NKE: Just Doing It

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

Editor's note: Hedgeye Retail Sector Head Brian McGough just returned from Oregon where he attended Nike's analyst day. Brian has been a big Nike bull for some time and says the stock deserves its 20x+ multiple all day long. According to McGough, "Nike won't make you rich here, but it'll still make you money -- and with a very low risk profile." Here's a brief excerpt from a report he just issued. Click here for more information on how you can sign up to receive his research.

NKE: Just Doing It - pink2

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. 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.