NKE: Duration, Duration, Duration

It's been a while since I've seen such a gaping hole in buy-side sentiment on Nike heading into a quarter. We all know the consensus sell-side call "taking up numbers because FX is turning positive on the margin, and SG&A cuts will pad any profit erosion from the weak business climate."  But as much as this is the uniform sell-sider view, the buy-side is in to separate ballparks. I think it's all about duration.

 

The bottom line is that this stock is locked into a trading range for the next 12-18 months at which point the market can start to see, and subsequently discount, Nike's next growth acceleration.  Until then, there will be fits and starts in the business - i.e. sales, inventories, and futures moving a few points here or there. If you want to play those fits and starts, by my guest. In fact, I'll help you do so as the market embraces and discounts information that is out of synch with economic reality. In the high $50s this thing had too much optimism in it - especially with no major swing coming our way as it relate to futures. But with a $54 stock, I'm squarely in the 'do nothing' camp into the print.

 

Here are some key things do consider.

 

Fact 1: Nike's current restructuring is definitely the right thing to do. Look back in time... Growth here is anything but slow and steady. This company grows in bursts, then resets the organization. That's what great companies do. They hurry up and evolve. The chart below says it all.

 

NKE: Duration, Duration, Duration - 6 23 2009 7 01 06 AM

 

Fact 2. We're only halfway through the current reset. Earnings at this company will not grow at a sustainable rate for another 12-18 months. Will FX help on the margin? Yes. In fact, the quarter Nike is about to report will mark the trough quarter, as evidenced by the following chart (FX weighted by Nike sales by country). 

 

NKE: Duration, Duration, Duration - NKEFX 6 09

 

Also, one can argue that the 5% headcount cut will help by around $0.20 per share - or 5%. But do you think that will REALLY flow both FX and SG&A saves through to EPS??? 

 

Anyone that thinks the answer is 'Yes' is living in a parallel dimension. In fact, if Nike did flow it through, then I'd start to question top line growth assumptions as the next leg of the story starts to rip. EVERY TIME Nike has gone on one of those blistering share-gaining runs of double digit top line growth, it has come after a prolonged period of investment. You can either bank on seeing the cost cut benefits today on the P&L, or the top line growth later. We'd need to have seen a major change in Nike's DNA to ignore the growth. Trust me...that has not happened.

 

Ok McGough... If that's the case, can we at least bank Nike delivering a knock-out punch to struggling competitors?  Unfortunately, the answer is 'No.'  I can't give a great answer as to why, other than to say that in all my years dealing with Nike, one of my few frustrations has been that the company does not take advantage of competitors being on the ropes as often as it should. It is a fierce competitor, but for some reason is content to leave a competitor on life support instead of pulling the plug. Translation = if you are going to take my comments and look for someone that will feel the pain as a result of Nike's investment rate, you're gonna have a tough time.


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