Bears Win Idea Dinner Debate Over Nike (NKE), lululemon athletica (LULU) and Under Armour (UA) - Wells Fargo
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Wells Fargo analyst, Ike Boruchow, hosted an athletic apparel idea dinner pitting Bulls against Bears and the Bears seemed to win.
lululemon athletica, inc. (NASDAQ: LULU): Bears were focused on 1) decelerating comps into tougher
compares (LY’s pant wall launch, pricing increases), 2) flat to negative traffic the past few quarters and 3) the inability to scale the business given the ongoing reinvestment (citing a HSD comp leverage point – which seems troubling given the slowing top-line). The Bull/Bear split was roughly 30%/70% but the conversation skewed even more negatively. The analyst thinks "bears have the “sexier” argument right now, but should top-line remain stable in 2H with investment spending that can begin to taper off to a degree, the bear case becomes much less credible".
Nike (NYSE: NKE): Bull/Bear split was 10%/90%, but the vehemence of the bears was not as pronounced as it was for LULU (bears view it as a “slow bleed”). Bear arguments were 1) competition from Adidas (successfully merged lifestyle and athletic to take share), 2) negative risk/reward from NKE’s dominant market share (easier to lose share than take it), and 3) the fact that the business may have been “over-earning” (pricing/margins) as the athletic trend worked in their favor. Bulls argued that 1) this is one of the best-run and most innovative companies in the world, 2) one successful platform launch could render the entire bear thesis moot and 3) the Adidas resurgence has been driven by just 4 styles (Superstar, Stan Smith, Ultra Boost and NMD), so NKE may benefit if one or more of those Adidas styles hit a wall.
Under Armour (NYSE: UA) - This one was a draw. Bears argued that 1) UA moved away from its core performance-apparel business very rapidly, so the wholesale business may “hit a wall” (since retail partners already carry a vast array of UA products/categories), 2) the footwear opportunity might not be as profound as expected (product quality is not great, too leveraged to one basketball player, lacks a scalable platform) and 3) the international business may face hurdles (UA’s heritage is in American Football, but Soccer/Basketball drive global sales). Bulls argued that 1) runway for growth is so long that the algorithm should be sustainable (fewer than 50% the domestic points of distribution as NKE, much lower international penetration), 2) downstream distribution (KSS) expansion is accretive to sales/EPS and is unlikely to be brand-dilutive (the customer doesn’t care if the brand is ubiquitous) and 3) downside risk to numbers is limited (for one the most heavily-shorted stocks in the S&P 500).
Shares of Nike closed at $52.14 yesterday.
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