I am never at a loss for words. While I’m a pretty good (self-proclaimed) listener, I absolutely lack the ‘switch’ between what’s in my mind and what is typed by my fingers. But for the life of me, I don’t know what to say about today’s Nike analyst meeting. I have more thoughts about what the company DIDN’T say than what it did. The ≈ 100 attendees and 850 webcasters heard subtle tweaks vs what Nike presented 2-years ago, and 2-years before that. Tweaks in strategy = tweaks in results. Nike needed to go big, and all it did was start the meeting interviewing Kobe Bryant – who knows nothing about the business aside from his SG&A allocation.
What Parker needed to say in the first 30-seconds was this…
“Let’s face the facts, every athletic brand of size in the world is accelerating – except Nike. Yes, we are losing share. Yes, we are pushing our growth targets. Yes, I am livid. But Yes, I saw this 2-years ago – before any of you did. Losing share is absolutely never acceptable. But we made a conscious decision to allocate $3b in incremental capital over 5-years to change the way we go to market. You did not know it – but we were doing it. We took too much capital away from Product and toward changing the longer-term paradigm. We won’t show all our cards today, but in 12-months’ time, our competition won’t know what hit ‘em.”
There was a day, many moons ago when I was involved in script-writing at Nike. It was an eye opening experience going to Mark, Charlie, Sprunk, and Gary DeStefano (Don wrote his own scripts) and saying “Sorry, but there is no way in hell you can say that to the Street.” I’d give whoever wrote today’s investment message a solid C-minus.
The good news – for anyone that is long the stock – is that my version of Parker’s quote is closer to the truth than what we all heard today. I’m highly confident that Nike simply did not unleash most of what it has in its’ arsenal to transform retail vs what we see today. And no, this is not all about FLEX, nor is it about AMZN. Those are simply by-products of the underlying shift in how Nike goes to market. Check-out our Black Book outlining Nike’s 6-mega-cycles since Blue Ribbon Sports in 1968 and where we are in kicking off MegaCycle #7. #Nike7.0: LINK. Never ever ever bet against Nike when it’s in this stage of transition. The company simply did not appropriately communicate what’s in store…likely bc it’s more than 2-3 quarters away (ie will fall in May19FY – when Parker retires as CEO, Trevor gets the nod, and Sprunk subsequently leaves (will be a huge loss).
I know Nike is a long – one of the best over a TAIL duration and we’ve got the estimates to back it up – 20% above the Street by May20 and the upcoming quarter has super low expectations. But my confidence level in staring a PM square in the eye and telling him/her that the stock needs to be bought today with impunity is simply shot. As such, I’m taking it off my Best Ideas Long list.
I am still long NKE (along w RH, AMZN, WMT, GIL) – but to be 100% clear -- the only name I would buy with impunity today (ie the only name worthy of a Best Idea designation) is COH (LULU is extremely close) – primed up over TRADE, TREND and TAIL duration. I hate even saying this bc it seems like one of those “if it tanks I told you so, and if it works I told you so’ hedge calls when an #oldwall analyst goes from ‘Super Duper Strong Buy’ to just plain ‘ol ‘Buy’. To be clear (again), if I thought this stock will work over 3-6 months, it’d be in my top 3. But my sense is that near May18 FY end, we can buy the stock somewhere near $50 and capture the beginning of the next ‘burts of growth’ (as PHK still calls it). We’re deep on the research to drill down timing on when to get heavier. I can’t imagine this will not be a Best Idea Long for me again once we de-risk the rest of this FY, or the price does it for us.
-- McGough
Things Nike Did Not Acknowledge, But Should Have
- The fact that there’s this thing called unit-share loss.
- That the biggest problem is not footwear but rather apparel. Price points have outstripped its ‘meh’ quality in the face of an increasingly well-capitalized start-up competitive set (from the Rhone’s to the Lululemon’s of the world).
- Little meat on the bone about turning around Converse – which, by my math – accounted for $500mm in incremental EBIT of the $2.5bn generated over the course of this cycle.
- Outlets accounted for another $500mm – so yes, Converse and Outlets were ≈ 40% of incremental EBIT). Since last analyst meeting – traffic in outlets decelerated, and investors have ‘stuck a fork in it’. It’s a topic of conversation every time I speak with a PM about Coach. It should be part of the debate as well with Nike.
- Talked about on-spec manufacturing, which is a plus. But Parker fell short in showing people why his statement “It used to be cool, but now it’s commercial” on the last conference call was correct. To be clear, there’s more going on behind the scenes than Nike showed the investment community. A lot more. But today was somewhat of a letdown relative to what could have been. On the bright side, there’s a lot left in the tank for people to realize and appreciate when management decides to talk.
- Talked Amazon, but of course low-balled the price point as expected. AMZN is the new Foot Locker. Will likely go in as high as $170 price point. But can’t mention that because they’re almost certainly not telling FL that. My bet is that we get a redesigned ‘Nike-branded’ UI on Amazon, which builds up a t-mall-ish concept for Nike that it uses to market to higher end content – and mid-tier brands that otherwise failed to invest in ecomm for a decade.
Things we liked:
- Finally acknowledged – in a roundabout way – that the Futures window – which currently stands at 5 months, is going away. The race to shrinking the futures window as it relates to the big players will determine who literally owns the specialty retail channel. If/when Nike wins this one…that’s how they get the wholesale customers back again as Nike’s best off-balance sheet assets.
- Digital….I think I liked this. But not really sure I even know what the word ‘digital’ means. The team used the word today, what, 70 times? What is ‘digital’ anyway? Mixture of e-comm, online community building, Nike+, 3D printing, spec manufacturing, new media advertising, stepping up space in NBA 2K, madden, FIFA or whatever…? ‘Digital’ 15% of sales today, and going to 30%. But no delineation as to how much of that will be on customers’ digital platforms (ie all of this might be a shift from FL to Amazon).
- Gross margin discussion: expect as much as 50bps annual expansion driven by mix – faster growth in direct, price, by product cost decline re process improvement. All of this is believable. What’s not is Nike having any cred on GM forecasting. But still, this 50bps is not a stretch – and is higher than the 30-50bps historical guidance.
- ROIC target is slightly higher at low 30% over the next five years. With all the gnarlieness…lets not forget that this is an astounding ROIC business – and we’ve seen ROE converge slightly due to a more balanced process in buying stock/dividend vs deploying back into the biz..
Things we didn’t like:
- Nike reminds you of targets when it beats them, not when missing them. And the company didn’t update all the previous targets from the 2015 analyst day – directly, at least. Total rev target implied at $44bn by 2020 vs prior $50bn. EPS implied $3.50 vs prior $3.75. The world pretty much expected this, which accounted for the pop in the stock today. Some other slight-of-hand targets…
- Women’s -- Was $5.7B in ’15 w $11bn target by 2020. In 2017 it was $7B. #failing
- Jordan -- Was $2.25bn in ’15. Said it would double to $4.5B by 2020. Now growth rate is ‘teens globally’
- Running – in ’15 said it would be $7.5B by 2020. On a ‘miss’ track. Currently a $5B+ business. Now the company has moved to regions.
- I want Nike to invest more. Nike NEVER guides to ‘slight SG&A leverage’ in a longer term financial model. I get concerned when Nike gets concerned about costs. Capex of 3-4% should be 5% or better – especially given that we’ll see a third of that funded by better working capital by scaling up spec manufacturing.
- The plans seem to not have much contingency planning for any challenges in the trend from economic weakness, country specific challenges, competitor challenges, wholesale partner weakness, changes in consumer demand for athletic, changes in fashion cycles, etc.
- 3M pairs will be made by Flextronics this year. Note…Nike will make over 300mm pair of shoes this year. A whopping percent is being Flexed.
And by the way…on this Flextronics deal. There was obviously play on this at today’s meeting. The FT even commented three days ago that you can make more $ on Flex Long than Nike if the strategy works. I’ll let Ami Joseph (Hedgeye Tech) make that call. But here’s what people miss…Remember when Larry Ellison had multiple teams go after the same initiative to compete against one another? Whoever wins gets paid. Whoever loses, loses their job? #toxic. I won’t say that multiple teams at Nike are trying to optimize FLEX, but I am saying that a cohesive team at Nike is likely gunning to disintermediate FLEX by planning with other providers. It will ultimately build scale with other players, until it breaks them on economics and/or takes in house (remember when NKE seeded FINL, HIBB, Chalet etc…). FLEX will deny this vehemently, bc Nike isn’t exactly volunteering this information (kind of like the Nike/Amazon/Foot Locker dynamic).
