There's a major comp consideration that's Bullish into Friday. If it does not materialize, then I'm likely to step on the Short accelerator.
I’ve been early and wrong on this short. #mcgoughfail.
But the underlying TAIL call still holds true
- Nike drove traffic, ticket, and ultimately comp for nine years and is not 73% of FL’s sales (up from 40%). It stuffed the wholesale channel this whole cycle to invest excess cash into a change in a 45-year paradigm in one of the few industries that is stuck in the dark ages w sourcing/manufacturing and distro.
- While that happened, FL UNDERINVESTED in its core, and leveraged SG&A, WC, and Capex.
- Now SG&A% is 19% (down from 25%), which is simply unsustainable.
- FL underinvested in non-Nike content, stores, and especially e-comm. Those costs are rising.
- The ‘adidas is hot’ argument is punk. The avg price of a Nike pair at FL is $160. Adidas is $110. UA is $95. A one for one substitution takes comp dollars down. That takes GP$ down, and so on…
- The ‘Nike e-comm call’ is consensus. But the P&L deleverage call is not. Nor is the call that as Nike changes up a 45-year sourcing/distro paradigm, it will go vertical w US manufacturing. Then it will jam FL on the wholesale model as FL begs for Nike’s in-store manufacturing capabilities (and pays for the machine, the kiosk, the Nike on-site designer, the working capital). In other words, FL will strengthen its position as Nike's best off-balance sheet asset. (that's NKE Bullish and FL Bearish).
BUT…here’s the near-term Short Risk. Nike us unquestionably accelerating product flow in the US market – faster than people think. I think Nike beats on top line.
- The only way it can get this ‘quick relief’ is to pump incremental volume through FL over a shorter time horizon. We're already seeing it. That obviously boosts FL comp.
- So in the end, while Nike comps, so should FL. And that appears to be happening.
Here’s the catch/opportunity. If FL only comps a sub-4% then that will INCLUDE the temporary Nike channel stuff. In other words, all else equal, the real underlying TREND for FL will decelerate more than the headline would otherwise suggest. If FL fails to put up a big comp, I’ll likely step on the accelerator short-side.
