This quarter was largely a non-event for Nike. On one hand you could argue that the company beat consensus when adding back discreet items, but the reality is that the quality of earnings (with a mix of high other expense and lower tax rate) was relatively poor given the weakness in its highest margin region – China (~20 of revenue but nearly a third of cash flow). As one would expect, the company did not issue 4Q (May) guidance and did not give any indication as to where next FY is headed – because it frankly does not have a clue. No fault there. But it’s a fact. One thing Donahoe (who’s first performance as CEO I’d give a C+ relative to Nike standards) wanted to leave us is that Nike has a playbook based on how China performed through its three stages of crisis-management 1) Recovery, 2) Normalization, 3) return of strong Nike growth – that will be applied to other regions as experienced in China. How I’m running the math, it gets be to about $0.14 per share in 4Q – or a about an 80% hit to EBIT for the upcoming quarter. Not irrational based on the fact that 80% of the company’s revenue is at a standstill today. To Nike’s credit, it’s balance sheet can handle all this virus can spit out and then some. The bad news is that the consensus is at $0.42, which means that unless numbers come out post-call at an extreme discount to where they went in, the company’s lack of guidance set itself up for a miss. I think that a $72 stock gets the noise around missing unknowable numbers. The bigger question with Nike, and quite frankly its biggest opportunity, is to come out stronger than it went in. Digital traffic was up 36% this quarter, which is impressive, but not as good as I think we’ll see in the coming two quarters. This is an opportunity for Nike to help change the paradigm as to how people shop for sneakers and athletic gear – the in-person element of which has kept online at a mere 8% of total sales. This is a power brand and there no reason why online can’t represent 30-40% of sales, which is also worth about another 1,000bp in Gross Margin. Though its clear that FL has scored points with Donahoe in his early days, any shift in this paradigm is Nike bullish and FL/B&M bearish. Assuming that the ‘China model’ of crisis management applies to the rest of the world, it builds to about $2.60 in May21 EPS, and then $4.00 in EPS over a TAIL duration – again, with minimal stress to the balance sheet. That’s a low-risk 20% EPS CAGR over three years vs where we sit today – tough to find that in consumer discretionary. Best Idea Long.
Takeaway: Uneventful print, little direction. But opportunity for Nike to change a stale paradigm of how its product is purchased in favor of online.
