Nike’s 2Q left little to be desired, with a $0.70 headline vs $0.58 consensus at our estimate of $0.60. Beat was top line and SG&A driven, with $0.03 help from a lower tax rate. North America and EMEA drove the upside. Gross margin was right on the pin. Few, if any, holes to poke in this quarter, with every region clocking in an acceleration on the margin – except China which still put up impressive 23% top line growth. The 3Q guide will likely get people bent out of shape to an extent, as our math on the guide nets out about a $0.70 EPS number vs the Street at $0.78. When all is said and done, we’re modeling that its more likely that the EPS number starts with an 8-handle. This was Parker’s last rodeo, as Donohoe will lead next quarter’s call as CEO – though I’m not expecting any major changes to strategy. But I am definitely looking for an acceleration in the DTC business – and Gross Margin – once his strategy is baked. This quarter active users for Nike apps were up nearly triple digits – a rate that’s sustainable for longer than most people think. Total direct sales were up 17% -- same as last quarter – a rate I expect to rise next year, particularly given that CY2020 will be a year where Nike will even further curtail marginal wholesale distribution. If there’s any surprise next year in wholesale expansion, it could be that Nike starts to sell into Target – after all there’s a $450mm void to fill with HBI’s C9 business going away. But net/net, it should be yet another year of DTC acceleration, which is bearish on the margin for most wholesalers not up to par with Nike’s distribution standards. Over the long term, I think Nike hits $50bn in revenue on the nose in 2022, which equates to about $4.35 in earnings power. Is the stock cheap today? Not by historical standards. But there aren’t many consumer brands out there today that have such a demanding control over its distribution and profit algorithm. Is it worth 25x earnings in this market (just a touch higher than a WMT multiple)? My answer is yes. This name won’t make you rich given the broadly positive sentiment around the name today, but the earnings algorithm will outperform both consumer discretionary in aggregate as well as the broader market. Best Idea Long.
Takeaway: No holes to poke in this one. The guide is conservative, and beatable. DTC accelerating under new regime. Best Idea Long.
