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Takeaway: Growth is impressive, but not as much as the consistency in which it’s managing the model – the best I’ve seen in 25 years. Best Idea Long.

Editor's Note: This is a complimentary research note from our Retail Sector Head Brian McGough. If you're an institutional investor interested in accessing McGough's research email sales@hedgeye.com.

Nike | Crushed the Quarter $NKE - zaa

We added Nike back to our Best Ideas Long list last week in anticipation of strong business momentum in the face of global retail and trade pressures that are dropping your average retailers like flies. But Nike isn’t average. This quarter showed that it’s superhuman.

The degree of consistency it's displaying in its financial model is staggering. 7.2% top line growth with digital growing 42% globally and 30%+ in North America (sorry FL, that means wholesale was likely down – you’re not that important anymore). Leveraged that to 10.8% Gross Profit growth with an impressive 150bp boost in gross margin – thanks in large part to driving its highly profitable digital model (pushing 2,000bps higher GM than wholesale) – and then 15.7% EBIT growth.

Big headline beat from Nike at $0.86 vs street at $0.70, with about 3 cents help from lower than expected tax rate. Revenue beat by 2%, and gross margin put up a big 120bps beat. Management called out margin strength in part due to deferred supply chain investments – but this is classic Nike. It took $0.04 out of 2Q guide (after a $0.16 beat) and will come back and beat again. We’re coming in ahead of the pre-guidance estimate by a nickel – implying another big headline 2Q beat. International markets performed well, particularly China which accelerated to +27% (C$) from +22% last Q, steady on 2 year trend.

As noted, digital was up 42% accelerating from about 30% last Q, and the best growth rate seen in about 2.5 years. Jordan showed double-digit growth in all geographies, including mid-teens growth in North America, and Converse returned to growth mode this quarter. North America was the main blemish – if you can call it that -- as footwear growth slowed to +4% from 9% last Q, a 150bps slowdown on a 2 year basis, and the region as a whole slowed 400bps to +4%. Management guided to an acceleration in North America throughout the balance of the year.

Is Nike expensive? Yep. But it should be. It’s not just the absolute earnings algorithm that’s impressive, but the consistency and predictability of the model in aggregate. Not many companies out there are guiding to higher Gross Margins in the face of tariff pressure.

The company is managing its financial model as well as I’ve seen it do so in 25 years. Best Idea Long.