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NKE: ...for all the right reasons.

Crusher quarter from the Nikester – ironically on one of the worst market days in a decade.


We were at $1.30 vs. the Street at $1.21 – and Nike’s $1.36 came in spot-on with our EBIT forecast, with a (sustainable) lower tax rate and shares outstanding making up the difference. Revenue was slightly stronger, offset by slightly higher SG&A – but that’s splitting hairs.


What we like is that revenue strength -- +17% (+13% constant currency) – came from the broadest cross section we can recall seeing in a while. Virtually all regions, both genders, and all key product categories performed extremely well. Recall that the crux of our Black Book (Nike: Lead, Follow, or Get Out of the Way) revolved around the company’s investments in recent years paying off in far greater magnitude and duration than is currently perceived to be the case. Women, Apparel and Retail all stepped up their game, which was also key to our call.


All things considered, the quarter – while outstanding – was right in line with our expectation.


A couple of points…

  1. Growth: We took our estimate – which was already $0.40 above the Street for the year at $5.20 – to $5.34. Next year we’re at $6.72, and then $7.87 for FY14. In the end we’re looking for 22% CAGR in earnings growth for the next three years. That’s tough to find for a $40bn market cap company.
  2. Irony: Six months ago, investors freaked out when NKE issued its downbeat gross margin forecast for 4Q11 and 1Q12 (both of which have been reported) and basically took rolled their EPS estimates back by a full year. Now, they’re rolling forward by a year. And guess what? They’ll still be too low…
  3. Repo: We’re liking the repo trend at Nike. This is the second consecutive quarter where shares outstanding were down 1% sequentially. Keep in mind that one of the greatest risks with Nike is the widening of the spread between RNOA and ROE (high class problem). They’ve been managing that better over the past few quarters through returning cash to shareholders than we’ve seen in a while.
  4. Basketball: By the fourth question in Q&A about a potential NBA strike, I was downright bummed that so much of management’s real estate was wasted on this topic by the sell side.  Consider this…
    1. Don’t look at Nike as the big loser in the event of a strike. That distinction belongs to VFC (major NBA licensee – Jerseys, etc…) and Genesco (Hat World, Lids). Nike does not sell officially sanctioned NBA product.
    2. True, basketball is a big business for Nike. It accounts for 44% of US footwear sales (running = 30%, Casual = 15%, training = 5%). But, and this is a BIG but, only 15% of basketball sales are seasonal. What does that mean? If you straight- line category sales over the course of the year at levels experienced in the off-season, and then looked at the incremental gain in-season. That amounts to about $750mm in annual revs on Nike’s base of $24bn.
    3. Of that $750bn, don’t think for a minute that it’s all a risk. With players not on the court, you can rest assured that they’ll be on the road supporting Nike marketing campaigns around basketball. Remember, they won’t be getting paid to play, so instead they’ll be getting paid to sell.  
    4. As for the basketball business outside the US – its less than half the proportion of total sales than it is here in the US. Do you think that people in Eastern Europe or China care if there’s an NBA season? Some probably do, but not likely to put a big dent in the business. Also keep in mind that basketball futures are up dd, and the buyers at retail placed those orders knowing full well that a strike is looming.
    5. Bottom line – I’m not worried.


NKE: ...for all the right reasons. - 9 22 2011 9 29 49 PM


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Cliff Notes From Our Eurozone Call

Earlier today, my colleagues and I hosted a call on the outlook for the Eurozone.  The replay is worth your time when you get a few minutes, but I wanted to flag two of the most critical components of the presentation, which were the slides that outlined the exposure of the German and French banks to the PIIGS.


I’ve posted them below, but they are worth printing off and taking into the next investment team meeting at your firm.  This is the crux of Europe.  Even the strong economies are only as strong as their banks.


To wit: 

  • German banks have €69.7 billion in capital and have a combined €523 billion in PIIGS exposure (non-bank private sector, banks, and sovereigns); and
  • French banks have €134 billion in capital and have a combined €671 billion in PIIGS exposure (non-bank private sector, banks, and sovereigns). 

The interconnected web of European debt and monetary policy is going to be a behemoth to untangle.


As Milton Friedman wrote in 1999:


“Once the euro physically replaces the separate currencies, how in the world do you get out? It’s a major crisis.”


We are long the U.S. dollar in the Virtual Portfolio via the etf UUP.


Daryl G. Jones

Director of Research 


Cliff Notes From Our Eurozone Call - 1


Cliff Notes From Our Eurozone Call - 2





Today, Daryl Jones (DOR), Keith McCullough (CEO), and Josh Steiner (Managing Director - Financials) teamed up to deliver an insightful and hopefully prescient presentation on the emerging European banking crisis. More than just a timely update to our Sovereign Debt Dichotomy theme, we take a deep dive into the European financial sector's liabilities and counterparty risk from a bottom-up perspective. Moreover, we walk through six probable scenario analyses for crisis resolution, in addition to providing our updated risk management views on several key asset classes.


To listen to the replay podcast of this call, please copy/paste the following link into the URL of your browser:



To download the presentation slides, please click on the following link:



As always, we're available to follow up with you should you have any questions. Please email or sales@hedgeye.com with inquiries.



In 1993, the Maastricht Treaty established the European Union and the path towards a monetary union and common currency in Europe.


On this path, the euro was launched in 1999 and has been a particular catalyst for criticism. Most notably, Nobel Laureate Milton Friedman stated in 1999 that he did not believe the euro would last ten years.


In contrast to Friedman's prognostication, the euro has lasted more than ten years, but just barely. In fact, many global markets are currently implying that Europe's monetary union and common currency are on the precipice of collapse.


Today Thursday, September 22nd, 2011, Hedgeye will be hosting a conference call to discuss the future of the Eurozone and the implications for global markets. The call will focus specifically on three topics: 

  1. Review of the history and structure of the Eurozone
  2. Assessment of the current situation and imminent risks and opportunities
  3. Analysis of potential and realistic scenarios to solve the crisis in Europe 

Please contact if you have any questions.  



The Macro Team

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