My thought process leading in to this print was that with the stock +/- 5% on the print, I ALMOST don’t care. I know that the 10% delta is a full years’ performance for some/most. But as my team laid out in our NKE Black Book last week (LINK) this stock is setting up for the same kind of multi-year run we saw in 2013. And 2010. And 2006. And 2003. And 1999. And 1994. And 1986. You’ve got to respect Nike’s six major mega-cycles and business model changes over 49 years. We’re just starting number 7. Hold on tight…
When Boring is Exciting. The interesting thing to me (and pretty much everyone who knows how to read a press release) is that this Nike print was so ‘massively and exceedingly’ boring relative to the hype headed into the event. Seriously…I looked at my team after this call with a puzzled face and said “did I even learn anything new”? The truth is that key metrics were definitely better, but management fell far short of outlining a plan as to how it’s going to sell more kicks. In fairness, it did not need to in order to make the stock work. It just needed to NOT soil the sheets.
The company handled this event artfully – better than it handled its US growth trajectory. It beat the quarter (quality was meh, but better than almost anyone expected), guided to EPS down ≈ 10% -- a level I think it’ll handily beat. The growth algo for the upcoming year does not sound like a slam-dunk, which probably stops the multiple from getting out of hand. But the reality is that with this guidance reset and better-than-expected momentum, the company is making it VERY difficult to be short this name.
The 7th Mega-Cycle. As it relates to the start of Nike’s 7th ‘mega-cycle’, the interesting thing to me is that this model change is the most obvious – big shift to consumer direct – and yet the consensus view is that it is the most difficult, and beyond what Nike management is capable of executing. Financially, this will likely be the greatest sales and margin event in Nike history. Common logic has it that it will correspondingly be the hardest, most complex, most expensive, and most time consuming change. That’s 100% true…the point people are missing, however, is that NKE started to prepare for this event in 2005 – before it reinvested the $550mm in EBIT Adidas gifted it via the Reebok deal – into the beginning of a DTC model that is taking shape today. In other words, this is the 8th or 9th inning of investment, and still pre-game for reacceleration in growth and EPS.
One of the biggest things to me is what Nike did NOT say…which is the price point to which it will sell through Amazon and Alibaba (t-mall). The consensus is unquestionably that Nike will sell ‘Kohl’s-ish’ product through Amazon. Not true. We’re going to see allocated product on Amazon – likely with a redesigned UI – something Amazon will likely use to lure in other higher-end brands that have been averse to selling on a ‘mid-market’ platform. Will we see Jordans, Dunks and AF1s? Not a chance…at least not yet. Nike won’t jeopardize losing the core urban customer by loosening allocation of those brands (it got too loose w Jordan over the past year – and will correct that). But will you see $150 running/vapor/fly, etc…? Fer sure.
Ahead of Consensus. We’re modeling an up year, and are coming out at $2.60 this year – likely 15% above consensus. Then we’re looking for 23% and 19% EPS growth over the next two years. The upside is about 60% due to revenue acceleration, 30% due to Gross Margin, 5% SG&A (I don’t want to see SG&A leverage here), and 5% due to non-operating income and tax rate (note, FX does not hurt the P&L at the same time the mark-to-market on hedges hurts below the line. Guidance there makes no sense)
As it relates to the stock setup…here’s one of the top consumer brands in the world that is at the tail end of the biggest investment cycle in its history to make it a leader in #retail5.0. It has a pristine balance sheet, all the cap you can ask for, and if I’m right on the model – the biggest acceleration in EPS growth NKE will have seen since the Great Recession. “It’s too expensive”? Really? 21x earnings and 15x EBITDA (17x and 13x, respectively, a year out).
I’m not one for picking a magic multiple out of the air, but with the characteristics I just laid out…would I argue with a 30x p/e? I won’t argue FOR it, but I won’t debate it either. That’d be $96 a year out. A 25x multiple is $80 in a year (37% upside), and $95 in two. I’ll take that any day. I’d be hard-pressed to find anyone that wouldn’t. In the end, the research call and the model both have to be right. I think they are…of course.
NKE Black Book | #Nike7.0: LINK
-- McGough
