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NKE | Key Issues

Takeaway: Here’s what we care about headed into the print. There are broad implications not just for Nike, but for its US retail accounts as well.

Here’s a quick overview as to what we’re looking for from Nike tonight.

  1. A Big EPS Beat: We’re at $0.93 vs the Street at $0.86. This company has not missed a 2Q in well over 10 years. It’s not gonna start now.
  2. Futures. We all know that 9 out of 10 times, the consensus futures estimate is +1/-1 the prior quarter’s 2-year trend. But that only proves to be correct 4 times out of 10. So the question is…are we plus, or minus. Let’s keep in mind that this is an unaudited number that management does not even know until 1-2 weeks before the print. That said, we’re looking for 15% Global C$ growth in Futures, including 10% growth in North America. The latter would represent a 400bp sequential slowdown from 1Q results.
  3. Bifurcation in Futures and Results. One of the key factors behind our long term call on Nike (and our short on FL) is that Nike is likely to build its e-commerce business from $1.2bn last year to $11bn by 2020. That’s nearly 60% ABOVE the e-comm target Nike gave the Street at its analyst meeting earlier this year. This means two things…
    • Futures: At some point, futures will become extremely less relevant, as futures only applies to Nike’s wholesale business. Naturally, we’ll likely hear the company talk about this when there is the inevitable downturn in futures.
    • Gross Margins: Gross margins are likely headed well over 50% vs the 46% it reported last year, as e-commerce margins are about 20 points above wholesale.
  4. E-commerce: We need to see growth this quarter of at least 40%. We’re modeling 50%. It’s going up against a tough comp vs last year (65%), but lets face it…when we’re making a case that e-comm will grow from $1bn to $11bn, going up against a ‘tough comp’ is absolutely irrelevant. Every quarter should be a tough comp, otherwise we’re simply wrong in our thesis.
  5. US Commentary: Here are a few points that matter a lot, both for Nike and for retailers like FL, FINL, DKS, HIBB, etc..
    • Saturation: If we were to ask only one question on the call (we generally don’t ask our questions publicly on conf calls) it would sound something like this, “Over the past six years, Nike has increased its penetration in key wholesale accounts from 40-50%, to 60-80%. At the same time it used the resulting cash flow to invest in the plant, people and systems needed to aggressively grow the leg of distribution – Nike DTC (e-comm) -- that will propel Nike from $30bn in sales to $50bn.  With zero square footage growth opportunities for the traditional retailers in the US, and Nike incrementally taking higher ASP product for its proprietary distribution network, how can the traditional retailers actually grow? We understand the ‘innovation agenda’, and the ‘category offense’, but unless Nike convinces the consumer to break out of a 35-year paradigm of per capita purchasing patterns – it seems like we’re at a point where it’s all about price for the legacy retail models. No?”
    • Basketball: Not hugely relevant to Nike, but relevant to retailers like FL where about 40% of sales are basketball. FL recently said bball sales slowed, despite a 4% increase in the number of Nike launches during its reporting period, and a 7.4% boost in average price point?
    • Inventory Levels: US inventories were elevated at Nike last quarter, and the company noted that it should be cleaned up by the end of Q3 (Feb). We need to see meaningful progress towards this goal, or at least increased confidence that it is being fixed. Reminder, Nike’s confidence in clearing out inventory might be bullish for Nike, but not necessarily the wholesale channel.
  6. On-site Manufacturing: Nike has kept this out of the forefront of the discussion for two years now. But it’s going to be a very relevant, very soon. Aside from driving the DTC model, it will gain even more leverage over retailers who will pay top dollar (in raw cash, working capital, or in margins) to have this technology in stores. We don’t think Nike will talk about this specifically, but we think it becomes a part of the discussion in the next calendar year.

INSTANT INSIGHT | Why Treasury Yields Are Down

What is happening to the 10-year Treasury?

 

The fact that yields are coming down, following last week's rate hike by the Yellen Fed, seems counterintuitive. Below is a brief excerpt from a note sent to subscribers earlier this morning by Hedgeye CEO Keith McCullough explaining why:

 

"... The U.S. 10-year Treasury yield was down to 2.18% yesterday and is holding 2.19% so far this morning with Yield Spread compression (10yr minus 2yr) still testing YTD lows as #GrowthSlowing in Q4 remains obvious to anyone who is rate of change driven and data dependent."

 

INSTANT INSIGHT | Why Treasury Yields Are Down - 10 yr treasury

 

Got it? #GrowthSlowing.


McCullough: The Three Signs of Coming Recession

 

In this brief excerpt from The Macro Show, Hedgeye CEO Keith McCullough breaks down the three precursors to a U.S. recession and urges viewers to be wary of one in 2016. 


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CHART OF THE DAY: Defanging Disney And Apple | $AAPL $DIS

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to subscribe. 

 

"... Consider an “expensive” and a “cheap” stock that are currently being defanged:

  1. Disney (DIS) broke its intermediate-term TREND line of $111, 2x in 2015 (AUG and DEC) on accelerating volume
  2. Apple (AAPL) broke its intermediate-term TREND line of $119, 2x in 2015 (AUG and DEC) on accelerating volume

Disney (DIS) now fits the intellectually appealing “expensive that is trending down” short-idea criteria, whereas Apple (AAPL) is crushing the valuation intellects as “cheap” continues to get cheaper."

 

CHART OF THE DAY: Defanging Disney And Apple | $AAPL $DIS - 12.22.15 EL chart


Defanging Momentum

“You buy cheap assets that are trending up and short expensive assets that are coming down.”

-Cliff Asness

 

Sounds pretty simple, eh? If you can nail the assumptions in the statement, that is. “Cheap” and “expensive” need to be defined using the right forward looking cash flows (not those of consensus) and “trending up” or “down” needs to be quantified, not hoped for.

 

Since Asness is the founder of a quantitatively driven hedge fund (AQR), he’s much more indifferent about what is going up and down than some qualitative fund managers who get married to stocks and their slide decks.

 

That’s not to say storytellers can’t kill it in our profession (they especially do in bull markets). It’s simply a reminder that there are lots of different strategies to consider. When the economic cycle slows, calling something “cheap” on the wrong numbers can kill your returns.

Defanging Momentum - 8 ball bubble 12.11.2015

 

Back to the Global Macro Grind

 

Table 1.2 in Efficiently Inefficient, by Lasse Heje Pedersen, does a good job tabling the differences between “Value” and “Momentum” hedge fund managers. Pedersen interviewed names you’d recognize like Asness, Ainslie, Chanos, Soros, Scholes, Griffin, and Paulson.

 

I call this out this morning as this is the most important debate going on in our investor base into year-end. It seems that many who were long “value” (cyclicals) this year are still long, whereas those who have been short the cycle continue to press it.

 

The economic cycle, that is. As in the thing that matters most at big cyclical turns. Unlike hitting daily, weekly, and monthly “exposure” and return targets, growth and inflation cycles are much more glacial. In other words:

 

  1. When INFLATION ACCELERATING peaked (2011-2012), “cheap” commodity plays peaked
  2. When GROWTH ACCELERATING peaked (Q414-Q215), “cheap” cyclicals started to trend down

 

“Expensive” growth stocks that showed organic #GrowthAccelerating (as cyclicals slowed like cyclicals do during a slow-down – hence the term cyclical) got even more expensive after the US Corporate Profit Cycle peaked in Q2 of 2015. This happened in 2H 2007 too.

 

This brings us to the FANG…

 

For those of you who are new to chasing “Momentum” as a Style Factor (expensive stocks that are trending up), the components of the FANG are Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (GOOGL).

 

If you’re looking for an intermediate-term TREND signal on these stocks (a way to quantify “trending up or down”):

 

  1. FB intermediate-term TREND support = $101
  2. AMZN intermediate-term TREND support = $606
  3. NFLX intermediate-term TREND support = $115
  4. GOOGL intermediate-term TREND support = $720

 

Unlike most establishment “technicians” on Wall Street, I don’t use single-factor point and click price momentum charts to define what is bullish or bearish from a TREND perspective. I use a composite 3-factor signal that includes PRICE, VOLUME, and VOLATILITY.

 

I don’t use my quantitative signal to be mean to people who don’t do macro. I use it because it works. I can assure you that I have back-tested and tried most technical “signals” you can get free on the internet. They are free for a reason. They don’t work at the macro turns.

 

Consider an “expensive” and a “cheap” stock that are currently being defanged:

 

  1. Disney (DIS) broke its intermediate-term TREND line of $111, 2x in 2015 (AUG and DEC) on accelerating volume
  2. Apple (AAPL) broke its intermediate-term TREND line of $119, 2x in 2015 (AUG and DEC) on accelerating volume

 

Disney (DIS) now fits the intellectually appealing “expensive that is trending down” short-idea criteria, whereas Apple (AAPL) is crushing the valuation intellects as “cheap” continues to get cheaper.

 

So why doesn’t the Old Wall and its circus of chart chasers (they are loudest at every economic cycle peak) start talking about DA-FANG? Or Defanging Momentum? Give it some time.

 

Because that’s all that remains between #Deflation and #GrowthSlowing morphing into a recessionary stock market signal (see Credit Markets for details). That’s when both “expensive” and “cheap” go down at the same time.

 

Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND signals in brackets):

 

UST 10yr Yield 2.12-2.32% (bearish)

SPX 1 (bearish)
RUT 1106--1155 (bearish)

VIX 17.86-24.41 (bullish)
USD 97.61-99.42 (bullish)
EUR/USD 1.07-1.10 (bearish)
Oil (WTI) 34.99-37.37 (bearish)

Gold 1050-1085 (bearish)
Copper 2.03-2.15 (bearish)

AAPL 104-111 (bearish)

AMZN 641-682 (bullish)

GOOGL 745-779 (bullish)

KMI 13.85-17.35 (bearish)

DIS 104-111 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Defanging Momentum - 12.22.15 EL chart


The Macro Show Replay | December 22, 2015

 


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