Nike blew away the consensus, as we expected. It put up $0.79 vs the Street at $0.56. Admittedly, it came in a bit shy of our aggressive $0.85 number (#accountability). But close enough to the pin. One of the most impressive numbers Nike put up is inventory growth, which came in +16% vs last year – mind you that in the preceding two quarters inventory grew at 44%. The rate at which it cleared through excess apparel inventory is stunning. Were gross margins down? Yes, by 330bp. But if it cleared all that inventory on its own we think GM would have been down as much as 600bp. It pushed the product through its wholesale channel to ‘fix the problem’ and minimally shared in the markdowns. It did that by way of ‘incentivizing’ the retailers with allocated and exclusive footwear. And as we stated in our recent deck “Duopoly Destruction or Paradigm Shift” (CLICK HERE) we think Nike’s footwear game is better today than we’ve seen in 30-years covering this company. Revenue came in big, as you’d expect when clearing through so much product – growing 14% yy. China accelerated mid-way through the quarter, and we expect it to turn positive in 4Q (we’ve expected this all along). That brings us to Nike’s guidance, which we simply can’t square. The company guided to a low-single-digit growth rate in its 4Q ending May to account for Macro uncertainty. Smart. That should put the Street close to $0.55 for the quarter. But we’re coming in at over 10% top line growth and $0.89 in EPS. Between strength in the US and in Europe, not to mention lapping horrible China numbers with the brand better positioned and the consumer showing up again in brick & mortar stores, and Adidas hemorrhaging share, we simply can’t get to Nike’s guide. Same for Gross margin. It guided to a 100-200bp hit to 4Q margins, and we’re only down 50. Given the lack of clearance activity needed, Nike’s pricing power in footwear (again, check out our Black Book for details on how its pushing new highs), and waning freight pressure, the only thing dinging Gross Margin is FX. With the absence of FX, Gross Margin change would likely turn positive this quarter (we’re down 50bps). Importantly, we think Nike is in the early stage of a MAJOR upwards earnings revision cycle. EBIT has been in the $6.5bn range since the start of the pandemic, and we think in the year that starts in June the company breaks through $9 BILLION – that’s a 43% EBIT jump in a single year. That all comes from revenue growth and gross margin recapture – while de-levering SG&A as it steps on the accelerator to put the pressure on Adidas. That gets us to EPS of $4.75, which is earning the Street’s FY25 number a year early. I get it…the stock is optically not cheap. You can buy LVMH at a lower multiple than Nike today, which says a lot given that LVMH is one of the best-run and most consistent companies in any industry in the world (yes, this makes us more bullish on LVMH). But we think that the ‘E’ in the equation for Nike is wrong. And this company will be consistently beating numbers for the next 4-8 quarters leading up to Donohoe’s retirement (he turns 63 in April and as is Nike’s practice, when you turn 65, you’re out). After three years of flat earnings, we think he’s going to go out BIG. We build to over $7 in earnings power over a TAIL duration, dwarfing the $5 consensus. The punchline is that the stock isn’t as expensive as it looks, and is one of the few companies we can point to in consumer discretionary that is in the early innings of a significant upward earnings revision cycle. We build to a stock over $210 over a TAIL duration vs the current $125, which is a big return for a name like Nike when other big cap retail/consumer names like ULTA, HD and LOW should be slowing on the margin. On a relative earnings revision factor, Nike should have few peers. Nike remains a Best Idea Long.