On an absolute basis, this quarter (to be reported Tuesday after-market) should be another miserable growth algorithm for Nike – far from what anyone should expect for a name trading at 40x earnings and 30x EBITDA with less than a percent of the float held short. But in looking at the rate of change vs 13 weeks ago, it should show dramatic improvement vs the simply horrific F4Q print/stinker that Nike blessed us with to close out its May ’20 fiscal year. Even more notable is that after a cold dose of reality on that print, the Street appears to have overshot on the downside in modeling the August quarter, as such we’re looking for a sales and EPS beat as US and European retailers restock after putting up simply massive comps – which is the first time this calendar year we could say that for Nike.
We’re modeling a 13% decline in the top line, which is meaningfully better than the 38% decline posted last quarter, and 300bp better than consensus. Again, North America should lead the upside – despite Nike shutting down nine US wholesale accounts during the quarter (will have a greater impact as the year progresses, but will accrue to better gross margins as well.) Recall the biggest disappointment last quarter was the deleverage in its supply chain and Gross Margin equation, as the company put up an 820bp decline in Gross Margins despite a meaningful mix shift. This quarter we should still see gross margins erode, but higher-margin digital sales as well as a better business mix overall (higher quality distro) should limit the GM erosion to 200-300bps.
On the cost side, we should see a high-teens decline in Demand Creation, and then another 3-5% decline in operating overhead due to Nike’s job cuts early in the quarter. All in, this still spells a 30-35% decline in EBIT – but our estimate for just north of $1bn in EBIT vs the Street at $863mm (and -$838 in 4Q). On the EPS line, that nets out our model to $0.54, which is a dime ahead of consensus – a stark contrast to the $0.51 per share loss last quarter when the Street was looking for $0.09 in earnings.
As it relates to the stock, we still like this as a Best Idea Long. Will it make you rich buying it at this valuation? Not really. But over a TREND duration we’ve got every line of the P&L inflecting positively over a 1-2 quarter basis. Then due to the way Nike is changing up its model to go Direct to Consumer during a ridiculously tough environment (i.e. its ripping off the band aid when its at a cyclical low), we’re got it clocking in at a recovery margin profile of 16% -- which is something Nike hasn’t seen in over 20-years. Pre-pandemic margins were ~12%). Most companies in Consumer Discretionary will be looking at recovery earnings well below last year’s peak – but Nike is one of the few that should meaningfully buck that trend and push Return on Net Operating Assets close to 50% post-pandemic – which is a stunning benchmark for a company of Nike’s size. Nike’s earnings CAGR should be 35% over the next 3-years leading up to May23 EPS of $4.00. Even if we assume multiple compression as numbers normalize, we’ve got upside to $130/$140 over 12 months – which is more than we can say for most companies in Global Retail. If we're wrong on the quarter and the stock trades down, we'll look to add more aggressively given the high-level of confidence we have in the longer-term model at Nike.
