Incredibly poor quality quarter from Nike. Missed consensus on every line of the P&L except tax rate. I said in our preview that revenue expectations looked aggressive, but that margins offered upside due to DTC shift (ecomm was +79%). It’s revenue decline was nearly spot-on with our estimate at -38% (1,000b worse than consensus). Its actually impressive in itself given that the global wholesale model was shut down for the majority of the quarter. The big disappointment was the GM line – the exact line I expected to surprise on the upside due to the mix shift to ecomm (which is accretive to the P&L by 2,000bps). GM decreased 820bps to 37.3% as higher ASPs were more than offset by higher factory cancellation charges, inventory obsolescence reserves and deleverage associated with lower shipments over fixed costs through its wholesale mode. All in, the company reported a loss of $0.51, vs the Street at +$0.12, and our estimate of $0.08. Disappointing to say the least, but you’d never know it by the muted sell off after hours. People clearly don’t own this stock for this quarter, or this year. If any good can come of this it’s that FY2021 numbers are likely to head materially lower – they were at $2.68 vs my estimate of $1.86. Then we’re likely setting up for 2-3 years of 20-30% EPS growth as the business model recovers – but until this point the timing of a recovery was much too soon. I think that Nike is going to take its time backfilling its wholesale model, and will use this opportunity to rip the band aid off the damaged part of its wholesale distro in favor of sustaining well above trend growth in DTC/Digital. Inventories were up 34% during the quarter, which is about as high as Nike has put up in years. Understood given the transfer of its product from wholesale to retail (the product that was not cancelled by Nike, at least). The company noted that it will likely be in balance by its FY2Q – suggesting the next two quarters will face GM pressure. I like that, as it will take consensus numbers lower. If we see the Street’s number come in below $2.00, then its still ‘game on’ with me on this name long side. But above $2.00 it makes it very difficult to call this a Best Idea Long with such an intermediate term variance between our numbers and the Street. Let’s see where the Street comes out. Stay tuned.
