3rd Trade Update March 23rd, 2012 at 9:20am: NKE is trading up a tad in the pre-market after what I would describe as slightly less than a barn burner as it relates to their Q3 report and forward guidance. (See Citi comments below) I would expect NKE to consolidate some gains in the near term as the stock is about 1% from all time highs made earlier in the week. I would have thought that a stock like this, was priced for perfection and a report that was not near perfect would cause investors to take some profits. Long term chart below is obviously amazing, but $100 would seem like a good level for the stock to re-trace to and consolidate before the big Summer Olympics rally that everyone and their mother is expecting.
As for my trade, yesterday I turned a Put Spread (Apr 105/100) into a Put Butterfly, to lessen my premium outlay, as I had hoped when I initiated the position that the stock would have been closer to the 105 strike that I was long. Because the stock was basically in the same spot (late day rally made it a $1 higher) than where I put the trade on 2 weeks ago, the odds of success weren’t great on just the event, and I felt that the likelihood of break-even could be increased with a lower premium structure.
So at this point I am risking .55 to make 4.45 if the stock is down about 10% btwn now and Apr expiration, I like those odds (definitely to have this exposure and get out for a small loss at the very least) especially when you consider the combination of how extended the stock is, how the event is out of the way and was good but not great, and how the broad market appears to have topped out near term.
Make no mistake about it, this was never just a play on NKE’s earnings, it was also a proxy for shorting extended market, and this trade will only be profitable with some help from a market sell off.
So For Now, I am holding the APR 105/100/95 Put Butterfly that I own for .55
This morning, Citi reiterated their Buy on NKE, but removed it from their “Top Picks Live” list, not really sure what that means but I think it has something to do with less of a near-term catalyst driven story.
Here is a quick summary of NKE’s report and guidance from Citi’s point of view:
We remove NKE from Citi’s TPL as +18% Futures could be strongest medium-term performance, NKE’s strong +15% stock performance YTD, & lack of NT catalyst until ~May. We do Reiterate our Buy on NKE as we believe price increases are being readily accepted by retailers and see growth on new innovation, con’t North America momentum & China.
Futures Robust at +18% vs. Street +14.0% & Citi +16-17% – NKE posted overall F/X neutral futures +18% on +22% North America, +10% Western Europe, +18% Central/Eastern, +20% Greater China, -3% Japan, and +22% Emerging Markets.
Clearing Inventories a New Risk — Inv. +32% on +20% Inflation & Mix & +12% on higher wholesale units on demand & timely deliveries. Per unit cost higher than expected, unit inventories higher in sportswear apparel in China/Europe (with GM impact at NKE manages this down), and NKE expects to see Inv. > Rev. 1HFY13 and expects to continue work through excess inventory for the next six months.
Guides ~+Mid-Teens 2013 EPS – NKE guided 4Q to +LDD rev growth, -100bps GM, +L-teens SG&A (OH +MSD, Demand +25%) & FY +M-Teens rev growth, GM -200bps. FY13 NKE expects rev at or slightly above +HSD & GM to benefit from higher prices/easing costs, & EPS ~+Mid-Teens LTG. We lower 4Q to $1.39 on new guid.
3Q EPS +3c vs. Street – NKE reported 3Q EPS of $1.20 vs. our $1.26 & street $1.17. EPS diff vs. our est. on SG&A (+12c, +10.1% vs. our +14.4%), other (+2c, +$11mm vs. our flat), offset by revenues (-8c, +15.1% vs. our +17.3%), GM (-7c, -200bps vs. our -130bps), tax (-4c, 27.3% vs. our 25%), shares (-1c, 467mm vs. Citi 463mm).
2nd Trade Update March 22nd, 2012 at 3:30pm: With earnings just 30mins away I have altered my postion a bit. Previous trade from March 9th:
NKE $110 Buy Apr 105/100 Put Spread for .90
-Buy 1 Apr 105 Put for 1.80
-Sell 1 Apr 100 Put at .90
NOW I HAVE SOLD THE APR 100/105 PUT SPEAD TO MAKE A APR 105/100/95 PUT FLY FOR A COST OF .55. I ORIGINALLY PAID .90 FOR THE APR 105/100 PUT SPREAD, AND NOW JUST SOLD THE APR 100/95 PUT SPREAD FOR .35 (.90 I PAID, MINUS .35 I SOLD). MY MAX LOSS IS .55.
NEW TRADE LOOKS LIKE THIS:
NKE APR 105/100/95 Put FLY for .55
Break-even on Apr Expiration:
Profits of up to 4.45 btwn 104.45 and 100 and btwn 100 and 95.45, with max gain of 4.45 at 100.
Losses of up to .55 btwn 104.45 and 105 and btwn 95.55 and 95. Max loss of .55 above 105 and below 95
Trade Update March 22nd, 2012 at 9:25am: NKE reports thier fiscal Q3 after the close tonight, the options market is implying a little more than a 5% move which is shy to the 4 qtr avg move of about 6.875%. With the stock about $110.40, the March 23rd (tomo expiration) 110 straddle went out offered at about $5.65, if you bought that straddle you would need at least a $5.65 move in either direction to break-even on tomorrow’s expiration, or about 5%.
-Wall Street analysts are overwhelmingly positive on the name with 16 Buys, 6 Holds and only 1 Sell, while short interest is very low at almost 1% of the float.
Here is a little Bull / Bear debate from2 diverging views on the stock by 2 venerable brokerage houses:
Jeffries, who rates the shares a BUY with a 12 month price target of $130 had the following preview heading into tonight’s print:
Upward Grind Intact on Anticipated Futures
We think NKE is set up well into F3Q12 earnings (despite the stock’s consistent upward march this year). The product cycle is alive and well, retail sell-through is robust, prices are on the rise and event catalysts are on the horizon. As a result, we see better than expected sales and futures orders as the key catalysts to near-term momentum. Last quarter’s lowered GM% outlook also creates a favorable margin beat-scenario.
F3Q12 Preview. We are modeling $1.20 for F3Q12 (Dec-Feb quarter) vs. Street $1.16 and implied guide $1.15. We believe the greatest areas of upside are GM% (expectations were lowered last Q) and sales (growth being guided up ~14% vs. 18% 1H run-rate).
Focus on Futures Orders. NKE has reported futures growth up 13% over the past 2 quarters. These are the strongest rates in years, leaving some to question their sustainability.
We don’t see futures slowing this quarter. In fact, we see an upward bias to 15% growth as retailers buy more units behind what we think has been a positive consumer reaction to higher prices. This quarter also begins to reflect Olympics and NFL orders.
Margins – Expectations Bar Reset. NKE’s gross margins have been the one area of weakness, mainly from higher product costs and currency headwinds. The good news is that expectations were re-set lower last quarter (pushing out the recover by another 6 months) and currency is less volatile (for now). As we look out to FY13, better than expected GM% recovery could be an interesting developing theme for NKE shares as supply chain initiatives start to yield returns. Meanwhile, we think Nike is managing SG&A well, especially in F4Q12 which is typically a heavy marketing period ahead of the Summer Olympics.
Bottom Line. We continue to expect NKE to demonstrate a consistent, upward trajectory. The stock is the most defensive in our space and as a result, likely lags higher beta names in a continued market recovery. That said, we think the risk/adjusted return is superior here given the strong fundamental story, secular legs and best-in-class management/brand/ competitive positioning.
Valuation/Risks
NKE shares trade at 18x our fiscal 2013 earnings and 12x EV/EBITDA. These metrics are in line historically and a premium to the group. We believe a premium multiple is warranted given strong a product cycle, sales catalysts and margin recovery. Our 12-month price target of $130 is based on a blended average of 22x P/E and 14x EV/EBITDA. Risks include higher product costs, adverse product cycle and brand loyalty.
Canaccord, a Canadian Brokerage firm who rates the shares a Hold with a 12 month price target of $96 had the following preview to clients:
STRONG FQ3/12 SALES LIKELY OFFSET BY MARGIN HEADWINDS: MAINTAIN HOLD
NKE will report FQ3/11 results on Thursday, March 22, after the close. We are modeling total sales growth/EPS of 15%/$1.09 vs. consensus estimates of 14.6%/$1.16, respectively. While footwear demand trends in the US remain robust, we believe trends in Europe have softened and will likely result in excess inventory in the region. In addition, steep discounts in performance apparel during the holidays also hurt gross margin, we believe. With inventory building in decelerating regions and the stock seemingly priced for perfection at 21x forward estimates, we view the risk/reward is balanced at best and thus maintain our HOLD.
• We estimate Q3 futures orders growth ex-currency of 12.2% withNorth America (+18%) and China (+26%) offsetting flat growth from Western Europe (0%).
• We expect gross margin to decline 150bps, in line with guidance. Despite no push back by consumers on 5-10% selective footwear price increases, we see little room for upside to margins due to heightened apparel markdowns and FX headwinds.
• We are cautious on rising inventory in Western Europe (+49%) and China (+79%) that could lead to incremental margin pressures.
Valuation
We arrive at our $96 price target by applying a blended average of a 17x P/E multiple on our 2013 EPS estimate, 11x EV/EBITDA and DCF
MY VIEW: When I put this trade on a couple weeks ago I had expected the stock to be a bit weaker heading into tonight’s event, that is why I picked a spread 5% out of the money. The stock is basically in the exact same spot it was when I put the trade on, and too make money on my Put Spread tomo, I will need at least sell off in line with the implied move.
Yesterday the stock was down a little more than 1% from a new all time high, giving some credence to the notion that the stock may be a tad ahead of itself in front of a potentially volatile event. If I were long I would clearly look to protect some gains and possibly replace stock with a structure that would provide some additional upside exposure, but with defined risk.
Today I will monitor how the stock trades into the print and possibly look to turn my Apr 105/100 Put Spread into a 105/100/95 Put fly by selling the 100/95 Put spread, thus reducing my risk and increasing my odds of success in the event that the stock sells off 10% btwn now and Apr expiration. Reason for this potential position tweaking is that the stock has just sat here, not realizing much of the Implied Volatility in the 105 puts that I am long so the spread value is less as the options have decayed, the position that I paid .90 for is now worth about .85 and with 2 weeks past since initiating the position I will need a fairly big move in a shorter period of time to earn this out…..I am not sure I want to make this such a binary trade on earnings……….Stay Tuned. To be clear, I don’t have a particularly strong feeling that NKE will miss and guide down, especially when u consider how some other high end consumer discretionary names are doing in this environment, but at some point Crude Gonna Crimp the consumer and maybe tonight’s guidance is the first evidence of that.
Original Post March 9th, 2012: Nike (NKE): Just Short It?
Here is a quick preview of what I will be discussing on Options Action tonight on CNBC at 5pm:
NKE $110
Stock is up 14% ytd, outperforming the SPX which is up about 9% ytd, things seem to be firing on all cylinders for the athletic footwear and apparel maker. There are plenty of near term catalysts to buoy sales such as European Soccer Championships, Olympics, NFL Jersey deal. The current valuation may reflect some best case scenario at about 20x 2012 earnings at the high end of the 5 yr range.
Chart below shows the almost lock step performance over the past 12 months of NKE with another U.S. multi national until this week’s break-out of NKE and break-down of MCD.
Little Fun Fact: In a note to clients last month, Morgan Stanley noted that NKE has Outperformed in 86% of all Summer Olympic Years and 77% Overall.
MY VIEW: The market is paying little attention to MCD’s same store sales miss, largely the result of weak sales in Europe and Asia….. Obviously I cant think of single reason why anyone would want to be naked short NKE but stock replacement could make sense for longs as they head into the company’s fiscal Q3 report March 22nd. Last year when the company reported their fiscal Q3 they missed for the first time in 5 years and the stock went down almost 10%. The miss was largely the result of lower margins due to higher input costs…..Cotton was largely the culprit, which is trading much lower now, but crude oil is right back above $100 a barrel where it was last year at this time.
If there are any take-aways from MCD’s recent commentary is that bad things can happen to good companies who are performing well. NKE gets only about 40% of their sales from North America, and as China growth slowdown became a hot topic this week, could we start to see companies like NKE note a sign of caution about emerging market sales in the near term, a place where a good bit of their growth is expected to come for the better part of the rest of the decade?
As a trader without a long position in the stock, I looked to make a defined risk bearish bet and buy a tight put spread as the stock continues to make new highs seemingly every day.
I bought this spread for what will likely amount to a 1/4 position and depending upon price action prior to earnings I will look to add:
NKE $110 Buy Apr 105/100 Put Spread for .90
-Buy 1 Apr 105 Put for 1.80
-Sell 1 Apr 100 Put at .90
Break-Even on Apr Expiration:
Profits btwn 104.10 and 100, make up to 4.10, max gain of 4.10 at 100 or below. Break even down 5%
Losses of up to .90 btwn 104.10 and 105, with max loss of .90 above 105.