NKE: Working for the Right Reasons

Takeaway: The TRADE, TREND and TAIL fundamentals are converging for $NKE to offer one of the better risk-adjusted returns in retail into 2013

This is a name that is working for the right reasons. While it might not make you rich at $100 (that’s pushback we get), the reality is that the TRADE, TREND and TAIL fundamentals are converging in a way for it to offer up one of the better risk-adjusted returns in retail into 2013. Nike is currently sitting at a 20x multiple on this year’s earnings, and when we look at the catalyst calendar and setup over the next two years, we can find no reason to justify multiple degradation.   The earnings acceleration to a 20% CAGR alone should set the stage. We’re building up to $7 in earnings 2-years out, which suggests a $140 stock, or around $120 in a year.

 

Along the way, you own one of the top ten brand names in the world and the clear leader of a duopoly in a GDP plus industry. Over our TAIL duration (3 years or less) we think you will start to see the benefit of unprecedented investment today to change the landscape of this industry. Our point can best be explained in an hour long conversation (or a soon-to-be released Black Book), but the crux rests in the convergence of new manufacturing technologies, mass customization, and digital proliferation of sport and commercially available product. This might not sound new to people who know the story, but we're convinced it is underappreciated from a strategic and modeling perspective. In the end it will keep Nike’s top line alive long past when the consensus thinks it will roll over due to perceived cyclical threats.

 

TREND (3 months or more): Over our intermediate-term TREND duration, two things should happen. 1) China should continue to stabilize and turn back up within two quarters. Keep in mind that it has been one of the biggest sentiment/stock obstacles, and China is Nike’s highest-margin region by a country mile. 2) Gross margin should turn decidedly positive after lagging for two years. These factors provide a massive cushion to the extent we see any slowdown in the US – though we don’t expect to see any growth in the US below 8% for the foreseeable future.

 

TRADE (3 weeks or less): From a near-term TRADE perspective, we’ve got the positive print showing such solid execution against a backdrop of such negative sentiment, and a stock split that takes effect on Monday the 24th.  While we hate to suggest that the latter helps, but it arguably helps the sentiment around accessibility to a retail investor over the near-term. The immediate-term SIGMA set-up is solid.

 

NKE: Working for the Right Reasons - 12 20 2012 9 37 35 PM

 

As for the quarter, here are some of the puts and takes…

  • The 2-year growth rate for US footwear is the highest in the history. The number ‘should have rolled’ according to the consensus. But it accelerated. Some will say that we’re just kicking the can down the road until revenue eventually decelerates. We call it execution. As a sidenote, Nike’s US footwear business alone grew in the quarter by nearly 3x the size of the entire revenue number UA printed for footwear in 3Q
  • US margins were up 272bps. Close outs are down and inventories are clean.
  • We like the blend of pricing vs ASP for footwear -- +3% and +4% respectively.
  • Comp store sales grew 18%. ‘Nuff said.
  • Running and hoops were both up over 20%. That’s solid. But women and action sports were down – that’s not what we want  to see as these are barometers for future growth. Yellow flag that one.
  • China revenue was -11% as the company continues to clean up its self inflicted black eye. While they continue to boast about how they can fix China because they’ve been in this position before, we’d ask “how did you get in this spot given that you’ve been here before? Nonetheless, futures in China at down half the rate of the revenue decline, which supports the trajectory that management suggests the business is on. Margins in China remain weak, but that’s a relative term given that they’re still clocking in at 32%.
  • In what might be a validation of the apocalyptic end of the Mayan calendar, Japan put up the highest 2-year growth rate in 13 quarters.
  • We do not, I repeat DO NOT, like the fact that Emerging Markets futures are only up 7%. That’s the sixth consecutive quarterly decline. Last we checked, Emerging Markets are supposed to grow. EM represents 14% of the company, and an greater proportion of its future. This is not a thesis killer for us, but is one of the issues we need more comfort with.

Overall, there will always be parts of a portfolio that need work. We think that when everything nets out with where Nike is today, it is a great place to be.


Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more