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It was very well received
Nike
1) False bottom in Nike’s business cycle
There’s a false bottom in the context of a slowing global growth backdrop. Consensus thinks that business has inflected, and while rate of change might be better, that doesn’t mean that the business should actually grow. Competitive threats not waning, distribution shrinking, and we’re seeing late cycle stuffing in marginal channels (ie KSS, DSW, etc). New platforms won’t hit critical mass for another 2 years, and Jordan still needs to shrink for 1-2 years before it can grow profitably.
2) Consensus looking through biggest risk in years
The organizational changes at Nike are material and should impact results in another 2-3 quarters, and yet an all-time high stock price of $74 is looking right through it. Gross Margins are improving, but to patch the org chart, fix a stalling e-comm model, accelerate on-site spec manufacturing (the only other distribution growth oppty outside of AMZN) and actually hit top line goals over a TAIL duration, NKE will likely do the right thing and up the ante on SG&A, capex, and inventory carrying costs. In other words, this is a classic eroding ROIC story.
3) Likely to push out Street numbers by a year in fy19
The quarter looks fine, but Nike likely to guide down Q1 (Aug). Then will likely promise yet another hockey stick this year – as it has in the past three. The difference this time around is that it’s unlikely to hit this one. We think that it will have to push out Street numbers by a year at some point in FY19. The risk is that this company nearly always wins (though we think ’19 will be a loss) -- 13% upside if we see Nike defy all odds and beat consensus. But the reality is that at 28x earnings and 20x EBITDA, even if Nike hits street numbers, the stock goes down. We have to see a beat in ’19 to make it worth buying today. 35% downside if our model is right – which would present a tremendous buying oppty.
Adidas
1) The growth story is not a short-duration fashion fad, the opportunity is real
Adidas is undersized in the US relative to the other global markets – which is obvious. Its share gains are not over. We get the whole ‘Stan Smith and Superstar’ fashion angle, but, it has more scalable platforms than ever before. New CEO has incentivized key talent so a CPG guy doesn’t need to micro manage a fashion business. The guy is a rock star. He’s a consensus rock star – but we have yet to see any of what he’s going to do and we think he'll win.
2) Multiple drivers to higher margins
Adidas has a number of margin drivers that are uncommon for a large cap stock including lower promotions, business divestment, sales leverage, regional mix, product mix, and channel mix. The largest margin opportunity is in the US where it is earns less than half of the margin of its closest competitor. It has the right product, go to market strategy, and management to narrow the gap -- finally. At current levels the Euro will be a tailwind by year end. Nothing groundbreaking here – except for the incredibly high likelihood that it will actually happen. It’s in our numbers and not the Street’s.
3) Europe slowing concerns – offset near term by World Cup
The World Cup should boost sales in all markets, but Europe has a proven impact around all World Cup years (that’s sorely needed now – as in today). Adidas bear case EPS out earns Nike by 500bp – at a 30% discount. Base case out-earns Nike by 2x. The price/value distortion here is both obvious and unsustainable. That said, if our Nike short works, then the valuation gap self-corrects. There’s your risk to Adidas short on a relative basis.
Puma
1) Pure growth story near and long term
2 of the top 3 global athletic brands (Nike and Under Armour) are in their weakest operational position in ~15 years. Puma has the opportunity to expand reach, gain share of voice and wallet, taking share from previous incumbents in both footwear and apparel. 1 point of share in the US would mean mid teens growth on top of industry growth in Americas segment (500-600bps to company). Putting the capital to work to make it happen now that it's no longer under Kering's umbrella.
2) Puma is and should invest heavily for share gain
This is ultimately bearish over the next 12 mos for those thinking Puma is an easy margin story. The company may never have a better opportunity to take share in core categories, particularly in the US. The company has signed several US influencers including Selena Gomez, Yo Gotti, Big Sean, and leverages its relationship with Jay-Z. Obligations have spiked, spending should continue to grow brand heat for future expense leverage. Definitely the right thing, but might not crush numbers as much as the whisper thinks in 2018.
3) Only concern is price
Tail is extremely bullish here, with our estimates 25% above consensus. That said, we’re slightly below in 2018 as the company steps up investment – especially given that it’s in control of its own capital plan with the Kering spin. Spend is to gain share in outer years = bullish. But until we get a better price (parabolic over three weeks) or get confidence in a 2018 beat, this name will sit at the top of our Long Bench.
