If there’s one company where I overwhelmingly get barraged with requests about my expectations into the quarter, it is Nike. (Note, over half of those come from investors that are not clients, so they do not get any form of response). This quarter, more than any I’ve seen in a while, is unique for Nike in that I really don’t think that the fundamentals matter a whole heck of a lot. Consider this…
Nike has not missed in 23 quarters – soooo good at managing expectations. I’d argue that it is the organization and incentive structure that does a good job in managing Senior management’s expectations rather than Sr Mgmt sandbagging.
Nonetheless…Nike also gives no EPS guidance, but usually gives enough pieces of the puzzle when it has visibility on its numbers. Not this time. The standard deviation in Nike’s quarterly estimates has been heading steadily higher (perhaps explained by the mayhem on Wall Street, but Nike’s trend is far higher than other companies) and this q is no exception.
But what I am often asked is “will the company preannounce if it is meaningfully off of the Street?” I usually have one answer, which is “Absolutely not.” But this time I’ll give the following answer… “They already did!” Whether it takes the shape of a miss, or a guide down I do not know. But when Nike came out and announced its restructuring and 1,400 person headcount cut, that was the company’s way of telling the organization, its customers, and The Street, that things have taken a dramatic turn. Anticipation of this is what kept me on the other side of this fundamentally and Keith short the stock several times from $65 down to the low $40s.
But the factor here that people are not baking in to the model is that this event will serve as Nike’s ‘get out of jail free’ card. It’s gotten to a point where it no longer beats on top line, FX, and Gross Margin, but will be relying on SG&A, FX hedges and maybe a lower tax rate.
If you were a CFO, and the rate at which your regional CFOs are beating plan is slowing (and starting to miss), you’re hearing really weak anecdotes are flowing in from the channel -- including bankruptcies, the rate at which you are growing organically is about to slow, FX is no longer your friend (see below), earnings visibility is not what it once was, and together with your CEO and Board the company recently announced a restructuring…what would you do? Most people would ensure that they’re investing in all the right initiatives today, that accruals are clean and appropriate, and that expectations are reset by the time we ultimately head out of this Great Recession.
Make no mistake -- I think Nike is proactively handling this situation, which is part of what makes it great. But it still does not help earnings for investors with a short duration.