00:00What are we seeing here, Christina? Is this indeed a turnaround? Is Nike able to sell, you know, more of its hundred plus dollar shoes to consumers as the rich continue to spend?
00:13Yeah, I think we're definitely seeing some green shoots. I think what was positive about the report last night was that every line item was a bit better than expected.
00:22And in the areas where they have been concentrated on and that's been running, where they revamped the portfolio, North America, where they're making a lot of changes to their wholesale partners and the business they sell there.
00:37And that wholesale business was all delivered growth in the quarter.
00:41So I think we can, you know, you can make the assumption that as they move that product portfolio revamp to other parts of the business and to other regions, then you could see similar results.
00:53And I think that was one of the things that was encouraging about the print light yesterday.
00:57You know, it strikes me that it's not just about shoes, right?
01:00This is a company that's selling, obviously, a lot more clothing.
01:04They sell a lot of equipment. They license the brand for a lot of products.
01:08What is the most exciting growth area for you and what's the biggest problem still?
01:15Yeah, I would say right now running is the most exciting.
01:18They talked about running being up 20 percent, and that's really where a lot of the new product has come in in the past year.
01:25But the biggest challenge is on the sportswear side and the classic shoes over the past few years.
01:31They had really exceptional growth in franchises like Air Force One, Air Jordan One, and Dunk.
01:39And those, the consumers moved away from those franchises, and they've done a lot of, you know, they've been pulling units back a lot, and they have a lot of clearance to do.
01:48So that area is still weak, and they still talk about a lot of aggressive actions needing to happen on the Dunk show in particular.
01:56So that's where they need new trends to come in to the brand to attract consumers and a new product.
02:03I love those fuzzy dunks that they sold in collaboration with the Grateful Dead.
02:07But I guess the young kids aren't looking for that these days.
02:12I wonder how important the U.S. is.
02:15Obviously, it's got to be their biggest market.
02:17But compared to a market like China, where they seem to be faltering, is that one of the biggest concerns?
02:22Yeah, for sure.
02:25So the U.S. is, you know, the biggest market, it's about 40 percent of sales.
02:28But China is, you know, it's pretty weak at the moment.
02:31It was down 10 percent.
02:33And the Chinese market, historically, was a very big growth driver for Nike.
02:38So to the extent that that market really suffers, will be a drag on the company.
02:43And there's some structural challenges they talked about in that market.
02:46You know, the way they do business is different there.
02:49It's mostly stores run by third party.
02:51They don't have the factory stores that they can use to clear goods.
02:54So it will take some time.
02:56So there's definitely a challenge.
02:58And they also talked about some markets in Europe being a little bit weaker.
03:02So while there were a lot of positives, there were definitely a number of headwinds they call out on the call last night.
03:10I guess tariffs have to be there in the headwinds, right?
03:13We were expecting a billion dollars worth of costs from tariffs.
03:17And now it looks like it's going to be 50 percent more than that.
03:19Yeah, no, for sure.
03:22So when they last reported back in June, the increase in the tariff rates that went into effect in August, they weren't known.
03:29So Nike sources, a lot of products from Vietnam, from Cambodia, from Indonesia.
03:33So those tariffs went to about 20 percent from 10 percent.
03:37So that's a big headwind that they call out.
03:39And they said for this fiscal year on the gross margin, it's now going to be 120 basis points impact.
03:46It used to be 75.
03:47So that's definitely a drag.
03:48And overall, they talked about the profit outlook for their fiscal year, 26, that ends in May being a bit weaker now because of tariffs, because promotions than it was a couple of months ago.
03:59So I think although on the sales side, we're seeing momentum and they are taking steps to clear through a lot of the excess inventory, there are definitely some headwinds on the gross margin and profitability that are still there and will be a drag this year.
04:15They're still trading at 44 times expected earnings.
04:20And that's more than NVIDIA.
04:24Why do you think the market's willing to put such a high multiple on this stock?
04:29Yeah, I think there's the expectation or the I would say the possibility that Nike can really turn around the brand.
04:38And, you know, they've done it before.
04:40Obviously, every situation is different.
04:42They're a bigger market now.
04:44And you could argue they were in a deeper hole.
04:46So the fact that if they could turn the sales around and get back to, let's say, mid to high single digital growth and also the profitability has been pretty low for them.
04:57Historically, Nike was a company that generated a double digit operating margin in that mid teens range.
05:04That's been a lot weaker now.
05:07So if you could get sales growing and profitability improved, particularly as they can reduce those clearance and promotions, then it could be a company that in a few years could be earning a lot more in EPS than they did this past fiscal year that just ended.
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