Conclusion: So much for both the bulls and bears to go out with today – and both are completely valid. The $0.09 cent beat was a penny above our model – which was already looking for a big print on horrible earnings quality. Street is likely to end up around $2.35 for the year. We’re comfortable at $2.48 unless management drops an earnings bomb in 4 weeks at analyst day – but it just got all the bad news out of the way so that is highly unlikely to happen. If no guns blazing with new ‘here’s how we’ll transform retail – like, now’ statement, then I have to re-evaluate why I’m long this name over a TREND duration. Fortunately, my confidence level is 80%+ that we’ll get just that on October 25th and then some.
Here’s what the bulls will argue…
- Headline beat. The ‘US market collapse’ theme is slowing (ie bullish) on the margin. That’s 50% of the business. Europe healthy, China accelerated – management bullish tone.
- On Demand Manufacturing – on the table, finally. “Right now it’s cool, before long it becomes commercial.” Nike will go to DTC first, then will save wholesale partners with 1st gen while Nike goes with NextGen in DTC – so on and so forth. I was too early on this. But it's finally happening.
- Launching SNKRS app in 19 new countries in the quarter, fueling 40% growth in Nike.com in international. DO NOT underestimate the power of an ‘allocation app’, ie “we’ll let you know shortly if we give you the privilege to buy this sneaker that we’re only making 1,000 of”.
- FX has crushed GM (in addition to way too much inventory). While Int’l not even mentioned in Q&A FX is currently inflecting from notable headwind to notable tailwind on the top line.
- ecommerce accelerated to 19% from ~10% in 4Q, about a 300bps acceleration on a 2 year basis. Big turn after a massive (and inexplicable by mgmt) slowdown. Note: it mirrored the e-comm slowdown we saw across nearly ALL of retail.
- Every point of channel shift from wholesale to ecomm adds about 60bps of growth which is amplified when share stabilizes (which it will). My question…did we see that this qtr? If we did, it underscores the weakness elsewhere.
And the bears…
- Extremely poor quality earnings. Core market still in the tank. Yes, mgmt bullish, but when is it not?
- [Innovation better than ever]. Uh…no. Not this quarter at least. Though if Parker is right – and I don’t like betting against him, then a rev acceleration will be a big bonus here. The rate of change is already getting better on the margin.
- Company ‘appears’ to have zero control over margin and inventory. Hit GM guide, but worse than it should have been – especially with DTC acceleration. This is my biggest beef.
- Made up for it with lower demand creation and SG&A. I will never ever ever ever give a company credit for this. This is what RL, TIF, KSS and TGT do. Not what we’ll see consistently out of one of the most powerful brands in retail. This should definitely turn in Nike’s F2H (my bullish counter).
- Did not back off of $50bn rev goal – and it has to. If it does not back off, then it's a multiple dampener. I’d argue that it’s far better for the company to take down the $50bn goal – even if it believes it will hit it.
- Adidas is growing faster than Nike in every region of the world – the gap narrowed from last quarter – but anyone running with the ‘Adidas is taking over the world’ thesis is still right.
- Converse – which has generated about a quarter of incremental Nike EBIT over the course of a decade – ‘re-collapsed’
- Tax rate from 17% down to 11% -- squarely in ‘huh’ territory.
Here’s what I’ll argue…
- Both the bulls and the bears have a LOT of valid points to go out with this morning. I know I do.
- But overall, I’m thinking of this as in-line-ish qtr. I know bears are rolling eyes reading that statement. But my team was modeling a horrible earnings quality – and that’s exactly what we got.
- Biggest beef for me is the lack of GM control and trade-off w SG&A to beat consensus.
- Street is likely to end up around $2.35 for the year. We’re comfortable at $2.48 unless management drops an earnings bomb in 4 weeks – but it just got all the bad news out of the way so that won’t happen.
- Catalyst before then? Probably not.
- If not guns blazing with new ‘here’s how we’ll transform retail – like, now’ statement, then I have to re-evaluate why I’m long this name over a TREND duration. Fortunately, my confidence level is 80%-90% that we’ll get just that on October 25th.
