I’m more bullish at $64 than I was at $59. This is exactly what I wanted to see. Nike just made it a notch higher on my Best Ideas list. Surpassed LULU. Second only to TPR. Downside to $55 – not insignificant – but 25x on $3.50 = 87.50 in 12-18 months. $25 upside, $8 downside. I like it…a lot. [btw, I hate picking a multiple out of the air, but if my numbers are right, then we’re looking at 23% EPS growth in FY19 – could Nike trade at 30x based on that? There’s $105. That’s not my call – but it could be.]
- Bears will point to the massive 4Q hockey stick guidance given the 2Q beat, 3Q guide down, and no change to the year. They’re gonna be wrong. This is a sandbag. Mark my words. Hanging on short side here bc the hockey stick will fail to materialize will prove to be a thin short. Will this cap Nike’s multiple for a quarter? Maybe. But setting up to beat next quarter, guide up and then beat the year.
- This quarter was a big net positive given what I laid out yesterday… “I’m bullish TREND and TAIL, with the biggest risk being a negative change in TREND duration – which would fall into the ‘Brian is wrong and no matter how powerful the TAIL thesis is – how in the world can I stay bullish?’.
- From my perspective, Nike both delivered upon and said what it needed to in order to make me more bullish at $64 than I was at $59 – it just set up for a 15%+ beat in 3Q.
- Quality of earnings were less bad, margins stabilized, investing in SG&A – yes, a repatriation hit in upcoming qtr – but no surprise – and likely to use cash to accelerate US investment/CustEx rollout. Inventories inflected.
- When Sales end a bottoming process, GM stabilize, and inventories correct – never ever ever bet against this stock. My contention here is that Nike is setting up for the 7th megacycle, for the next burst of growth, since 1968. We’re about 2-3 years through a 3-4-year transition.
- If you want to hang on short side. Don’t. But if you don’t want to listen to me, at least keep it in on a VERY short leash. This quarter gave ZERO reason for long-onlies to sell. And Short interest is only 3.5% of float – not enough to move the needle. Sorry folks.
CALLOUTS FROM THE QUARTER
1. HERE’S THE BEAR CASE. I don’t Buy it. The over/under on our numbers in 3Q(Feb) is for an $0.11 beat.
2. As expected, earnings quality was bad – US bad…but beat GM, gave it back in SG&A – which is exactly what I want to see for a company reaccelerating a brand.
3. Management tone – this did not sound like a team that is not in control over its business. Campion (CFO) put his big boy pants on and handled this call like a champ. On the ‘Don Blair’ scale, I’d give him an 8 out of 10. Granted, this team would sound confident at a mortuary conference in North Korea – but this was a step up in tone.
4. Biggest knock is revenue derivation. Rev Beat, NA weak, EMEA Strong
o Revenue growth of 4.6%, accelerated from 0.1% sequentially and was 190bps above expectations.
o North America was the weak spot as revenue decelerated 180bps sequentially to -4.5% due to footwear declining 6.7% and equipment declining 13.9% while apparel improved 190bps sequentially to +0.5%.
o EMEA was the standout growing 19% YY, accelerating 1540bps driven by 15.6% growth in footwear and 26% growth in apparel. FX was a 500bps tailwind, the first time it has been a tailwind in the 6Qs of history the company has provided for this region.
o 90% of reported $ growth came from EMEA this Q.
5. Second quarter in a row of e-comm acceleration. Accelerating Alibaba, Asos, and Amazon. And we have not even seen Amazon impact yet. Pilot coming with stitch fix, in women’s product. Only 13 Nike SKUs on Amazon so far – that’s likely going to 500 and a price point well above the $105-$115 we see today. Sorry FL.
6. Category Commentary vs FL – a lot of this is Product Hype/Fluff…ie not relevant for a company that sells 400mm pair of kicks. But innovation matters…
o Nike oddly bullish on Basketball in conflict of numbers from FL.
o Comments were bullish on Jordan brand as well this quarter.
o Converse (source of incremental $500mm in EBIT over this cycle)
Basketball Commentary on the Margin
1Q17: Did not quantify. “In basketball footwear, the Kyrie 3 continues to be the number-one selling performance basketball shoe. Also in the quarter, the KD 10 showed incredibly strong sell through.”
2Q17: “Nike BBall grew strong DD as we energized through performance and style.“
Running Commentary on the Margin
1Q18: The Zoom platform saw strong consumer response from the Pegasus 34 to the Zoom Fly to the Vaporfly 4%, which sold out completely in quarter one. As we revitalize some of our core footwear running franchises, in just the last three months, Air VaporMax grabbed the number one market share in the United States at the $150, and up price point.
2Q18: The performance story of Q2 was the incredible impact of the Zoom Vaporfly 4% and the impact it had in the marketplace as it dominated the podium at the top six marathons this fall. The energy around the Vaporfly 4% and the ZoomX cushioning has a real impact on the rest of our Running business.
o Nike plans to quadruple performance bra business globally in 5 years….. Watch out champion/HBI…
7. SIGMA Bullish – big swing towards Quad 4 (clean up Quad which leads to Sweet Spot more often than not). Inventories +6%, similar to Q1 but the sales growth accelerated 450bps. But the quality of inventory should be improving ahead of a new wave of products coming to retail at the end of Q3.
8. GM Beat - ASP up = bullish, FX opportunity?
o Gross margins were a 60bps beat vs. consensus and 30bps vs. our estimate. Still abysmal – but first real beat in 7-quarters. The biggest driver was ASPs benefiting margins instead of having a negative impact. Fx was the biggest detractor from GM and higher product costs were a small detractor.
o Fx in Q2 became a tailwind to revenue growth of 1.6% from neutral in Q1. We have seen in the past that changes in Fx take 4 to 5 Qs to impact gross margins. So we expect GM to begin to benefit in Q4. Going forward less markdowns should also benefit gross margins.
