Nike (NKE): Taking to the bottom of our Best Idea Long list. Yes, we’re getting less bullish on Nike the stock, not Nike the company. There’s no bigger bull out there on this company than @HedgeyeRetail. People are underestimating the pure speed at which at which new CEO John Donahoe is accelerating the Consumer Direct initiative at Nike. The guy’s a stud. He’s put in action half a dozen initiatives that prior CEO Mark Parker has been talking about for a decade – not the least of which is aligning with higher-end retailers, committing real capital to the women’s business, and shifting the high -end part of the business incrementally towards consumer-direct (i.e. going around wholesale distro). The print on Friday was just ahead of our Street-High estimates – and guidance was bullish across the board. High quality consumer names have been putting up great numbers and the market has been showing no love – yet NKE is trading up 3% after market. Here’s my dig… This is the most loved stock in Retail. The ‘buy rating ratio’ is the highest its been in 20 years on the sell side, its trading at the highest multiple in 20-years, and just 1% of the float is short. More importantly, while we remain ahead of consensus, we’re less that 10% ahead for the next three years…and we are modeling EBIT margins that recover to nearly 18% (17.6% to be exact). That’s a good 500bps ahead of Nike’s prevailing margin rate. As an analyst, there comes a time where you feel like you’re pushing your model – and getting overly bullish/aggressive. Trust me…it doesn’t feel good. That’s where we sit with Nike today. We’re modeling an ideal financial outcome, and the Street is not too far behind. That’s what bothers me. The Street is getting too close to our numbers, and I’m getting less comfortable with our numbers as they stand today. So we’re taking Nike down to the bottom of our Best Idea list. We like it more on a pullback. But if the stock keeps setting peak multiples on peak earnings, we’re not afraid to go short. Expectations are the root of all heartache.
