NKE: I'd Hate to Have to Compete With This Model

Takeaway: NKE's growth algorithm, return profile, widening gap in category dominance, and astounding product pipe are all near impossible to match.

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.

  1. 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.
  2. 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.
  3. 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%.
  4. 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).
  5. 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.  
  6. 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.



TODAY’S S&P 500 SET-UP – October 10, 2013

As we look at today's setup for the S&P 500, the range is 28 points or 0.33% downside to 1651 and 1.36% upside to 1679.                          













  • YIELD CURVE: 2.35 from 2.31
  • VIX closed at 19.6 1 day percent change of -3.64%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Bank of England seen maintaining 0.50% bank rate
  • 7:45am: BoJ’s Kuroda speaks at Council on Foreign Relations
  • 8:30am: Initial Jobless Claims, Oct. 5, est. 310k (prior 308k)
  • 9:45am: Bloomberg Consumer Comfort, Oct. 6 (prior -29.4)
  • 9:45am: Fed’s Bullard speaks on monetary policy in St. Louis
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Fed to purchase $1b-$1.5b TIPS in 2018-2043 sector
  • 12:20pm: ECB’s Draghi speaks in New York
  • 1pm: U.S. to sell $13b 30Y bonds in re-opening
  • 1:45pm: Fed’s Tarullo speaks on regulatory reform in D.C.
  • 2:30pm: Fed’s Williams speaks on economy in Boise, Idaho


    • Sec. of State John Kerry in Bandar Seri Begawan, Brunei, for U.S.-ASEAN Summit and East Asia Summit; leaves for Malaysia to meet officials, attend Global Entrepreneurship Summit
    • 8am: Treasury Sec. Jack Lew testifies at Senate Finance Committee on debt limit
    • 8:45am: World Bank President Jim Yong Kim holds press briefing
    • 9:30am: IMF M.D. Christine Lagarde speaks to press
    • 10am: Senate Banking, Housing and Urban Affairs Committee holds hearing on consequences of default on financial stability, economic growth, with American Bankers Association CEO Frank Keating, Sifma present Kenneth Bentsen Jr.
    • 1pm: House Natural Resources panel holds hearing on EPA and mining jobs


  • Sept. U.S. same-store sales seen slowing from Aug.
  • Debt-limit prospects gain as both sides open to short-term deal
  • Hong Kong raises haircut on U.S. bills for margin cover
  • Samsung set for $1.4b windfall after Seagate stock sale
  • Microsoft’s board said to work on hiring new CEO this year
  • Jarden’s Franklin close to buying MacDermid to add chemicals
  • Blackstone receives first-round bids for La Quinta: WSJ
  • KKR to pay $1b for industrial-products makers Crosby, Acco
  • Manhattan apartment rents fall for the first time in 2 years
  • ECB agrees to bilateral currency swap agreement with PBOC
  • Telecom Italia is said to value Brazil stake at $12b
  • Libyan PM seized from hotel by revolutionary group in Tripoli


    • Angiodynamics (ANGO) 4:01pm, $0.03
    • Bank of the Ozarks (OZRK) 6pm, $0.60
    • Blackhawk Network (HAWK) 9am, $0.05
    • E2Open (EOPN) 4:05pm, $(0.15)
    • iGATE (IGTE) 6:45am, $0.43
    • Lindsay (LNN) 7am, $0.91
    • Marriott Vacations Worldwide (VAC) 8am, $0.39
    • Micron Technology (MU) 4:04pm, $0.23 - Preview
    • Safeway (SWY) Aft-mkt, $0.16 – Preview


  • Brent Crude Rises as Libya Prime Minister Freed From Detention
  • Soybean Reserves Reach Record as Goldman Sees Slump: Commodities
  • Cocoa Reaches 21-Month High on Demand Indications; Robusta Rises
  • Copper Rises on Speculation U.S. Will Avoid Defaulting on Debt
  • Gold Falls as Investors Weigh Prospects for Debt Deal, Tapering
  • Tin Membership Increases at ICDX as Indonesia Targets Benchmark
  • Gold Seen Lower by Morgan Stanley in 2014 as Goldman Says Sell
  • Soybeans Climb on Supply Outlook Before South American Harvests
  • Japan Buys Least Milling Wheat in 3 Months in Regular Tender
  • Refiner Gains in Asia to Rebound as Units Shut: Energy Markets
  • Cold European Winter Could Create Energy Crisis, Cap Gemini Says
  • Costlier CO2 Permits Boost Long-Term EU Gas Demand: Bull Case
  • Apple to Toyota Seen Gaining From Thailand’s Upgrade: Freight
  • Rebar Rises on Bets Chinese Economic Growth to Support Demand


























The Hedgeye Macro Team














investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Fatal Fear

“Failure is not fatal, but failure to change might be.”

-John Wooden


As I was walking from one client meeting to another yesterday in Boston, I think I changed my US stock market view at least 3 times. Government sponsored volatility does that to a simple “folk” like me. Isn’t it cool?


What isn’t cool is not changing your mind. Especially when the causal factor that is driving the market’s immediate-term volatility is either Congress or the Fed, the best plan is usually accepting that the plan is going to change.


Does Big Government Intervention in your markets A) shorten economic cycles and B) amplify market volatility? In our Q413 Global Macro Themes call tomorrow at 11AM EST, we’ll show you the trivial data that answers that question. #OldWall media “Fed” story count vs Volatility (VIX) has a positive correlation that will make Bernanke’s “price stability” fans cry.


Back to the Global Macro Grind


There’s no crying in risk management. So strap it on and keep moving out there. After watching this government gong show and changing my mind throughout the day, I ultimately opted to hit the buy/cover buttons into yesterday’s closing bell.


In other words, this is the first morning since Bernanke decided not to taper (September 18th) that I’ll be telling clients to buy-the-damn-dip. Unlike how I used to play this game (emotionally), this is purely a quantitative signal.


Other than salvation sent down to us from our overlords from upon high in D.C. (who will be saving us from themselves again), what’s changing this morning?

  1. US DOLLAR Index just v-bottomed off its long-term TAIL line of @Hedgeye $79.21 support
  2. US Equity Volatility (VIX) can easily snap @Hedgeye TREND support of 18.98
  3. US Equities (SP500) can easily recapture 1663 @Hedgeye TREND support of 1663

Yep, that’s about it. That (and US 10yr Treasury Yield holding @Hedgeye TREND support of 2.58%) is just about all this “ordinary folk” needs to see. Fading the false premise of a US “default” just puts a contrarian cherry on top.


But what shall I do if consensus sells the open and the VIX holds 18.98?

  1. I’ll sell

Nope, it’s not any more complicated than that. Remember, I’m just a paper trader newsletter guy who has to keep it simple as Zero Edge sells you some fear and Gold ads (gold nailed Fading Fear again btw - ZeroBid).


Context is always critical when making both asset allocation and net positioning decisions (I started the week net short). Don’t forget that buying US stocks here comes on the heels of a very basic pattern:


1.       Dollar Down

2.       Rates Down

3.       Stocks Down


Oh, and volatility (VIX) up +70% from its August low.


Government sponsored volatility crushes confidence. US stocks have been down for 11 of the last 15 days on that and the only “UP” days have come on moves like you are seeing this morning:

  1. Dollar Up (+1% in the last 48hrs)
  2. Rates Up (10yr Yield +10bps from the OCT low to 2.69%)
  3. Stocks Up (TBD from the 1-month closing low of 1655 SPY)

Again, “keep it simple stupid.” That’s what my old hockey coach used to tell me when I’d try the howdy doody on a defenseman (I had really bad moves) instead of just driving to the net and firing the puck.


“Again!” –Herb Brooks


I’m definitely not saying “this is it!” Only people that don’t timestamp would say something ridiculous like that. All I am saying is that after a 4% correction from the all-time US stock market high (1725 SP500), the reward in buying stocks is in its highest probability position (versus the risk) in 3 weeks. SP500 has +23 handles of immediate-term upside to 1679 versus 1651 support.


And that’s all I have to say about that.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.61-2.71%



VIX 17.65-20.98

USD 79.79-80.81

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fatal Fear - Fed vs. VIX


Fatal Fear - Virtual Portfolio

Conference Call With CEO of Meritage Hospitality

What's On The Menu For Wendy's Future?

Conference Call With CEO of Meritage Hospitality


Monday, October 14th at 11:00am EDT  

For details please email



The Hedgeye Restaurants Team, led by Howard Penney, will be  will be hosting a call with the CEO of Meritage Hospitality, Bob Schermer, to talk about the current trends in the QSR segment of the restaurant industry and trends in the Wendy's brand. 

The call titled "What's On The Menu For Wendy's Future?" will be held on Monday, October 14th at 11:00am EDT.




  • Image Activation and its Impact on the Wendy's System - Highlighting the good, the bad and the ugly from a franchisee perspective.
  • New Products - The Company has hit a well known home run with the Pretzel Bacon Cheeseburger (and now Pretzel Pub Chicken Sandwich).  But how good is good? And what is next?
  • Breakfast - Why did the Wendy's system have so much trouble launching breakfast?




Meritage is playing a meaningful role in helping to reshape the Wendy's system.  Currently, the Wendy's restaurant system is entering a once-in-a-generation transition as many of the original "legacy franchisees," now at an average age of 62 years old, are beginning to retire from the system. Wendy's management calls this process "system optimization." The net result of "system optimization" will be fewer franchisees, operating larger restaurant portfolios at higher levels of sophistication.


Meritage has made commitments to complete Wendy's Tier II and Tier III "image activation" restaurants in 2013.  As a result, Meritage has an "in the trenches" understanding of the image activation construction cost variables to measure the incremental return on investment.




Please email or call to learn more about the event. Attendance is limited. Please note if you are not a current client of our Restaurants research there will be a fee associated with this call.




Howard Penney

Managing Director



Takeaway: This whole mess likely gets resolved with a whimper rather than a bang.

Editor's note: In the interview below, Hedgeye Global Macro Head Daryl Jones clarifies much of the nonsense, half-baked truths and distortion surrounding fears that the United States is on the cusp of a catastrophic default.Click here to watch a brief default discussion between Jones and Hedgeye CEO Keith McCullough on HedgeyeTV.




Is the United States going to default on its debt?


The U.S. government bond market is signaling explicitly that the United States is not going to default.  Specifically, the credit default swap (CDS) market, while slightly elevated over the last couple weeks, remains well below a level that would indicate a credit event is imminent. 


Further, even if Congress did not extend the debt ceiling, both the Treasury Department and President have options to continue servicing U.S. debt.  Ironically, the deficit-to-GDP has narrowed from more than 10% to just under 4% in the last three years, which implies that U.S. is getting more, not less, creditworthy.


So why has the Obama Administration been peddling this “catastrophe” narrative?


The Obama administration wants to portray the Republicans in Congress as reckless in order to win the day on the Affordable Care Act.  The best way to do this is via fear mongering and scaring the voting public into believing that Republicans are willing to risk the economy in order to win an ideological argument. 


What is your thought on media coverage of this whole saga?


The media coverage, no surprise, is lacking in any context or analytics.  As a result, according to a recent poll from Rasmussen, more than 62% of Americans think the U.S. is likely to default on its debt.  The media coverage is shameful in that it is perpetuating a very, very unlikely scenario and thus scaring participants in the real economy and, frankly, hurting consumer confidence.


What’s your best guess on how this whole thing gets resolved?


This whole mess likely gets resolved with a whimper rather than a bang. 


Both parties realize that risking a default is not a practical negotiating tactic, so therefore will come to the table and negotiate a compromise.  It is likely that Obamacare remains largely intact and that the Republicans get some reduction in spending and/or tax reform to further bolster fiscal responsibility.  

Early Look

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