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- News of the Week (September 30, October 4, 2024)
News of the Week (September 30, October 4, 2024)
Nike; Tesla; Sell-Side Notes; EBIT Comp Sheets; Hims; Amazon; Nu; SoFi; Headlines; Macro
Brad Freeman
October 05, 2024 • Estimated Reading Time: 18 minutes
Table of Contents
Max subscribers — my portfolio has not changed since the last update.
1. Nike (NKE) – Earnings Review
a. Demand
Total revenue missed estimates by 0.5%.
North American revenue roughly met estimates; Europe, Middle East, & Africa (EMEA) revenue missed by about 4%; China beat by about 3%; Asia Pacific & Latin America beat by 1.4%.
Revenue declined across all geographies and channels besides growth in Latin American and Chinese wholesale.
North America revenue declined by 11% Y/Y. This compares to a 1% Y/Y decline last quarter.
EMEA revenue declined by 13% Y/Y. This compares to a 1% Y/Y decline last quarter.
China revenue declined by 3% Y/Y. This compares to 3% Y/Y growth last quarter (last quarter greatly benefited from extended holiday season).
Direct-to-consumer (DTC) revenue beat estimates by 2.5%.
Wholesale revenue missed estimates by 2.5%.
Revenue fell by 9% Y/Y on a foreign exchange neutral (FXN) basis.
b. Profits & Margins
Beat 44.4% GAAP gross profit margin (GPM) estimates by 100 basis points (bps; 1 basis point = 0.01%).
Beat EBIT estimates by 1.5%.
North American EBIT dollars declined by 15.2% Y/Y vs. 5.2% Y/Y growth last quarter and 4.1% Y/Y growth last year.
EMEA EBIT dollars declined by 14.8% Y/Y vs. 2.0% Y/Y growth last quarter and -4.6% Y/Y growth last year.
Greater China EBIT dollars declined by 4.4% Y/Y vs. 3.6% Y/Y growth last quarter and a 3.0% Y/Y decline last year.
APAC EBIT dollars declined by 2.9% Y/Y vs. 3.7% Y/Y growth last quarter and a 17.2% Y/Y decline last year.
Beat $0.52 EPS estimates by $0.18.
GAAP EPS fell by 26% Y/Y. Its tax rate was 19.6% vs. 12.0% Y/Y. With a 12% tax rate this year, GAAP EPS would have fallen by 18% Y/Y.
Nike told investors that it was “staying disciplined on costs.” Still, demand creation expenses rose 15% Y/Y despite the revenue declines. SG&A overall did fall by 2% Y/Y due to lower overhead expenses via layoffs. GPM expansion was driven by lower product, warehousing and logistics costs. Strategic pricing actions (sacrificing revenue for margin) helped too.
c. Guidance & Valuation
Nike removed most of its annual guidance. I think this was the correct decision. It’s wise to try to get as much bad news out of the way as possible for new leadership. It’s also wise to let a new CEO take their time on perfecting the new plan. Lower the bar for their future success. Previous annual guidance for fiscal year 2025 called for a mid-single digit decline in revenue, 20 bps of GPM expansion and positive SG&A growth. What it did tell us this quarter is that internal expectations have “moderated” since its previous annual guide. It still sees Y/Y revenue declines improving during the 2nd half of the year.
For Q2, it guided to -9% Y/Y revenue growth, which missed estimates by about 2.3%. It also guided to 150 bps of GPM contraction due to more markdowns, wholesale revenue mix, supply chain deleveraging and more. This is materially worse than expected.
d. Balance Sheet
$10.3 billion in cash & equivalents.
$9 billion in total debt ($1 billion is current).
Inventory fell by 5% Y/Y.
Dividend payments rose 6% Y/Y.
Diluted share count shrank by 2.7% Y/Y. It has $7.8 billion remaining on its $18 billion buyback program.
e. Call & Release
Some Needed Context:
It’s no secret. Just like countless consumer discretionary brands, Nike has fallen on harder times. Some of that is macro-related and some of it is product assortment and innovation related. There’s also an increasingly popular opinion that Nike’s brand is decaying and slowly dying amid strong competition from Hoka and On Running. If that’s the case, this weakness would likely prove to be structural. If not, it won’t. I’m in the “it won’t” camp. Still, whether the brand is truly losing its shine or not, results are currently ugly and a new CEO has just been named.
He will surely come with a significant pivot in Nike’s current strategic approach, and what that pivot looks like will take time to solidify. This is why Nike removed annual guidance and postponed its investor day. This is a massive company that has, for whatever reason, lost its way. Turnarounds for this type of name don’t manifest overnight. All of this is to say that I don’t really think this quarter matters; Hill doesn’t even start his new job for 10 more days.
“We are reporting our results in a transitional moment, as John retires and Elliott joins as our new President and CEO on October 14th… Elliott is a beloved NIKE veteran who brings a powerful connection to our employees and culture, a deep love for our brands and a passion for sport. Over his [previous] 32 years with Nike, he built a proven track record of leading our global teams, brands and businesses ” – CFO Matthew Friend.
Current (Pre-Hill) Turnaround Plan:
Nike has been “moving aggressively to shift its product portfolio and re-energize the brand’s momentum through sport.” Changes to realize this objective have included the removal of several middle management layers to accelerate pace of innovation. “Speed Lane” is a key piece of this push, which is its new approach to product delivery that aims to shorten time to market through “hyper-localized design and closer work with manufacturing partners.” It has been instrumental in turbo-charging Nike’s launch of sub-$100 shoes and 6 other product lines. The savings pocketed from cutting ties with managers as well as more savings from reduced small parcel fulfillment and other efficiency initiatives will amount to $1 billion for this year. That will be reinvested back into the business.
Beyond organizational restructuring, it expedited the sunsetting of older brands like Dunk and Jordan 1, which, altogether, represent a mid-single digit percentage impact to revenue growth. That headwind will remain in place throughout fiscal year 2025. The most noticeable impact here is on its digital business, where sunsetted franchises delivered -50% Y/Y growth. Wholesale fared much better, which is prompting Nike to shift more of the remaining inventory to that channel. That will be a margin headwind and is another reason why delivering compelling newness is so important: It nurtures direct channel demand to deliver better marketplace balance and operating leverage.
“Partner feedback on our future product pipeline has been very positive.”
General Signs of Struggles with Subtle Signs of Progress:
A lot of Nike’s weakness is being driven by lower traffic across its channels. This was most severe for NIKE Direct and digital. Overall, marketplace inventory levels got a bit more bloated Q/Q. This meant “requiring higher levels of promotional activity in Q1 to drive conversion.” Traffic trends did improve month-over-month (M/M) in August, but still missed internal expectations. During the call, Nike also called the “multi-brand environment” very competitive and warned investors that it will “take time to expand market share.” For evidence, its spring 2025 order book results were “lighter than planned.”
There are some subtle green shoots that point to its new innovation resonating. For example, Nike sees new product revenue contribution doubling this year vs. last year. This will help offset some (definitely not all) of the accelerated product sunsetting headwind and other current demand headwinds.
“Comebacks take time. We’ve had some early wins, but have yet to turn the corner.”
Performance Demand Trends:
The clearest signs of Nike’s recovery can be seen in its “Performance” segment. It delivered strong growth across men’s fitness and soccer while generating compelling results in men’s and women’s running. Both running segments delivered positive growth and sharp Q/Q improvements (easy comp but still). It just launched its largest running campaign in several years to nurture this momentum. Early consumer reception was called “strong.”
Interestingly, the most notable piece of running strength is “in footwear.” That was a bit of a surprise to me, considering the most legitimate competitive threat for Nike comes from current running shoe vendors. Overall revenue from new performance shoes rose by double digits Y/Y. Furthermore, the spring 2025 order book points to 10%+ Y/Y unit growth for the year. That likely doesn’t mean 10%+ Y/Y revenue growth, as new introductions of cheaper shoes will likely mean unit growth leads revenue growth.
“Running has been one of our toughest fights over the past few years and is one of our biggest opportunities. We are focused on driving a comeback here.” – CFO Matthew Friend
Running Innovation Coming Soon:
New “max cushioning system” to “blend comfort and style.”
Running apparel refresh with more focus on “women-led designs.”
New trail-running models.
The aforementioned debut of sub-$100 shoes to cater to somewhat fragile macro and consumer anxiety.
“As we look to the spring, newness and innovation for footwear will take a step forward with growth in the mid-to-high single digits Y/Y. We expect to see Q/Q gains in newness and innovation as a percentage of total footwear.”
Lifestyle Demand Trends:
This segment continues to struggle. It shrank by more than 10% Y/Y, while Nike “expects declines to continue through the year.” This is for Nike and Jordan. Leadership thinks they need to improve in their ability to react to changing consumer preferences here. The company is currently prioritizing full price sales to “protect the long term value” of the brand, which is amplifying revenue declines for this segment.
More on China:
Retail sales in China “moderated” for Nike and the industry. It “was not immune,” as the firm saw sharper traffic declines than expected, lower conversion rates, bloated inventory and more promotional pressures. It remains the top sports brand there and also remains confident in the long-term opportunity while expecting near-term weakness to endure.
f. Take
As many of you know, I’m a sucker for ubiquitous, global, powerhouse brands with what I view as temporary struggles. The massive intangible value stemming from these iconic brands motivates bright individuals to keep pushing for change until that change actually works. The Nike Swoosh, with its activist attention and new team, is a perfect example. It inherently invites loud, pro-shareholder voices to the table to demand better performance. To me, this isn’t a dying brand. This is a brand with broken assortment and innovation… and now a new CEO with a track record of doing better in these areas.
That’s exciting, but I still think it’s too early here. The issues plaguing Nike are less concrete than some of the other struggling consumer titans. Consumer preferences are hard to precisely calculate, and so its ability to facilitate better launches will likely take time. It needs to do better with mining its massive database to guide the product roadmap and needs to fully embrace those learnings. No more trial and error on new products. I could easily see this making its way into my portfolio at some point… just not yet. I need to see the new CEO’s actual plan (again, he hasn’t started yet) and I need to see real green shoots of that plan bearing fruit. Hopefully that happens in the coming quarters.
2. Tesla (TSLA) – Deliveries Contextualized
Tesla barely missed delivery estimates for Q3. Emphasis is on barely, as the 0.1% shortcoming could be called a rounding error. Still, this estimate had come down quite a bit and it did miss more elevated whisper numbers by about 1.0%. Interestingly, Chinese demand fared better than in the USA and Europe, despite the Chinese market being considered the most competitive in the world. This was almost surely aided by deals on car insurance and lower-cost financing offered to consumers to spur demand. Deliveries in North America and Europe were the sources of the small miss here. This could be why Tesla just cut U.S. pricing by $2,500 for Long Range Model 3 and Y vehicles.
The combination of price cuts, other demand incentives and the small deliveries miss could weigh on profit margins this quarter. Emphasis on could, as there are other variables such as energy margin expansion and layoffs that will offset the likely continued Auto GPM pressure. We shall see how these puts and takes play out in a few weeks.
As many of you know, I’m not bearish or bullish on this name. I’m not a shareholder and would never short it. I think that gives me a relatively objective opinion on what’s happening here. So here’s why I think Tesla’s financial results have worsened lately:
This is macro. This is not EV competition catching Tesla; this is not Elon’s antics weighing on demand; this is not the world deciding combustion engines are actually the future. This is macro. Rate hikes directly make its cars more expensive, and that obviously weighs on demand. There’s been some plug-in hybrid momentum recently, but that doesn’t interrupt the overarching trend of our global auto fleets going electric. You’ll notice that while Tesla’s margins have tanked, they’re still by far the most profitable EV maker on the planet. They do have the luxury of scale and maturity that other programs don’t, but the point remains.
I expect the recent 50 bps cut to ignite demand and I expect several more cuts over the next 12+ months to incrementally fuel that fire. The end of 2024 should mark a trough in auto demand if Tesla’s products remain high quality and better than others; that seems to be the case for the business. The caveat? Who knows how handsomely the stock will be rewarded but better business results, as it already trades for 90x forward earnings (2.60x forward net income PEG) and 148x forward free cash (1.65x forward free cash flow PEG).
3. Interesting Sell Side Notes
JP Morgan downgraded Mercado Libre to neutral. The caution is mostly related to the red hot stock and sky-high expectations that come with it. It also mentioned Meli’s credit investment cycle and how that could weigh on margin expansion in the near term. To me, this just seems like JP Morgan taking their win after they have been so right about this name.
Pivotal Research started Alphabet with a buy rating. It sees the Giant’s commanding global search market share as safe. It also thinks its deep presence in consumer hardware (through Android) and willingness to offer incentives to manufacturers set it up to be the default AI option across many vendors. It doesn’t view potentially higher traffic acquisition costs (TAC) as preventing the firm from realizing a compelling return on invested capital (ROIC) from these initiatives. Finally, like everyone else, it called out Google’s massive headcount and opportunity for reductions to power more profit growth. My least favorite source of operating leverage, but a source none-the-less.
Barclays reiterated its underweight rating for Apple. Its channel checks are pointing to -15% Y/Y global growth for iPhone 16 thus far, with shorter wait times. It also cited potential cuts to semiconductor component orders as more evidence. That -15% estimate is miles away from Wedbush’s +12% Y/Y estimate, with dozens of other analyst guesses filling in that wide range. Modeling Apple iPhone growth with alt-data has historically been challenging for analysts. It’s a very complex, multi-faceted supply chain.
Cowen sat down with SentinelOne CEO Tomer Weingarten this week. It doesn’t see geopolitical tensions in the Middle East as material to this business. It also came away with the impression that new logo momentum is accelerating and its net new ARR guidance is comfortably attainable. It also called the Lenovo deal a “blueprint for other partnerships.” Keep them coming.
Jefferies reiterated its overweight rating for The Trade Desk. Its channel checks point to 2025 being a “breakthrough year” for fully biddable programmatic streaming ads. This confidence is in part related to highly encouraging Disney commentary on some streaming clients now only buying biddable impressions and spending over $100 million per year. It sees next year revenue coming in a full 6% ahead of current consensus. Happy all time highs.
Cowen interviewed Zscaler’s CFO this week and concluded the following as part of a buy rating reiteration: Billings growth is solid. Changes in go-to-market are working and give leadership confidence in the faster growth that it guided to for Q3 and Q4. Furthermore, Zscaler is not feeling any pressure to cut prices to win business. Good news for revenue. Good news for margins.
4. Updated EBIT Comp Sheets
Definitions:
EV = enterprise value = market cap + cash - debt
NTM = Next 12-months
FY = fiscal year
CAGR = compounded annual growth rate
Needed Overarching Data Notes:
Lower on the right-most column means cheaper. That column is an iteration of Peter Lynch’s PEG framework. Instead of P/E divided by forward earnings growth, I use a 2-year earnings CAGR. In addition to using net income (the “E” in P/E), I also use EBIT (like in this case) and free cash flow (like I will for next week).
This is simply one slice of data. It is not the be-all-end-all of valuation.
Y/Y growth uses the firm’s current fiscal year. The 2-year CAGR uses its current year, next year and the following year.
Fiscal calendars don’t perfectly match. Schedules are mostly similar, but not identical.
Needed Company-Specific Notes:
I used EBITDA for Trade Desk, Airbnb, Duolingo, Cava, SoFi, Hims and Axon. These firms don’t make any GAAP adjustments for EBIT and have modest depreciation and amortization expenses. By using EBITDA, the chart offers a more apples-to-apples view by accounting for things like stock compensation in the same way across firms.
Celsius, Adyen and Spotify also don’t make quarterly adjustments to GAAP EBIT. Still, those three pay very little stock compensation, so there’s a small gap between GAAP EBIT and EBITDA. For these firms, I used GAAP EBIT.
Samsara and Spotify were excluded from the YTD average, as they’re both positive outliers.
Samsara was excluded from the current FY Y/Y growth average, as it’s a positive outlier.
a. Current Mature Growth & Bellwether Brand EBIT comp sheet
Last quarter averages were as follows:
29x EV/NTM EBIT
28.9% Current FY Y/Y EBIT Growth
22.0% Fwrd 2-yr EBIT CAGR
+1.9% YTD Analyst EBIT Estimate Change
1.77x EBIT Multiple / 2-yr EBIT CAGR
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