We're hosting a Black Book call on Wednesday, June 6th reviewing the short thesis on NKE. Details below.
Call Details:
Date/Time: Wednesday, June 6th at 2pm EDT
Toll Free:
Toll:
UK: 0
Confirmation Number: 13679747
Live Video Link: CLICK HERE
OUR ORIGINAL COMMENTARY WHEN WE TOOK TO BEST IDEAS SHORT LIST
I’m taking Nike to a Best Idea Short – for the first time in my 24-year career. I still think that the TAIL call is one of the best in retail – but recognition of that will likely take an extra 1-2 years (ie pushed out). I’m taking down numbers – potentially a quarter early – but think this is dead-money at best, and has 3-1 down/up.
The narrative is that the business has bottomed, and for this quarter – perhaps it has. But I have no evidence that the business has actually turned. I’m modeling a penny miss, but that could go either way. Nike has only missed by a measly penny once in a decade (ie it always finds a penny). But I think that there’s another leg down to come, and I’m taking down my numbers for Nike accordingly. Aside from the US, Europe is a real risk to this story. In fact, this is the first time I can recall that I have ever meaningfully taken down numbers for this company. Even when I worked there and ran my own ‘Street’ internal model, I never took earnings down – even though 'top down dictated' guidance often suggested otherwise.
I’m no longer modeling an EPS beat for the year (FY19 – which just started), and think that the company will guide down in the upcoming quarter. Simply put, the pressure that the brand is seeing in the US is not ebbing – not in wholesale, not in retail, and definitely not in ecomm. We should have seen a 300bp boost in gross margin from e-comm sales over 3 years, but we’re seeing the opposite, which shows how bad the base business has been. And we’re not at the bottom.
Could I be a quarter early on this? Absolutely. After all, the company was on the road recently and exhibited bullishness which pushed the stock higher. It’s clearly not concerned about an immediate blow up -- and neither is the market. That said, I think it is doing so as more of a PR move than anything else. It has to go on offense with investors the same way it is doing so with the press, and most of all – employees – as it fights to right two decades of misogynistic behavior (and subsequent numerous firings). The culture inside this company right now is toxic and fear-filled, and has gotten to a point where I don’t see how it cannot affect numbers – numbers that are already setting up for FY19 pain.
Again, I could be early, but with this name trading at an all time high, at 28x earnings and 20x EBITDA, a 2.5% FCF yield when it’s barely shorted (2% of the float) AND it’s getting ready to miss the consensus for only the second time in 13-years, I can get to far more downside than up. Looking out over a 6-9 month horizon, I get to a bull case of $78, and bear case downside near $50. That’s down/up of 3 to 1.
In the end, to buy this today you have to believe the stock is going to $80+. Good luck with that. All in, I think it’s a low risk short, and dead money at best.
