Nike on the Move After Earnings, and What Drove Yesterday’s Sell-Off 12/21/23

0:01Live from the NASDAQ market site in the heart of New York City's Times Square this is fast money. Here's what's on tap tonight. Not doing it. Shares of Nike sharply lower at this hour and a revenue miss and a softer than expected outlook. Is this the latest sign of a consumer starting to stumble? We'll do a deep dive straight ahead. Plus, the least magnificent. Hard to believe that Apple is up nearly 50 % this year. It's the worst performer among the so-called Mag 7, though. Can it go from the bottom to the top in 24? We'll debate that. And later, Eli Lilly and Novo Nordisk have fattened up their bottom lines on the obesity drug boom.

0:34Will the off-the-charts demand and not enough supply hurt potential growth in the new year? We'll break that down. I'm Melissa Lee coming to you live from Studio B at the NASDAQ. On the desk tonight, Dan Nathan, Karen Feinerman, Guy Adami, and our guest trader for the evening, Lori Calvasina from RBC. Welcome, Lori. And we start off with Nike swooshing lower, the sports apparel giant warning of weaker revenue going forward. It also announced plans to cut$2 billion in costs over three years. Nike's earnings call just kicking off. Our own Sarah Eisen's got the very latest. Hey, Sarah. Hi, Melissa.

1:03So this is a bit of a good news, bad news situation for investors. On the good news front, Nike is really ramping up the profitability here. That was evident in both the numbers and the comments in the release. $1.03 per share was a big beat. Gross margins came in better than expected as well. You mentioned the cost savings plan they're announcing,$2 billion. They say they're going to do that by simplifying product assortment, increasing automation and technology, streamlining our organization, i.e. job cuts, and leveraging our scale, Nike says, to drive greater efficiency. In the release, this is unusual.

1:37The CFO, Matt Friend, is quoted by saying, we are shifting toward more profitable growth as we look ahead to a softer second half revenue outlook. Those comments, I think, getting a lot of attention because they are warning about the second half of the year. And reminder, Nike just reported its second quarter. That was also evident in the numbers today. 1 % overall revenue growth. Revenue growth in its key market, North America, shrinking in the quarter, excluding currencies. Europe, shrinking in the quarter, excluding currencies. Nike did manage to grow about 8 % in greater China, but that was a step down from the double-digit growth that we have seen in that region for Nike in recent quarters.

2:16Also, just want to highlight some other areas where they're seeing slower growth. Digital, for instance, sales up only 4 % there. wholesale, which is the department store channel, down 2%. So I think that really rings true of what the CFO is saying about the softer second half revenue outlook. We'll learn more from the conference call, which just kicked off. They usually share specific guidance toward the back end of the prepared remarks. After they talk up the innovations and how strong the brand is, expect to hear a lot about the Olympics, which are gearing up as well this year for next year for Paris and what Nike has planned.

2:51But I think the big focus will be on the demand environment, which is the not so good news part of this story. And clearly Nike is sensing a shift here when it comes to consumers. Karen's got a question for you, Sarah. Yeah. Hi, Sarah. So the inventory that looked like very good shape. So it looks it seemed to me like maybe they knew during the quarter that they were seeing some softness. I mean, they ended up their turnover was excellent and that inventory was very good. So when did they kind of get wind of this or are they sort of shifting and just going to a higher margin business because those margins were good?

3:22Yeah, I mean, I think they're going to a higher margin business, which is clear. And they're trying to control things that they can control, which is why the shift into more profitable growth. And with that comes the inventory management. I don't know exactly when in the quarter they started to realize that because from what I've heard, they had a very strong Black Friday, for instance, and Cyber Monday. But I don't think it's surprising. We've heard it from other retailers as well, specifically on Target and Walmart, on general merchandise, that the consumer is looking for value and has slowed down.

3:54And I think hearing it from Nike as well sort of jibes with that fact. And they are able to manage the profitability picture in the face of that. The release does seem to be much more conservative than the company normally is, Sarah. And I'm just wondering if you can sort of characterize that for us and give us a sense of is it really? because it sounds like they're being a little defensive about their business right now. Cost cutting, they're also warning of softer growth in the second half. I think that's a change. I think the announcement of the$2 billion cost savings program is new. First of all, the fact that Matt Brown is saying a softer second half revenue outlook, that is unusual to have that kind of tone in a Nike report, especially lately in a Nike report.

4:37Look, it's still a category leader. And, you know, by all accounts, they've got these these good new innovations that are heading the market. I think there will be questions on the call because of this, Melissa, about full price and whether they're able to drive margin that way. Hold the line there if the demand environment really is weakening. But I agree with you in terms of the defensive posture. I get that from the release. We don't usually get that from Nike and the release. And I think that's the point they're trying to make. But they're also trying to cheer up investors and drive profitability in what we saw in margins and say there's more to go here on that story.

5:11All right. Sarah, thanks so much. Great to see you. Sarah Eisen. What do you think of Nike, guys? A lot here, right? So we had a robust conversation last night in absentia. You were obviously doing it. I heard some of that. You know, you said that you were listening to this. I thought it could trade up to 128 into earnings. I think it got up to 123. So that was wrong. So what do you do now? Now, Karen mentioned inventories. Last quarter, they were down 10 percent off a decent sales growth. That was good. And I think that helped margins this quarter. Now, inventories are down 14 percent year over year, which should continue to help margins.

5:42And it is a bit of a margin story. But you know what? Unfortunately, it's a North American story as well. And 45 percent of their revenue comes from North America, which is now down three and a half percent year over year. That's concerning on top of a two billion dollar in cost savings on a company that does close to 60 billion revenue. you, that's a significant number. What do they see that the market isn't seeing? Question is, where do you buy the stock? What's the right valuation? I think it goes lower than 115 now. I don't think it gets down to the September low, which was 98, but somewhere between 105 and 108, I think it settles in.

6:14It's interesting that we're spending so much time talking about margins and inventories and the like. And, you know, if you look at that print that they just had a 44.6%, I think the street was looking for 44%. For the back half of the year, expected about 46 % that margin. So like when you ask at what point did they start to put some of this sort of inventory controls in place or start thinking about profitability, I look at the 46 percent in the back half and I say that's probably not particularly likely. And, you know, you see this sort of action. They're putting these they're taking this charge.

6:40They're putting these kind of initiatives in place over the next few years. There's probably another quarter of difficulty, especially if they're warning to that. I mean, I'm just saying like, you know, and this is one of the things I think is interesting about some of these late cycle names, some of the things that we took away from FedEx. As we get into the new year, we start thinking about Q4 earnings and the sort of visibility that a lot of companies have. This might be it. The micron thing, again, and I'm not trying to tie these all together, but it's kind of an interesting week of earnings now.

7:04You know, that is a little, to me, it's a bit more cyclical. It's a bit more what's going on. I think this is much more impactful about what the consumer here might be doing and how they're thinking about it abroad. And the consumer abroad, you're pointing out that China was weak. Very weak. And you wonder, what does it mean for others operating in China? Right. And I was just looking, Starbucks doesn't seem to be doing much in the after hours. But so as Sarah said, this was a quarter of puts and takes for sure. I think this inventory thing is very interesting to me. It sets them up well because the inventory continues to shrink, which was such a big issue for them.

7:36They started to get their arms around it last quarter, which is why the stock reacted so well. But I'm not sure when they got cautious. And so I think it's better margins. But if your overall sales aren't growing, well, that's not nearly as good. This$2 billion cost control over three years or cost reduction over three years, that is a significant amount to their bottom line if they get there. And I don't know what the right multiple is to put on it. I'd like to buy more down, but I agree with Guy. Let it shake out a little. I think some analysts are going to be disappointed with this. And I think that the tone of the call seems somewhat downbeat.

8:14Yeah, downbeat for sure. What does this say, if anything, in your view about the consumer and where we are in the cycle? Well, it's interesting. I think the resiliency of the consumers started to be taken for granted. And I've been in that camp as well, right? And we've had a couple of interesting prints. We had consumer confidence that came in better than expected. We've got Michigan tomorrow. We'll see what that shows. We've had some GDP and consumption data that's come in a little disappointing. So I think the sort of nuggets that they're going to give us about the cadence of consumer health, I think, are going to be really important macro-wise.

8:42In North America, I think everyone understands China's been weak. Yeah, Foot Locker's down more than 2%, 2 % just about on the back of this. What do you want to know from the conference call? What are they seeing about why is this$2 billion of cost savings over the next few years? Where did that come from? I mean, because we haven't. No, I'm not joking. I'm actually not joking. Do you think they're going to say that or do you think that realistic? I don't know what they're going to say. I do think that they can operate more efficiently. Yeah, I do. And then in terms of, you know, they're getting their inventory in order.

9:11But what do you make of the slowdown? North America is still your biggest segment by far. What's going on with the slowdown in North America? Well, so I obviously work out a lot, right? And so I was on Nike.com actually just yesterday. That's the workout? Well, no. I was looking for a new pair of running shoes, okay? And they have hundreds, if not thousands of SKUs. Like, it's actually, it was mind-numbing. I actually just gave up after 10 minutes, and they did not get an order. You know what I mean? So it's kind of interesting when you think about that. You said to yourself, why are you laughing?

9:43Because you're the only Iron Man on the table. No, first of all, it's got nothing to do with that. Oh, really? You shop for sneak. Do people do this? I mean, now I'm off. Yes, of course. You don't go to the local Nike store. Hasn't digital been a huge part of the Nike story? When you're talking about AI, you're talking about efficiency and logistics. You're talking about efficiency. You know, like all that stuff. Yes. So, I mean, like that's my only point. And, again, obviously I work out a lot. So the other point I want to make is that, you know, you just referenced that move off of the September low when they reported.

10:12The stock was down 30 percent from its 52-week highest. They could have said anything. You know what I mean? And the stock was going to rally. And now it's rallied 35 or some percent. So I think this is also going to be a story as we get into January. Look at the stock market from January 2022. It looks like a V, you know what I mean, to January 2024. If you think about it, I think it gets a lot harder from here. And I think this is when the stock picking really, like, kicks in. Just one more point I want to think about is the we've seen a lot of supply chain improvement and that's gone to people's margins.

10:42And I think that's getting a little long in the tooth. So I kind of wish it were something else. Higher pricing, higher average sales price or something. Better cost control instead of instead of, OK, the supply chain issue is better. So our margins were better. What kind of consumer buys Nike? And I ask that because for a long time we thought, I mean, Dan, I guess. Yes. For a long time, we thought that, you know, the higher end consumers, a little more insulated. They've got their jobs still, et cetera. But if we are seeing some softness, I'm wondering, Lori, how you sort of impute that onto retail and what parts of retail?

11:15Well, look, I think, you know, there's this been there's been this bifurcation between the high end and the low end. And I would assume that their consumers are going to be a little bit more skewed to the high end. That's really where the resiliency has been. And I do think, you know, to kind of Dan's point, Consumer stocks have done really well on the heels of interest rates coming down, and that's historically what's happened cycle after cycle after cycle. Some investors have been saying to me, like, look, you know, look how much yields have already come down. Look at where they're forecast to be at the end of next year.

11:41Is this trade done? Is this over? I think what we're learning right now is that setup is as important as anything else. They've got some things coming up on the calendar, Guy, as I know you're watching very closely. Tiger Woods' contract with Nike is going to be up. Yeah, I'm laser focused on that. But they can lose a major, you know, enforcer of the brand. Without question. And they will find another major. So I'm with you on that. They'll lose people. You know, the cemeteries are filled with irreplaceable people. So Nike will figure this out. That's not my biggest concern. You know, my biggest concern, again, going back to it, is where did this come from?

12:15You know, we're talking about cost savings,$2 million over three years. What are you seeing? North America slowing down. China clearly still a bit of a problem, maybe better than expected, but slowing down as well. all this on a backdrop of a company that's been rewarded with a very sizable valuation over the years. Is it justified in this environment? That's what I look for. Is this very bad for Foot Locker? It is trading lower in the after. It is. I mean, it's had a huge run. Also, I think, you know, did she say wholesale was down about 2 percent? That's them. That's so that's not great for them.

12:49Yeah, it should be under pressure. So, Lori, you know, one of the things I think that China is interesting, and I'm just curious, as you think about your outlook for domestic companies here and earnings potential. You know what I mean? We have the dollar command input costs, as you guys just mentioned. Like, I feel like enough people, there are not enough people talking about China right now. And I really feel like if you look at the data they have and you look at the deflation and we're so excited about, you know, disinflation right now, what if they were to export that weakness overseas? Is that a 2024 story for a lot of our consumer companies, possibly?

13:18It potentially could be. I mean, I think what's interesting on China is that the negativity has been so deep. I mean, I've come off like two months of like nonstop travel and nobody's really, you know, talking about China that much anymore, which I find absolutely fascinating. But if you look at the funds flow data from EPFR, you're starting to see a little bit of an uptick. So I've been looking into China and into well, I think it's getting less negative. It's not turned positive yet. So but we're starting to see, you know, this kind of improvement and trend under the surface. So I've actually been talking to people in the last week about, you know, is there opportunity here from a contrarian perspective?

13:50And that could translate into too much negativity on the consumer or just the geography as a whole or just rotation out of the U.S. So I'll be curious to see what they have to say on China. Yeah. Let's talk about the broader market here. It's a good opportunity to segue here because just on Tuesday, I think you had a note out saying that there was like warning signs flashing about the markets being overbought. What do you see now at this point? Is this just the beginning? So I will say, you know, very clearly, I am still in the constructive camp for 2024. We've got a 5 ,000 target. I'm not sitting here feeling like that's too low at this point in time, though.

14:24The big thing that we've seen change since we put our outlook out in mid-November, we did it right before Thanksgiving, is that sentiment has really just done a complete shift. So back at the beginning of November, AAI net bulls were down around one standard deviation below the long-term average. That is typically a pretty strong buy signal. And where we are now, last week we hit one standard deviation above that long-term average. That typically signals a flat market over the next three months and about a 6.5 percent gain over the next 12 months. So I still think we're going to have a good year.

14:52But I do think we just need to sort of have that pause that refreshes. We need to stop and, you know, just take a minute and digest some of these gains. Because I do think it's fair to say sentiment's gotten a little too frothy here at the end of the year. Pause is very different from the kind of pullback that we saw yesterday. Granted, we were up a percent today on the S &P 500. But in terms of the debate around Fed rate cuts. Yeah. Do you think we get clarity on that early next year? I think we need some clarity. To be honest, it was, you know, I was in Europe last week, so I wasn't, you know, sitting there looking at the news every single minute, you know, when that Fed meeting happened.

15:25But it really got to the end of the week, and it just felt like too much had been priced too quickly. And I started to see equity investors really start to worry about that late last week and early this week. So it's not that I don't think the cuts are coming. Our team makes a very strong case for why they start in the middle of next year. And if we get more job cuts, right, from big companies like this, that is going to feed that Fed cut narrative. But March, that seems a little too early. $232 of earnings. And so that gives you a 21-ish multiple north of 21. But what's the potential pitfall of that 232?

15:57I mean, there's a lot baked in. What is earnings growth projections? I think almost 13 % for 24. So the last I saw in the consensus bottom-up estimate was about 245, 246. And I'm at 232. And I'll tell you, that is another source of real interest in my client meetings recently. The big difference between my number and street consensus is I've got kind of flattish margins versus 2022, down a little bit from this year. The bottom-up consensus, not just in, you know, say, staples or tech, just about every single sector in the S &P, massive margin expansion is being anticipated for next year. Now, most of the buy-siders I've been talking to the last couple weeks think the sell-side numbers are too high.

16:34They are very sensitive on this margin issue right now, which may be why we're seeing kind of a push to come and say, hey, here's how we're going to continue to defend those margins. But that's a real source of concern. Like, are these profit margin expectations simply unrealistic on the sell side heading into next year? Do you want to ask a question or no? No, no. I do have a question. You know, because it's the end of the year, and at the end of the year, you tend to be a little bit more reflective on what has passed. On everything. On everything. But for a strategist, I would imagine it's what you got right and what you got wrong.

17:05And I think a lot of people got wrong the notion that the economy would be much more resilient, that the consumer would really hang in there, and that we would be here at your end, where we are right now. So how do you take that into consideration as we go into next year? And consensus seems to be all on one side in terms of that soft landing narrative. So I still think, you know, I've never been in the recession camp. You know, I've never called myself a recessionista. We always thought this was going to be sort of a growth scare, something close to a recession, not quite meeting the definition.

17:34And that was sort of a tough call to make back in 2022. You know, I will say what I think we got right this year is sort of recognizing that resiliency was there. I think our valuation model is going to probably end up being right on the year. It's been calling for about 4 ,700 and a low 20s P.E. But, you know, we didn't manage our target properly. We were looking at other things that were more bearish. And so we had a target of 4 ,250. So clearly not bullish enough. But as I look into next year, I think we're still going to have debates over the Fed. I think we're still going to have debates over consumer.

18:04And I think that's coming at a time when sentiment is frothy. So those could be triggers and take the market down for maybe reasons that don't quite pan out later on. But I tell everybody calls today have 60 percent conviction level. If you say you have 90 or 100, you're lying. So we're just going to have to be sort of vigilant as the year goes on. How do you feel about the broadening out of the market? And maybe even if the broad market doesn't do well, that there can be sectors that really can do well. So I'm an old small cap strategist and we pay a lot of attention to that. That is, you know, sort of the destination.

18:35If a lot of money comes out of this mag seven trade, the big cap growth trade, I think the big cap growth trade got crowded and valued for and overvalued for good reasons. But there are tactical problems there and we do need to see some correction. I think that interest rate expectations falling, the Fed fears falling, that was the first leg of this. I think for that to really continue, you need to see economic expectations improve. Growth stocks and big caps typically outperform when GDP is sluggish. GDP is expected to be about 1.2 next year, 1.8 the following year. That is an environment which this growth trade should bounce back.

19:09If those numbers are too low, and I think there is a decent chance they are, we may not know that until a little later in the year, then I think you'll see that rotation trade get a second life. But I do think, you know, people like to beat up. I'm answering so many questions on concentration right now in the MAG-7. I can't tell you how many requests we've done for people. They're not bad stocks. They're there for a reason, but we just may need, again, to see that take a little bit of breather, and other parts of the market may deserve to shine for a moment. All right. Coming up, what role are the new Envogue Options product, zero-day to expiration options, playing on the whipsaw of the market?

19:42They're getting much of the blame for yesterday's late-day tumble, But should they? We'll go inside the numbers. But next, the least magnificent member of the Magnificent Seven. Should Apple get booted from the so-called Mag-7 because it only was up 50 % this year? We'll debate that. More Fast Money right after this. This is Fast Money with Melissa Lee, right here on CNBC.

20:13Welcome back to Fast Money. Apple may be a$3 trillion stock. Its shares may be up nearly 50 % this year. But believe it or not, the tech titan is far underperforming the so-called Magnificent 7 in 2023. In fact, to date, Apple is the worst stock in the group, where names like NVIDIA, Meta, and even Tesla have more than doubled this year. It's also being beat by other mega cap names like Eli Lilly and Broadcom, or the stock's best days behind it. And, you know, Barron's had an article today questioning it. Are the best growth days behind it? It certainly looks like it when you take a look at what you're paying for in terms of the growth that it's posted in the past fiscal year.

20:50Dan, I feel like I should go to that. I think they're doing okay. All right? So I think Apple's doing okay. We're not going to kick them out just yet of the MAG7. But, you know, this is an argument that we've been talking about for a long time is that, like, the growth is not like some of the hyper-growth names that have gone from$200 billion in market cap to a billion, like an NVIDIA over the last year or so. I mean, it's a very mature company now. They have a disproportionate amount of market share in the smartphone market. They own all the profitability there, right? So you think about that.