It’s tough to listen to Nike’s conference call and not sit there in awe at how well the company executed its top line this quarter. When companies are collapsing left and right in this tape due to the inability to manage through a global Macro melt down, Nike hit its top line guidance on the nose (+9.6%) – despite the fact that the Macro climate eroded meaningfully over the past 13 weeks. You might love the stock, you might hate it…but it’s tough to not agree that this is a great company – and increasingly deserving of its premium multiple. In hindsight, this is likely the quarter that people point to as to when the shift to a consumer-direct model actually started to manifest itself in better growth and margins. That part of the call has legs. Long ones. Ironic that NKE played up its wholesalers on the call, bc the real message is that it is hell bent on growing around them.
The bad news for me is that I’ve been short Nike since $75 in June – and while not a money loser in absolute dollars, it’s definitely been an outperformer in Global Consumer Discretionary. The crux of my call was that we’d likely see a sharp slowdown in Nike’s top line in the second half of the May fiscal year due to the inability of the US market to compensate for the slowdown in Europe and China. While that’s definitely manifesting on a reported basis (FX), the reality is that the true underlying brand growth is nothing short of phenomenal – by region, by category, and by consumer. Are expectations super high right now? You bet. But the reality is that unless management is flat-out lying, it’s seen zero slowdown in brand momentum in regions where the Macro climate is otherwise destroying even high quality companies across sectors competing for share of consumers’ wallet. If I was ‘Captain Long-Only’ and I owned this stock right now (regardless of aftermarket trading) I’d be pumped right now.
There are definitely nit picks here. Took down 3Q (partial sandbag), and operating overhead was up a mind-numbing 18% in 2Q. The company chalks that up to digital investment – I ding them for not acknowledging the impact of the mid-year #metoo compensation structure change for many of the employees without a Y chromosome. Let’s be clear…the company is doing the right thing. It’s cleansing 40 years of misogynistic behavior via terminations, promotions, and pay rate changes. I’m not getting political here. I’m simply running an earnings model that just saw an 800bps hike in SG&A. That’s definitely bearish for another 3 quarters, and might not even be fully represented in guidance. But to sustain superior top-line, I’ll definitely take that trade-off.
The punchline with all of this is that I’m taking NKE off my Best Idea Short List. The other companies I have on that list are simply unworthy of being mentioned in the same sentence as Nike.
Would I own the name here at 20x a high-expectation EBITDA number with literally no visible wrinkles in the financial model? No. The reality is that things can change quickly in this business, and when the stock opens at 9:30 tomorrow morning it will be valued like a panacea for large cap consumer growth PMs. But when valuation is near the top of the list of reasons I don’t want to own something, I find that the short case simply stinks.