▶ Full Post Text
Nike will be releasing earnings next week. Management already prepared us to not expect any major wins
A lot seems to have gone wrong with the company in recent years, and the worst part is that this seems to mostly have been self-inflicted.
1. Went all in direct to consumer, cut wholesale partners, destroyed those relationships
2. Flooded the market with AF1, AJ1, Dunks, and killed the heat on some of their best franchises
3. They chased lifestyle revenue, and pretty much abandoned the sport performance identity (major strategic blunder imo).
4. One of their worst moves was to build a fixed-cost infrastructure for a digital business that never ended up reaching the scale management projected.
5. Misread China's channel dynamics and let inventory pile up across digital and wholesale simultaneously
6. Its EMEA markets showed structural mismanagement, so the management's response was to paper over it with volume, rather than addressing structural causes of weakness.
7. Tried to fix all of it at once from a position of weakened brand equity and elevated inventory everywhere which just worsened things for itself.
Management now insists that they are working to correct these misteps. The main thesis they're trying to push is that the company never lost its fundamental advantages (athlete relationships, innovation capability, brand equity, wholesale infrastructure, global scale, etc.) and all wrongs actually related to discipline.
In prior earning calls, they seem to be pretty explicit that the timeline is longer than they initially suggested and some geographies are messier than initially diagnosed. China and EMEA have structural weaknesses compared to North America, and require more time.
They have guided Q4 revenue to fall between 2% and 4% of last year Q4's total of $11.1 billion. If the reported revenue is below $10.6 billion, that's going to be really negative for the Nike. They're betting on the North American market showing strength, and if that does not play out, their thesis is breaking down.
I'm tracking \\\~24 specific milestones for the company in the upcoming earnings, and will be sharing updates if anyone is interested in them. Right now, shareholders will want to see that Nike can address past failures, and stick to the clean up thesis they are framing.
Personally, I think the stock is expensive right now at 28x forward earnings, especially since the best signal we could be given is that the fundamental decline is slowing, not reversing. I think that's a pretty thin foundation for a 28x multiple.