prev

NKE | #GOAT

Takeaway: Here's a graphical overview as to why we think this quarter is Nike's Greatest Of All Time.

We welcome anyone to challenge our statement that this is the best and most impressive quarter in Nike’s 35 years as a public company. Our rationale is below. But whenever any company’s performance is so mind numbing – both on an absolute basis and relative to expectations – one has to wonder if there’s room to go. Is this the time to peel some off, or sell outright? The stock closed Thursday at a $99.2bn market cap. It flirted with $100bn only twice before. But Friday it will hit the triple digits, and the question is whether it will fall below $100bn ever again. We’re going to answer that question in depth when we release our Nike Black Book on October 12th (two days before the analyst meeting). But our initial sense is that the best is yet to come.

 

Interestingly enough, the only negative in the quarter was a high level of inventories in the US. This will be nothing more than a hiccup for Nike, but it should absolutely slow growth, or impact margins for Retailers like Foot Locker and Hibbett, two of our top shorts.

 

Here’s why we think this quarter is Nike’s #GOAT… (note: not all of these factors are at historical peaks, but collectively, they paint a GOAT picture).

 

1) Growth Algorithm.  5% top line, 7% gross profit, 17% EBIT, and 24% EPS growth. It’s tough to ask for more from a $33bn revenue company. Moreover, check out the chart below which shows that directionally, the company had a nearly identical Algorithm five quarters in a row. The number 5 is very important, because it ‘comped the comp’. There’s nothing stopping it from getting to 6, 7 or 8.
NKE | #GOAT - NKE 9 24 chart1

 

2) EBIT Growth. Despite only 5% revenue growth, this was the second largest EBIT growth quarter in Nike history as measured in incremental dollars – something that should technically not be happening in the heart of a down-cycle in FX.

NKE | #GOAT - NKE 9 24 chart2

 

3) Pure Unadulturated Growth. Seriously…this company just put up a 17% (currency neutral) futures number. We’ve only seen that once before over the past 10 years, and that includes a time period (’05) that had $20bn less in revenue. Growth should be slowing, but someone forgot to send Nike that memo.

NKE | #GOAT - NKE 9 24 chart3

 

4) Let’s put this growth into context. First off, nearly every geography and most categories are growing double digits – all at the same time. The only real negative callout is Emerging Markets. This has been a gripe for us over the past year. Last we checked, Emerging Markets are supposed to ‘emerge’ as opposed to grow at half the rate of mature markets like the UK and US. Every sport is up for Nike except for Football due to a hangover from World Cup last year (we’ll give a pass on that one).  If we look at the implied dollar value growth over the upcoming futures window, that’s about $2.6bn. If you annualize it, it is the size of UnderArmour and AdiBok’s US business combined.

NKE | #GOAT - NKE 9 24 chart4

 

5) Currency Immune? Nope. The chart below shows that revenue is doing exactly what it should be doing given FX pressure. But EBIT is not. We still think it’s amazing that nobody questions why gross margins are positive despite the negative hit in FX. In every single past FX downcycle back to the time it started to sell outside the US in earnest (circa 1990), Nike’s margins got hit dramatically due to FX transaction impact. Did the company acquire a black box to hedge better? No. Is it making more product locally? No (though that should soon happen).  The stark reality is that the massive growth ramp in e-commerce is materially padding margins – much more so than the company casually admits on the conference calls.  Consider the following math. If we assume that e-comm and DTC growth (which grew at 46% and 21%, respectively in the quarter) was in line with the company average at 5%. With implied margins at e-comm of 70% and DTC of 50% that means that the base business was down 38bps in the quarter with outsized DTC growth driving 125bps of the margin change.

NKE | #GOAT - NKE 9 24 chart5B

 

6) RNOA Looks Solid. While not perfect, due to higher inventory levels, the overall trajectory of RNOA is outstanding – sitting at 42%. As a reminder, this analysis looks at the only two things that consistently drive value creation for consumer brands and retailers – 1) tax adjusted operating margins x 2) operating asset turns. A company can usually improve any one of those in any period, but can rarely improve both at the same time.  Nike is better than any company we’ve ever seen in driving value in this regard.

NKE | #GOAT - NKE 9 24 chart6B

NKE | #GOAT - NKE 9 24 chart7

 

 

 

NKE | New NIKE Black Book

 

Takeaway: We’re issuing a detailed Black Book on Nike just ahead of its Oct 14 Investor Day, and will dive deep into all the key issues as we see ‘em.

 

There’s going to be several key areas of focus for Nike in the three weeks between NKE’s print this evening, and it’s Analyst meeting on October 14th. As such, we’ll tackle them prior to the analyst event in a deep dive Black Book and presentation on Monday, October 12th at 1:00pm ET.  Key issues include…

 

1) Global growth algorithm – how will today’s building blocks be different in 1, 3 and 5 years.

2) US Distribution -- how much runway exists for Nike to profitably grow in the US.

3) ASP Cycle -- Where are we, what keeps it going higher, and where’s the downside risk.

4) e-commerce – why Nike sandbagged on its targets, and will sandbag again.

5) GM%: Why a 50%+ Gross Margin is achievable for Nike

6) China: How weakness in the Chinese economy could affect Nike’s growth

7) Athlete Endorsements – we’ll look at returns on athletes, which are largely diminishing

8) Competitive Landscape – especially in the US. Also how customers are becoming competitors

9) Investor Meeting: How this analyst meeting should be different from others.

 

Call details will be provided one week prior to the call.


PIR | Another Long Walk On A Short PIR

Takeaway: At $8 PIR is trading at 6.5x p/e, 0.4x sales, and 3.5x EBITDA on 2018 #s. We’re willing to stomach the near-term pain with numbers like that

If everyone wants to get bent out of shape on a 2% top line miss for a company that’s been struggling for the better part of 3-years, then they can be our guest. With a beaten-up value stock/show-me story like PIR, we need to see it go, in order, through the four critical stages of retail recovery. Those are 1) capex cut, 2) working capital improvement, after which we can begin to see 3) margin improvement, which will, in turn fuel 4) revenue growth. A company like this can’t go straight from “will it stay in business?” to “accelerated top line growth”. That’s simply not how the retail world works. The company’s capex will be down by 27% this year, we just saw a 16 percentage point positive swing in its sales to inventory spread (see SIGMA below), and that sets up for meaningful margin recovery in FY17 (which starts in four months).  Along the way, we’re still seeing a comp of 2-3%, which ain’t half bad. We still think a year from now people will be looking at $1.25 as very realistic and achievable earnings power for PIR. That implies that at $8 the stock is trading at 6.5x earnings, 0.4x sales, and 3.5x EBITDA. We’re willing to stomach the near-term pain on this one with numbers like that. On the way back up, it’s not unrealistic at all to get to a stock well above $20 if our numbers are right.

 

PIR | Another Long Walk On A Short PIR - PIR SIGMA

 

More Details on the Quarter

  • A $0.03 miss in a seasonally weak quarter -- 180bps on the comp line, and merch margins down 380bps. As expected, new CFO Jeff Boyer took down this year’s EPS number by 30% to a range of $0.56-$0.64 as he more than took his lumps (and set beatable targets, we think) in his first call with the company.
  • But for a print as hairy as the one PIR reported tonight, we think the long term margin and earnings story is intact as earnings growth bottoms out at -62% and reaccelerates into positive territory in FY17. Over the past 2 quarters alone the company has had to stomach $22mm+ in added gross margin pressure (about 260bps) with more to come in 2H. That’s on top of the 500bps of margin that have evaporated over the past two years as PIR took its e-commerce business from 0% to 17%.
  • The sales to inventory spread improved by 16 percentage point from the first quarter and marked the best SIGMA reading we’ve seen since 3Q14. Inventory and store distribution will still be an issue for the balance of the year. But, the -10% inventory growth guidance (after the sequential change we saw this quarter) and the commentary surrounding the possibility of DC sq. ft. rationalization is bullish from where we sit.

  

09/24/15 09:21 AM EDT

PIR | LONG WALK ON A SHORT PIR

 

Takeaway: This is a great name to buy on an ugly print. Ugly qtr, but financial recovery finally within reach.

 

We’re not expecting a whole lot of positive news from PIR’s 2Q print (today after the close). EPS is a moving target, and guidance will be light. But when all is said and done we think that the results will show that the financial and operational inflection point for this beaten-down value stock is finally within reach. Are we concerned about a headline miss later today? Yes. We were well aware of these concerns when we added PIR to our Best Ideas list on August 31. Furthermore, we have yet to talk to anyone about this name that is not expecting an ugly quarter. Several analyst notes have already come out calling for a miss, and on top of that, short interest has raced up to 16% of the float – a four-year peak. We think they’ll ultimately be proved wrong.

 

PIR | Another Long Walk On A Short PIR - PIR shortinterest

 

A key consideration is that CFO Jeff Boyer will handle guidance for the first time after joining the company in late July. It’s not entirely clear how he will handle guidance…but we can’t imagine that he’ll want high targets his first year on the job. We’ve heard this concern from bears as well “new CFO will lower the bar”. Maybe we’d be concerned if the stock was up 20% over the past quarter, but we’re looking at quite the opposite – a 26% decline since the last earnings report in mid-June, and 12% over the past month.  So will guidance be lower? Probably. But it’s very important to note that Boyer is likely to lower because he wants to, not out of necessity.

 

Why We Like It – PIR is a beaten-up, ugly value stock…there’s no two ways about it. But with the stock trading at just 0.5x sales – a level it hasn’t sustained in six years -- we think there are two primary questions to ask. 1) Are we going into a major recession? and 2) Is management going to do anything more destructive that would otherwise emulate a major recession? If you answer ‘No’ to both of those questions, then we think it’s a very good risk/reward to buy the stock with $3-$4 down and $20 upside.

 

Our Answers:

1) We have some major questions marks as it relates to the economy, but we’re not calling for an all-out recession.

 

2) This is a company that is no stranger to execution issues, but we don’t think that management is about to do anything more that would cause a downturn in the business (especially w/ new CFO taking the seat in late July). Quite the opposite, in fact. Consider this…

  • Over the past three years, PIR gave up 5 points of margin as it played catch-up with its e-commerce business, which stood at only 1% of sales in 2013. Today it is pushing 17%. E-comm will continue to be a headwind as it grows to the mid-30s (about 130bps of dilution over 4 years), but the combination of merch margin recovery and store base rationalization should more than offset the dilution. We think that ~300bps of the margin recoverable.
  • Interestingly enough, in our survey in this report, PIR’s categories ranked as the ones where consumers are most apt to switch sales online. If there is any company that should have invested in e-comm, it is PIR.
  • We’ve had three straight years of elevated capex as the company built out e-comm capabilities. That rolls off this year, with asset consolidation (closing stores) and multi-year margin tailwinds takes RNOA from trough levels at 19% in FY16E to 31% by 2020. That’s a long tail, but even the slightest sign that we’ve found the bottom should make this stock rally.

Listen to Guys Like CNBC’s Steve Liesman At Your Own Peril

In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough calls out CNBC economics reporter Steve Liesman for his consistently flawed economic analysis, including his Pollyannaish assessment of this morning’s lousy U.S. durable goods report.

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

Subscribe to Hedgeye on YouTube for all of our free video content.

 


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Cartoon of the Day: A Japanese Unicorn!

Cartoon of the Day: A Japanese Unicorn! - Abenomics unicorn cartoon 09.24.2015

 

Brief excerpt from this morning's Early Look by Hedgeye CEO Keith McCullough:

 

“So,” since 90 TRILLION Yen in money printing + the 3 arrows of “Abenomics” isn’t working, what did the Japanese announce overnight? “Three More Arrows”!

 

I seriously couldn’t make that up if I tried. And if a spend more than another sentence on what the 3 “new” policies are, today’s note is going to turn into a joke (1. “Stronger Economy” 2. “Welfare” and 3. “nominal GDP target of 600T Yen”).

 

Best of luck with that, dudes.

 


INITIAL JOBLESS CLAIMS | CONVERGENCE CONTINUES

Takeaway: Post-holiday claims reflect ongoing strength in separations while the rate of improvement remains consistent with the late cycle environment

LATE CYCLE STRENGTH AND CONVERGENCE TO ZERO:  While durable goods, business investment, net exports and goods inflation remain in discrete deceleration alongside the retreat in global growth, the domestic labor market continues to tread a path of late-cycle improvement. 

 

As we’ve highlighted, Initial Jobless Claims have been the most consistent, lead labor market indicator for the economic cycle with peak improvement occurring ~7 months ahead of the economic cycle peak and coincident with or slightly ahead of the equity market peak.  

 

As it stands, rolling claims peaked 7-wks ago and while +267K in the latest week remains strong (and largely free of holiday related noise), from a rate-of-change perspective, growth will continue to converge towards 0% over the next couple months as we traverse trough comps.  From there, monitoring marginal changes becomes a lower-intensity proposition as positive growth signals deterioration, at the margin. 

 

In short, the labor market data remains trend consistent and somewhat of an insular island of strength and while there remains some modest runway left for further improvement, the late-cycle clock tick is getting louder.

 

Looking across the energy states, indexed claims in the chart below increased week-over-week from 94 to 96 while the index for the whole country fell from 84 to 81 in the period ending September 12. The spread between the series increased from 10 to 15.

 

INITIAL JOBLESS CLAIMS | CONVERGENCE CONTINUES - Claims18

 

The Data

Initial jobless claims rose 3k to 267k from 264k WoW. The prior week's number was unrevised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -0.75k WoW to 271.75k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -8.8% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.0%

 

INITIAL JOBLESS CLAIMS | CONVERGENCE CONTINUES - Claims2 normal  5

 

INITIAL JOBLESS CLAIMS | CONVERGENCE CONTINUES - Claims3 normal  5

 

INITIAL JOBLESS CLAIMS | CONVERGENCE CONTINUES - Claims4 normal  5

 

INITIAL JOBLESS CLAIMS | CONVERGENCE CONTINUES - Claims5 normal  5

 

INITIAL JOBLESS CLAIMS | CONVERGENCE CONTINUES - Claims6 normal  5

 

INITIAL JOBLESS CLAIMS | CONVERGENCE CONTINUES - Claims7 normal  5

 


VIDEO REPLAY | P & Web IV: What You Need to Know

At 12:00PM ET today we will be hosting a presentation entitled P: Webcaster IV = Powder Keg, outlining our bearish thesis and discussing the implications of the Web IV outcome on P’s business model.

watch thE REPLAY BELOW

 

Participating Dialing Instructions

  • Toll Free:
  • Toll:
  • Confirmation Number: 13620143
  • Materials: CLICK HERE

 

KEY TOPICS WILL INCLUDE

  • Challenging Business Model: Limited operational leverage despite operating under lower Pureplay rates
  • Pandora vs. SoundExchange: A review of the Web IV proceeding, the key tenets of each of their arguments, and why P is losing the key debate
  • Powder Keg: We’ll detail a range of potential outcomes, and the limited wiggle room P has without having to restructure its business model
  • Fool's Gold: Why the Copyright Register's decision is not a preliminary victory for P; all it means is that P is just treading water.

 

**This event will be followed by another presentation with special guest David Oxenford, Counsel to Webcasting Companies at 2:00PM ET. This will be a Fire-Side Chat on the relevant Web IV statutes and the Services' arguments.


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next