We took Nike off our Best Idea Long list 2 weeks ago, as our patience for this management team is wearing way too thin (and our best long call on it actually came out sounding like a good short). The reality is that Donahoe is going to go down as the worst CEO Nike has seen in its history. Yes, even worse than Bill Perez circa 2004/5. (Yes John, Old Wall analysts won't say this out loud bc they want banking business and Corporate Access, but hey, welcome to Hedgeye's world of #accountability, #transparency, and #trust). Bulls can make all the excuses they want, but this brand is just losing share across the board – almost any way you measure it. Yes the company beat the quarter, but it was a sandbagged number. Reality sets in when you look at the actual earnings algorithm – Sales +2% in constant currency (flat in reported $), EBIT down 5%, and EPS roughly in line with where it was 5-years ago before JD took the top job at Nike.
There will be a time – probably within 6-12 months (before the time Donahoe retires next year) when we'll want to go full-scale long Nike, as the rate of change will likely turn positive by mid-FY25 (fall of 2024). But for now, the way to get paid off of Nike's horrifically performing P&L and its share loss is to go long FL.
The punchline is that if there's one thing that's clear, it's that Nike has a massive revenue problem, and the path of least resistance there is actually quite simple – to take Foot Locker's allocations up by about 25%, from 50% of the store to 75% (where it's been historically). That's good for about $1.3bn in wholesale revenue, or about 400bp in growth for Nike. Foot Locker already signaled that Nike allocations are headed higher, and Nike went as far as to say 'we're leaning more into wholesale partners'. We're 100% certain that Mary Dillon (FL CEO) and Heidi O'Neill (likely next Nike CEO – she's underwhelming, but can't be worse than Donahoe) have been having serious discussions about 'getting back together' for six months now. What's a nice little bump for Nike in getting back is a massive earnings event for Best Idea Long FL. We think that this puts FL into a 2-year comp upcycle in the 15% range, with massive operating leverage in the model, which puts $7 per share in earnings in play, with the Street underwriting about $2. We'd never argue a big multiple on a junky name like FL, but the reality is that it will probably get about 12x a $7 number (retail trades at peak multiples on peak earnings, and trough on trough – get used to it), or a 4-bagger from here.
Warning...First person rant about to begin for McGough. The gap between what comes out of this management team's mouths on conference calls and what actually transpires in its business and audited financials could not be more disconnected.
- The company used the words 'Innovation' and 'Newness' (note, I hate that word – ask me why live) over 50 times on the call. And yet revenue was flat. Why should we believe that Donohoe can all of a sudden innovate when he's tried and flat-out failed for 4-years?
- It's re-launching Air around the Olympics. Ok thanks for that John...what's this, the tenth re-launch of a platform that was debuted in 1979? Sorry bud (not actually my bud), but that's not going to unseat the brands that stole 13 points of running market share from you in your time on the job (from 20% to 7%).
- Nike management says that it's 'pulling back' on Statement product such as Dunks and Air Force 1. Let's face some facts here, Nike isn't pulling back, the consumer is. Nike is simply responding to weaker wholesale orders and elevated discounting to keep inventory tight in its DTC business. This company will never admit a mistake, or that it's wrong.
- No mention on the call about Jordan being down. No color on Converse comping down 20%. Nike 'gaining share from 'Western and Local Brands in China'. Ok, but the market must be down massively bc the 2-year comp in China went negative and was down sequentially by 500bps.
- I have said this before, but if I could look at only one statistic for a brand to gage consumer connectivity/demand, it would be e-comm growth. This quarter digital was DOWN 4%, and 'the digital channel remains very promotional'. Can someone explain to me how the hell the one channel where Nike controls the full experience from soup to nuts is the most promotional? I just don't get it. One thing I do know is that its' product is just terrible relative to the competitive set, and the decision to go full-on DTC was one of the biggest mistakes in Nike history.
- Is it fixable? ALL of it? Yes, and yes. I'm a firm believer that any brand can be fixed – especially one as powerful as Nike – but it takes the right amount of capital in R&D and Marketing, and the $2bn in cost saves from the RIF will largely be re-channeled into those areas. DECK, ONON, and ADDYY (and Puma and UAA – though they're hardly players today) will all be in a world hurt when this business reaccelerates. But we're realistically looking 9 months out before that shows up in the numbers for NKE.