If you’re Captain Long-Only, then you’ll look at this Nike $0.03ps beat, realize that the company is executing, check all the boxes and simply move on to the positions in your portfolio that need a much higher degree of babysitting. Revs were +7.0%, Gross Profit +10.2%, EBIT +6.6%, and EPS +12.5% if you adjust the tax benefit last year. All in, those results were ‘perfectly fine’. Unfortunately, there’s nothing about Nike’s multiple – or the blow-out precedent it set last quarter that suggests to me (or Mr. Market) that the word ‘fine’ is acceptable in describing a Nike quarter at this valuation. Seriously, the November quarter was one of the highest quality and best rates of change I’ve seen from this company in the better part of a decade. But this time around, there were definitely holes that need to be poked. And yes, I’m gonna poke ‘em -- not the least of which is a weak/tempered 4Q(May) guide -- looks like a $0.20 guide down by my math. Major callouts as I see ‘em…
- North America revenue rolled over. Growth was still healthy at 6.7%, but when Nike DTC is accelerating and we see the likes of FL put up a 9.7% comp in the quarter, we should have seen an acceleration in Nike’s North America revenue. Footwear was better than ‘fine’ – up 10%, but apparel growth was anemic at +2%. There’s a miss that needs to be addressed, but was glossed over on the call.
- Europe was +12% constant currency – and though a 200-300bp deceleration on a 1 and 2-year basis, I gotta hand it to Nike here. Europe is a mess from a retail perspective, and Nike is leading the market like a champ.
- China growth was killer at +24% in constant $, but slowed 700bps sequentially. I know, I know…I’m splitting hairs. But when Nike reported in December we were all dumbfounded as to how it bucked every negative Macro cross current. This time we’re seeing growth take a step backwards.
- Converse was down 2% on top of a -8% comp last year. There’s a problem there that Nike is not publicly addressing. You may want to double check me on this, but I don’t even think Nike mentioned the word Converse in its prepared remarks.
- Digital growth of 36% was really impressive, but decelerated 500bps (-850bps on a 2-year basis.)
- Gross Margin: Blew away the 70bp guide and came in 130bps vs last year. Co chalked it up to FX benefit and DTC. Not sure I fully understand how FX hurt on the top line and yet benefit the GM line, but it’s not sustainable. Regardless, the underlying GM strength from DTC is both commendable and bankable.
- SG&A: Nike de-levered SG&A by 132bps despite the fact that Demand Creation (30% of SG&A) was flat. Operating overhead was up by 16.9% -- close to the 18% growth we saw three months ago. The company finally acknowledged that this is due to wages – though I’ll take it a step further in saying that it is almost entirely #metoo, as Nike financially remediates decades of misogynistic pay standards at Nike.
- Inventories: By a country mile, the best part of the quarter. Up only 0.9% on 6.7% revenue growth. The company’s got its inventory positioning under lock and key – which is critical as it goes more DTC.
So…am I splitting hairs here? You betcha. This is a great company executing on an aggressive plan, and it’s making its competition look silly. But given the outstanding trajectory of almost every line of the P&L that we saw last quarter – with the stock following through accordingly – it's critical to my investment process to point out the flaws as I see ‘em. Rate of change matters. Not making any changes to our model – which is not far enough ahead of consensus for me to be on board recommending this stock at 29x earnings and 21x EBITDA.
