Yesterday Deutsche Bank hosted a Bull vs. Bear debate on Nike Inc. (NYSE:NKE) with the room roughly evenly split between the two sides. Bulls and Bears have different views on whether Nike’s dominance in North America is a strength or a liability. Bulls contend that Nike has the ammunition to drive a re-acceleration while Bears argue that its growth algorithm has simply changed.
Much of the Bull case centers on Nike's sheer dominance in the North America market. Nike's scale and ability to react to market changes, Bulls contend, make it unlikely for the company to be under pressure for long. Bulls pass off ADS and PUMA’s current momentum as the brands simply benefiting from the fashion cycle (just as Nike once did) and believe the two are too small to materially dent Nike's business. Moreover, Bulls argue that UAA’s deceleration is validation that fighting against Nike is difficult as the latter’s enormous operating budget allows it to invest heavily in product, marketing, etc. Bulls also point out that international performance, particularly in Western Europe and Greater China, remains strong. Finally, in terms of FY18 guidance, Bulls feel that flat YOY EPS would be fine as long as pressure is primarily from FX.
Bears acknowledge Nike's sway over North America, but unlike Bulls, label it as a liability rather than a strength. Nike had been growing too fast for its size and its market share in North America, Bears argue, is structurally too high. A decline in share could take place if Nike moves to ‘reset’ its wholesale business and proactively curtail shipments. Bears also narrow in on the drivers of EPS growth. They feel that Nike has been relying on SG&A cuts to meet EPS estimates, a strategy likely to unravel in FY18 if it is forced to accelerate investments. More fundamentally, Bears believe Nike's growth algorithm has changed, with ASP gains, HSD-LDD revenue growth, and GPM expansion no longer in the cards. Bears counter Bulls on International by asserting that growth has been decelerating and inventory positions are unfavorable. Lastly, for FY18, Bears see real risk of an EPS decline.
In its Bull vs. Bear preview, the firm reduced FY18 estimates below the Street, but reiterated its Buy on Nike. It expect EPS growth to stagnate next year largely due to FX, but believes Nike’s underlying business will inflect with a solid product pipeline and subsiding market share losses. FL’s pre-announcement, which indicated a strong Mar. & Apr., is also favorable for Nike’s 4Q. Finally, given Nike’s still significant international potential and growth outlook scarce in broader retail, the firm is sticking with its Buy despite near-term pressure.