Conclusion: NKE's growth algorithm, return profile, widening gap in category dominance, and astounding product pipe are all near impossible to match. Simply put, it deserves its 20x+ multiple all day. This stock won't make you rich here, but it'll still make you money -- and with a very low risk profile. Here are some of our key takeaways from the company's analyst meeting.
- Focus: There were no startling revelations at the Nike analyst meeting (as we expected). But the focus and cohesiveness of the new management team was exceptional.
- A cliché worth repeating. The company remains maniacal in its quest to innovate. That sounds like a cliché when talking about Nike, because it’s all management from the CEO on down ever talks about. But in evaluating the product pipeline, it’s abundantly clear that literally no one can compete effectively with Nike without a painful outsized capital outlay.
- The biggest area that surprised me was with its Women’s product. Apparel, in particular, has taken a major leap forward. Nike has LULU right in its crosshairs. That’s not say Nike will beat LULU (quite frankly, we’re not sure it ever will) – but it’s finally got a formula that could compete. Very important because only 16% of sales are women. Goal in 3-years is 23%.
- FINALLY. Nike finally discussed a key initiative we’ve been talking about for two years – the ability to manufacture customized product (by color and size) at point of sale. Think about it – the model for footwear makers over the past 4 decades has been to design product in the US, and then to outsource to Asia – the entire process taking nine months at the earliest. Now, they’re introducing the capability for a consumer to walk into a store and build their own shoe at a kiosk. They’ve had that capability through NikeID at their own stores for a while. But those orders still go to one of its 700 third-party plants in Asia to be processed. Now the product is being manufactured right there…on the spot. So basically, a consumer could go into the store, build a shoe electronically, then go to Chick-fil-A for a bite to eat, and return an hour later and their shiny new kicks will be waiting. This is an absolute game changer, and it’s one that no other brands have the scale to compete with. Sound expensive for Nike? Ask yourself this…what retailer on the planet would not give their left arm to have one of these Nike kiosks/mini-manufacturing hubs in their stores? It’s be a big competitive advantage, and one that we think would lead the Foot Locker’s of the world to lay out the capital needed on their own balance sheet. Nike only allocated 90 seconds to this at their meeting. It was worthy of a full hour. We think that people will grossly underestimate the importance of this initiative (no one even asked any questions on it).
- Finally using digital data for commercial purposes: Another bit of food for thought. For years now, Nike has been collecting data through its Nike+ digital initiative, Nike Fuelband, and Nike Training Club (iPhone/Pad app). It appears that the company is finally reverse engineering the data in a way to both create and improve and of course innovate product. It’s almost like how Wal-Mart uses RFID to learn the shopping patterns of its shoppers. Nike is finally harnessing all the data it collects and is turning into commercial opportunity.
- Nike is expensive, and it should be. While we wish there was a bit more controversy on the name, the reality is that it is executing so well that it’s tough to poke holes in its growth algorithm and business visibility. CFO Don Blair noted that its goal is to generate returns in the upper quartile of the S&P. That goal to us seems modest. With 9-10% top line growth, 30bp-50bp in gross margin improvement each year as Nike builds its Direct model, better than 25% ROIC, and all the capital it needs ($5bn) to return shareholders – it’s safe to say that not many companies (in the S&P, Dow, or the whole market for that matter) could match Nike’s growth algorithm, category dominance, stability in growth, and return profile. Simply put, it deserves its 20x+ multiple all day. This stock won't make you rich, but It'll make you money -- with a low risk profile.