Was this a good quarter for Nike? No. Revenue was up only 2% (+6% in constant currency), EBIT was down, and EPS was basically flat with last year. But the sentiment headed into this quarter was about as bad as we've seen in a decade for Nike. The company annihilated that sentiment, and though it tweaked the components of 2Q, it didn't guide down -- something we were expecting to see. EPS for the quarter came in spot on with our estimate at $0.94, and $0.16 better than the Street. No changes to our estimates for the year (or outer years), which are meaningfully above consensus. Inventories remain in check, down 10% from last year, though gross margins were down 5bps from last year, and the company made up for it with lower operating overhead. In all, not a stellar quality of earnings. But the wheels are clearly not falling off this story like the consensus expects. We continue to expect revenue growth to accelerate as the year progresses, and though we're tempering our Gross Margin expectations slightly (offset by lower OpEx) due to the strong dollar and the subsequent FX hit, we're still coming in at +300bps vs last year -- double the company's guidance. With the combination of lapping apparel discounting from last year, freight, China margins finding a bottom, and the incremental shift to DTC, we still expect this to be a big gross margin year. All in, we're coming in at $4.00 for the year in EPS, vs the Street at $3.25. Then we get to $7 per share in earnings by year 4 of our model. Again, a mile ahead of consensus. The only thing that's changed since we outlined our Best Idea thesis in a deep dive Black Book (see link below) is a) the price, which has acted like death; and b) the dollar, which has gone the wrong way. But fundamentally, we still think that this P&L is on track to inflect meaningfully in the next two quarters. If we're right in our model, then this is likely a $180 stock over a TAIL duration -- a double from where Nike closed today, and still a pretty sweet return from where it's trading after hours. But we still think the best way to play Nike is to go long Foot Locker (FL) -- which is the first time we've EVER had FL above NKE on our long list. We're near certain that the path of least resistance for Nike to accelerate revenue is to up allocations to FL, which went from 76% Nike 2-years ago to 50% today. That is the mother of all comp drags. As the percent of the FL store goes back up above 65%, this puts FL in a MAJOR comp upcycle, with operational and earnings leverage to match. We get a TON of pushback that this will happen, because management teams aren't admitting it. But those conversations are going on right now (which is why we think Mary Dillon bought stock two weeks ago). Ultimately, we build to over $7 in EPS power for FL over 3-years vs $1.30 today. Is Nike a safer, lower beta bet? Yes. But FL has major torque in the P&L. This is one of those rare periods where what's good for one is good for the other. And though Nike is still growing DTC faster than wholesale, we think it's going to turn on the wholesale spigot in 2H and accelerate revenue. Both are Best Idea Longs.
Nike Black Book CLICK HERE
Foot Locker Black Book CLICK HERE
