Nike Didn’t Do It
Ah, Nike stock; a permanent fixture of markets and a staple of low risk-long-term investing. Nike is such a great brand that it doesn’t have to cut prices as far in a downturn as Lululemon, Puma, New Balance, and Reebok. This peaked investors’ expectations leading up last night’s crunch earnings call, but something didn’t click.
Nike was force-sold after-hours as it fell below break-even, reporting $790 million down the gutter and sales down 48% in North America. Chinese sales were down just 3% with the country reopen, but that wasn’t enough to save the stock. Could we see this coming?
There are three lenses for an investor to view a business; what it does (product, customer, market), what it costs (cost structure), and how it’s financed (capital structure). Nike’s edge is visible through the first lens; it sells sportswear to obsessed fans.
It does have efficiencies of scale re expenses. It is well-financed with its own cash and borrowed cash, but the quality of financing (debt terms, profit levels, and stock price) depends on what the business is doing and what it costs. For Nike, it’s all about the brand!
This pandemic has not been the “right type” of crisis for Nike’s stock to outperform. It’s been less a demand crunch with customers cash-tight than it has a supply crunch with cost structures stretched. Its advantage is with customers!
We’ve seen supply chains freeze, but not people forced to split change to afford things, or forced to show their willingness to pay for the brand at the expense of other brands. It’s also been an indoor crisis, so not ideal for selling running shoes at any price. Just sayin’!
The stock is down to “only” pre-corona levels, but there’s still a rare trade in this name. It normally operates at such a scale that short-term moves are unknowable, but if Nike benefits from us hitting the gym to work off all the pandemic stress-eating, the stock might have some spring in it. Buy the dip?!
