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NKE - Flash Call Friday Morning 8:30 am ET

Takeaway: Please join us for a 'Flash Call' at 8:30 am ET where we will review our thoughts on the NKE CFO announcement.

Given the high level of interest we’re getting after this evening’s announcement from Nike about CFO Don Blair retiring, we’ll be hosting a Flash Call Friday morning at 8:30am ET to review our thoughts. We’ll have 5-10 minutes of prepared remarks, will take another 10 min of Q&A, and will be done well before nine o’clock.

 

Participant Instructions:

Dial in number:

Conference code/password: 13601867

 

02/12/15 05:39 PM EST

NKE - CFO RETIREMENT = NEGATIVE DEVELOPMENT

 

 Takeaway: This is a bad event. The business is absolutely fine – no issues there. But Blair is as good as they come. Stay away for now.

 

There’s no sugar-coating this announcement from Nike that CFO Don Blair is retiring. We’ve always said that there’s only one person we’d be worried about leaving Nike, and that is Don.  The reason is that aside from having tremendous credibility with the investment community, Don has served as a critical bridge for Mark Parker (CEO) into the world of cost management, capital deployment, and ROIC – which is key for a CEO who is otherwise (brilliantly) focused on brand, design, and the consumer. 

 

To be clear, we’re pretty certain that this is not a sign of an impending blow up. Business at Nike is fine, and he is leaving while he’s on top. In fact, to his credit, Don would absolutely not leave if the company was trending in the wrong direction – and he’ll be there until October 31 of this year. Anyone looking for a blowup during that time period will be disappointed.

 

Andy Campion is perfectly appropriate as a CFO for Nike, Inc. – but as much as people will argue that serving as CFO of the Nike Brand prepared him for this job, we’d say that there is a massive difference between being the CFO of a subsidiary (albeit a huge one) and being the outward-facing CFO of a company that's in the top 10% of the S&P 500. Even Don Blair had an extremely painful initial 2-3 years while he navigated through the confusing internal forecasting process inside Nike. The fact is that Don is one of the best CFOs that I (McGough) have known in 22 years.

 

The learning curve for his successor will be steep. And keep in mind that Don fought hard (and won) serious clout for the Finance organization in a company that is traditionally Brand and Marketing-driven. With Don no longer as the anchor, we think we’re likely to see more political tussles internally – potentially for a few years – while the new regime is established.

 

We’re taking Nike from our Long list to our ‘Bench’ until we get more comfort in organizational structure. If we were looking at an 18 multiple, we’d hang in there. But at 23x, we’d rather wait. 


NKE - CFO Retirement = Negative Development

Takeaway: This is a bad event. The business is absolutely fine – no issues there. But Blair is as good as they come. Stay away for now.

There’s no sugar-coating this announcement from Nike that CFO Don Blair is retiring. We’ve always said that there’s only one person we’d be worried about leaving Nike, and that is Don.  The reason is that aside from having tremendous credibility with the investment community, Don has served as a critical bridge for Mark Parker (CEO) into the world of cost management, capital deployment, and ROIC – which is key for a CEO who is otherwise (brilliantly) focused on brand, design, and the consumer.  

 

To be clear, we’re pretty certain that this is not a sign of an impending blow up. Business at Nike is fine, and he is leaving while he’s on top. In fact, to his credit, Don would absolutely not leave if the company was trending in the wrong direction – and he’ll be there until October 31 of this year. Anyone looking for a blowup during that time period will be disappointed.

 

Andy Campion is perfectly appropriate as a CFO for Nike, Inc. – but as much as people will argue that serving as CFO of the Nike Brand prepared him for this job, we’d say that there is a massive difference between being the CFO of a subsidiary (albeit a huge one) and being the outward-facing CFO of a company that's in the top 10% of the S&P 500. Even Don Blair had an extremely painful initial 2-3 years while he navigated through the confusing internal forecasting process inside Nike. The fact is that Don is one of the best CFOs that I (McGough) have known in 22 years.

 

The learning curve for his successor will be steep. And keep in mind that Don fought hard (and won) serious clout for the Finance organization in a company that is traditionally Brand and Marketing-driven. With Don no longer as the anchor, we think we’re likely to see more political tussles internally – potentially for a few years – while the new regime is established.

 

We’re taking Nike from our Long list to our ‘Bench’ until we get more comfort in organizational structure. If we were looking at an 18 multiple, we’d hang in there. But at 23x, we’d rather wait. 


HEDGEYE INSIGHT: Quick Take on Nike's New SNKRS App | $NKE

Editor's note: This is a complimentary research excerpt from Hedgeye retail analysts Brian McGough and Alec Richards. Click here for more information on our services for individuals.

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HEDGEYE INSIGHT: Quick Take on Nike's New SNKRS App  | $NKE - nk1

 

Takeaway: There is a lot going on with this new Nike SNKRS app. The takeaway right up front is that it makes buying shoes easier on a mobile device. That's obviously bad news for traditional retailers like Foot Locker (FL), Hibbett Sports (HIBB), Finish Line (FINL), etc. We haven't seen this type of technology before but it makes sense given Nike's push into the direct business.

 

A couple additional nuances worth mentioning…

  1. Everything purchased on the app ships for free. The free shipping threshold on nike.com sits at $75. As we were typing this it made sense to us because this is a sneaker-head app which will probably not feature any styles under the current hurdle rate, but it’s a solid piece that the marketing department can use. We think that Nike moving to free shipping across the board is a 12-18 month development.
  2. The app will curate specific styles that fit the consumers taste. That's cool, but we think the more important feature is the limited/new release notifications. Limited releases are a big driver for the likes of FL. Nike now has a way of communicating with its target consumers directly about these releases.

HEDGEYE INSIGHT: Quick Take on Nike's New SNKRS App  | $NKE - nke


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CAKE: A Troubled Concept

Takeaway: Despite strong industry trends, restaurant stocks are not immune to looming cost pressures.

CAKE delivered one of the worst prints we’ve ever seen out of them, missing top line and bottom lines estimates by 177 bps and 2025 bps, respectively.  Comps also disappointed, coming in at +1.4% vs the +1.9% consensus estimate.  After reading the press release, and seeing the massive level of margin deterioration, we didn’t think it could get much worse – and then the earnings call started. 

 

CAKE: A Troubled Concept - chart1

 

CAKE: A Troubled Concept - chart2

 

COST PRESSURES

Management’s commentary on food and labor inflation was critical on a couple of levels: 1) CAKE will be hard pressed to grow margins in 2015 and 2) this is awful news for the small and weak players in the industry. 

 

To the first point, CAKE’s food cost pressures in 2014 were widely recognized due to higher dairy and seafood prices.  But the degree to which this line de-levered over the course of the year was astounding.  Management conceded that it is considering supplementing its contracting with direct hedging, but to what extent this will help is unknown.  While many expected CAKE to be one of the largest beneficiaries of the retreat in dairy prices, beef and, to a lesser extent, chicken are expected to drive 2-3% commodity inflation in 2015.  They will have a very difficult time leveraging this line further without delivering a 2%+ comp, a feat they haven’t accomplished in over two years.

 

CAKE: A Troubled Concept - chart3

 

Labor inflation was a much less publicized issue throughout the year that the company mainly attributed to unusually high group medical claims.  This pressure, however, is expected to continue in 2015 and could be compounded by minimum wage increases in select states across the nation.  All in, management expects $10-12 million in wage inflation.  We wrote in a bearish Black Book last January that the margin story was over for CAKE and it certainly appears to be.  They haven’t driven labor leverage since 1Q13 and probably won’t anytime soon.

 

CAKE: A Troubled Concept - chart4

 

To the second point, and we’ll have more on this in a later post, the pressure CAKE is seeing is not limited to them.  If a well-established player in the casual dining industry is struggling to control these costs, what does that mean for smaller, rapidly expanding players in the industry?  They’re going to feel a bigger impact – and it’s not going to be pretty.  Minimum wages increasing and the restaurant job environment is improving.  It’s getting increasingly difficult and expensive to retain employees – an issue that, just today, Panera referred to as the “war for talent.”  In the coming days, we’ll unveil a list of companies that we believe will have a much more difficult time operating in this environment than consensus expects.  And, yes, we’d short all of them.

 

ANEMIC TRAFFIC GROWTH

“Holiday 2013 was the first in which many traditional bricks and mortar retailers experienced in-store foot traffic give way to online shopping in a major way.”

-Howard Schultz, Chairman/President/CEO/Founder

 

Howard Schultz made this remark last year on his company’s 1Q14 earnings call – and we think it’s spot on.  If it’s not, CAKE’s traffic isn’t doing much to suggest so.  Traffic declined -1.2% in 4Q14, marking the ninth consecutive quarter of negative traffic.  Management insists it’s not related to the secular decline in mall traffic but, if that’s the case, they need to prove it.  The traffic and margin decline we’re seeing suggests this company is operating a broken model and, if it’s to be fixed, it will take significant time and investment.

 

CAKE: A Troubled Concept - chart5

 

UPSHOT

CAKE guided FY15 EPS to a range of $2.08-2.20 on 1.5-2.5% comp growth, a far cry from the current $2.42 consensus estimate.  If they want to hit this range, they’ll need to deliver strong comp growth and, with limited drivers in place, we’re not sure how they do that.  Speaking to the lack of incremental leverage in the business model, management actually admitted that it needs to either develop or acquire a growth concept in order to deliver long-term EPS growth in the mid-teens.  And you probably already know how we feel about multi-concept operators.  This brand is in trouble and, if it weren’t down 10% today, we’d short it.  In fact, if it bounces meaningfully, we’d likely jump at the opportunity.

 


Cartoon of the Day: Beware the China Snail

Cartoon of the Day: Beware the China Snail  - China cartoon 02.12.2015

"Chinese GDP growth hit a 24-year low in 2014," Daryl Jones, Hedgeye Director of Research tweeted earlier today. "And you're worried about Greece?"


This May Be the Biggest (and Most Overlooked) Market Risk Right Now

The biggest risk to the market right now isn’t fundamental – it’s technical. Not technical as in chart analysis (e.g. "The technicals look bad), but rather the structural nature of the U.S. equity market.

This May Be the Biggest (and Most Overlooked) Market Risk Right Now - 56

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Specifically, one of the least discussed risks to the U.S. equity market is the $2.6 trillion in assets under management (AUM) in the ETF industry, which is now more-or-less tied with the AUM of the entire hedge fund industry. The proliferation of passive investing has accelerated demonstrably in recent years amid the confluence of three key factors:

 

  1. The secular trend of underperformance among active managers
  2. A trend of minimal variance in returns at the sector and style factor levels
  3. A trend of subdued volatility at the index level

ETFs provide their investors – which are increasingly institutional – a cheap way to passively allocate to systematic risk. That’s great for investors, but in doing so, it severely disrupts market functionality (e.g. all-time lows volume and turnover) and distorts the price discovery mechanisms at the security level (e.g. tight, but spurious correlations in “risk on” or “risk off” episodes).

 

This May Be the Biggest (and Most Overlooked) Market Risk Right Now - Russell 3000 Turnover

 

When the market goes up, no one cares. But when investors panic – as previewed in early-to-mid October – the market goes down hard and fast because investors are likely de-risking their portfolios of entire factor exposures (e.g. “U.S. equity risk”), rather than of individual names.

 

In summary, the proliferation of passive exposure to market beta likely means the buying power of investors who are prepared to defend individual names/stories is getting dwarfed, at the margins, by the selling power of those that will just want out when the tide turns.

 

It took nearly 74 weeks for the U.S. equity market to trough during the last major downturn (10/9/07 – 3/9/09). If the October 2014 draw-down was any indication of the current dire state of market pricing dynamics, a similar decline is likely to have substantially more velocity absent outright central bank intervention.

 

“Velocity” * “Volatility” = “Mass Panic”, whereby “Mass Panic” heightens the risk that investors make decisions that lead to permanent or semi-permanent capital impairment.

 

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