TAIL: The call is big…and our numbers match.
- Reversing a stale 40-year paradigm with how product is designed, manufactured and distributed.
- This is FAR deeper than the simplistic ‘Nike doing more e-comm’ call. If it was that easy to do, it’d be there already.
- Nike is playing down this strategic shift, and the consensus believes ‘em.
- Those that do believe think Nike started this process 3-years ago. They’re wrong. Try 11. We’re in the 8th inning of the investment. Now harvesting.
- The shift to a DTC model ‘gifts’ Nike 4-6 points in revenue growth (consolidate the full $180 p/pair price instead of $81 wholesale equivalent).
- Adds $12bn in revenue by May’20.
- Incremental margin goes from 12% to 27%.
- EBIT margin tests 18% vs 14% today.
- EPS CAGR accelerates from 10-12% to 20-22%.
- EPS of $4.25-$4.50 in May’20 – 30% above the Street.
- The only real downside is the model becomes more capital intensive.
- DSOs down as shift to direct model, but
- Finished goods inventories likely up more – even though new technology gets Nike 50% closer to market.
- Payables extend due to added leverage over supplier base (including new US manufacturing partners – FLEX, and the companies Nike is seeding to keep FLEX ‘honest’).
- Capex likely to trend up materially – from 3% of sales (peak in industry) to 5%. Gotta build up scale and spend the coin to support a 50% gross margin.
- I mind increased capital intensity, but keep the following in mind.
- Due to higher operating margins, we still get RNOA going from 44% today to 50% by May20.
- Nike is extremely underlevered. I never gave it credit for high returns on capital, bc it simply did not invest enough of it (ie rising ROIC and declining ROE).
- We’re finally seeing Nike put more money to work. Say what you want about Nike being a big spender…the reality is that it has proven itself as an extremely responsible and effective steward of capital.
TREND – revenue should drive the ‘3-Quarters or Less’ duration.
- The biggest factor that matters as it relates to the next 2-3 quarters is the trajectory of top line growth.
- The consensus thinks that we won’t see double digit top line growth here for another 7 quarters. SEVEN. ‘innovation dead, adidas, Jordan on a decline…’
- I think we’ll see it within three quarters. Here’s why...
- Does anyone REALLY think that heads did roll as soon as it lost incremental share nine months ago?
- Nike can get product to market much faster than most people think. It has 45 years of product it can tap in order to get retro product to market. We saw it this part quarter with a LeBron retro – exclusive initially to FL. We also saw it with an Air180 Flyknit – that actually looked nothing like the (increasingly stale) FlyKnit as we know it.
- That’s exactly why FL is still comping – bc Nike is pushing in more product sooner than it had otherwise planned.
- I’ve got North America sales accelerating by 400bp this quarter – the Street has zero incremental growth.
- Sorry to disappoint – but I’m not giving ‘my futures estimate’. The reality is that the company does not even know the number until a week before the print. There are more moving parts than anyone thinks -- it’s arguably easier to model Global GDP bottom-up.
- What I will say, however, is that we started to see a bifurcation in Revs vs Futures two quarters ago. That will continue.
- I’ll never say ‘futures don’t matter’. Bc they do – directionally. But the R-squared breaking down fast.
- Could NA futures be down 4% again? Of course. Could be down 6%. BUT, can just as easily be +1. Find me anyone who’s modeling that.
- From a TAIL perspective, I WANT to see futures eroding and revenue accelerating – that’s the only way people will more consistently track the real underlying trends as opposed to what a 30-year old metrics tells them (only 55% of the US biz – used to be 98%).
- Ultimately, I’m at $0.61 for the quarter, up 12.3% vs last year. The consensus is looking for a 3% EPS decline to $0.53. Realistically, Nike will keep guidance unchanged for the rest of the year – giving bears ammo to say that ‘Nike beat and guided down’. I’m Ok with that. In 4Q I’ve got EPS growth accelerating to 17%.
TRADE
Yes, the stock is working for the year-to-date. But short interest is at an 8-year high, revenue should accelerate, and if I’m right on the headline beat then this stock could start with a $6 very quickly. If I’m wrong on the top-line, however, I’m going to end up being wrong on the TREND call as well as the TRADE. While I’ll be the first one to beat McGough up over that one – I can’t imagine anything will come from this event to de-rail the TAIL call – which is about as big as I could find...period.
