Nike Reports Results… And Economic Track Records Ahead Of Presidential Debate 6/27/24

0:03Live from the Nasdaq market site in the heart of New York City's Times Square this is fast Here's what's on tap tonight. The Nike Swoon, shares hitting 18-month lows after its latest earnings report. We've got all the details on the footwear giant's quarter, and we'll bring you all the headlines from that conference call. Bloss out of AI and into what? As the red-hot semi-trade loses steam, where is the money flowing? The great rotation may already be underway, and the beneficiaries may surprise you. And later, Roaring Kitty barks. The market provocateur sending out a cryptic message this afternoon that sends shares of Chewy and other pet stocks on a volatile ride.

0:37What the options market is saying about the moves. I'm Melissa Leak, I'm D-Live from Studio B at the NASDAQ. On the desk tonight, Karen Feinerman, Dan Nathan, Guy Adami, and former Bridgewater chief strategist Rebecca Patterson. But we start off with an earnings alert on Nike. Shares are lower after reporting revenue miss and disappointing guidance for the current fiscal year. The conference call is just getting underway. Sarah Eisen has got the details from that quarter. Hey, Sarah. Hi, Melissa. Good to see you. So the concern here with Nike is growth or lack thereof. Profits were a big beat, driven by margin expansion, but sales missed and were down 2 % overall.

1:10Also importantly, CFO Matt Friend alluded to a guidance cut for 2025 in the release. Here's a quote from his statement, in part saying, Our fourth quarter results highlighted challenges that have led us to update our fiscal 25 outlook. Expect those new details to come on the call, but it is unusual to hint at a guidance cut from Nike in the press release. So why? What are those challenges? Well, I did speak to some senior executives at the company, and here's what I can tell you. The lifestyle business declined. Think Air Force Ones or Air Jordans. And then the performance business, which is running and basketball, it did grow double digits, but it wasn't enough to offset the lifestyle declines.

1:48Another weak spot, the digital business. That was down 10 percent in the quarter. They really started to see weakness in April and May. And in part, it's because the lifestyle products are more represented on the website. So an outsized decline there. The business has tripled also in the last few years when it comes to digital. So it is seeing the decline. And that's where you see the DTC, direct-to-consumer, drop off. And then finally, traffic in China actually started to decline in April. And so the company lowered expectations there. Now, here's the big picture. CEO John Donahoe is about one year into a three-year turnaround.

2:23He's made executive changes. He's made cuts to the organization, shifted the focus to core areas like running, and also making some changes around the channels, for instance, shifting business back to the wholesale partners away from the direct-to-consumer and clearing out some old products to make room for some of the newer innovations. Now, some of this can be attributed to some of those changes, some of the weakness that is in the quarter, but some are surprising too, for instance, like the drop-off in digital sales. Nike executives tell me, Melissa, they do feel confident in the turnaround still and the innovation cycle.

2:56They're pointing, for instance, to optimistic wholesale orders that they're seeing. But clearly, they're going to have to convince investors. Sarah, it looks like the margin was disappointing compared to estimates. And I'm wondering if you think it's because of a mixed shift, because of the lifestyle weakness, or if there was discounting involved here. Well, clearly, it's a promotional environment. The executives see that in China. They see that in North America as well. So that's part of it. Also, discounting as it relates to some of the changes that they're making in order to make room on the shelves for new product.

3:29But I think overall, you know, they have more levers to pull on the profitability side of things when it comes to costs, for instance, it's a massive organization than they do on the revenue growth. And that's really what the concern is for investors here. It's getting the brand heat back to Nike and franchises that are so important like Air Force One and Air Jordans and Dunks. That is the core of the issue of the business. It's why you look at Adidas, for instance, its stock has outperformed thanks to Samba's becoming cool again. And that's really what investors want to see. Now, Nike says it started the innovation turnaround with performance and it saw double digit growth in places like basketball.

4:09And it will take time to work through and get to lifestyle. But that's something that the executives are going to have to try to convince investors on the call of what other sort of progress are they seeing and what kind of confidence level do they have in turning that around. All right, Sarah, thank you. Good to see you, Sarah Eisen, on Nike. What did you make of the quarter, Guy? Well, we're going to talk about a few things after the Nike conversation that I'm sure America's wondering about. But I'll say this. You know, they looked at the EPS and said, that's a pretty significant beat. And then you sort of look at the quality of the beat.

4:38SG &A was part of it. Huge tax rate differential in terms of what the street was expecting and what they came in at. Then they said, OK, let's look at the revenue. Revenue wasn't good. Now, last night I sat here and said, listen, last quarter inventories really came in down 11.5 % against sort of flat sales growth. I thought that would mean margins this quarter would be very good. They weren't good either. So you sort of put this all together and say, wait a second, you know, things are not going particularly well. And then you hear some of the commentary and now they're going to be in the penalty box.

5:05You know, I thought the stock would be trading 99 post earnings. It's trading 89. And I think people are going to start to take a hard look and say, even the multiple that's less than it's been historically, is that too rich? To your point on the low-quality beat, gross profit dollars fell short of consensus estimates. So that's the number to focus on. Yeah, and Sarah really surrounded that trade. But she was really focused on that lifestyle stuff. And it's interesting, in the Wall Street Journal this morning, there was an article how Nike missed the boom in running culture, which I thought was really interesting timing here.

5:35And they're talking about Hoka. They're talking about New Balance and some of these other brands. And so that was always at the core of this company, right, in the last 50 years or so. And the lifestyle stuff has been huge. Jordan brand is massive. And then you think about, OK, they have the Olympics. We have the Euros going on. There's a lot of promotional opportunities for Nike here. So again, like the guidance is not out now. The fact that she said that they hinted to a guidance change for 2025 that reads kind of negatively. But let's see what happens. For sure, it reads negatively. Yeah, we're going to update our forecast.

6:06But yeah, I'd be shocked if it's positive. Right. I would be shocked. I mean, disappointing. I own some. I would like to be bigger. I'd rather buy it higher with better news than lower with bad news. I think that, I mean, this is a few quarters now. They had some, you know, a couple of ups where things seemed better. We talked about last night the inventory getting into better shape and so less promotional, which ultimately would be better for gross margins. But, I mean, this is a little deported. They've lost their mojo, right? So the multiple, I don't know exactly what the new guidance will be, but it will go down at least one turn, which puts them at about 23.

6:43and for a company that I do still think deserves a premium multiple, it's not crazy expensive, but as I was saying before, I'd rather buy it higher when they seem to have gotten it together than here. But you're presuming that their passive innovation is still going to hold, that they're going to be able to revive that sort of gene in their DNA. I believe that. I mean, for no other reason, they have tremendous resources, right? They have tremendous resources to do that. And I think, I mean, this is the company that wants to win. It reminds me of Lululemon. We talked about this before. Similar dynamics.

7:20Wow, new competition, right? Fiore and Aloe. And here we have different competition on and Hoka and New Balance and others. And yet I do still think there is a way for Nike to win. Yeah. And I would just say, you know, going from the product and the strategy to the environment they're dealing with, two uphill battles they're going to have continuing for the rest of this year, probably in the next year, which is going to be sluggish overseas growth. You know, China, greater China is over 15 percent of their revenues. They only half of their total revenue comes from outside North America. So it's going to be a sluggish China consumer.

7:52I think we're going to get a sluggish European consumer despite rate cuts, just given the environment. Even with the Olympics, you think? Well, Olympics is a point in time that's not going to last the rest of this year. But yes, you might get a little spike for a week or two. And then the other big one is the dollar. You know, the dollar is up. DXY is up about four and a half percent this year. Dollar's up about 12 percent against the yen. And I don't think we're going to see the dollar weaken materially any time in the foreseeable future. The Fed may ease in September or December, but they're not easing fast or a lot unless something really hits the fan here, which tends to be dollar supportive as people come back and bring in cash.

8:26What do you want to know from the conference call? What's going on? I mean, this is now three years. Think about it. I mean, put up a long term Nike chart. This stock is cut in half since the all time high in November of 2021. It's a series of really poor quarters. It's just, you know, they're trying to get their inventories in line, but the margins aren't going up. Like, what's happening? Is competition eating their lunch? I mean, that's pretty clear to me. And innovation, I guess, is part of it. But I think competition is a huge part of it. And I think they probably, quite frankly, got lazy.

8:53I'll say this real quick. I mean, the October 2022 low, I think, was 87-ish. And we're obviously precariously close to that now. I mean, stock has to hold. This is pretty key support levels, Mel. It's funny. You know, as long as I've been in the business, people have been, and this is over 25 years, is they've been challenging the multiple that this company has, not too different than what we've heard with Starbucks and a few other, you know what I mean, discretionary sort of things. And it's been, you know, bottom left, upper right until very recently. Now, there have been periods where there's been big drawdowns and the like.

9:23And so, you know, to me, this is a company that has, you know, over 25 % market share in U.S. footwear. And, you know, any time these guys hit a multi-year or multi-quarter, however you want to think about it, challenge, they usually figure it out. Karen just used the term they like to win. And, you know, and then when you think about Lulu was always challenging them and the women's, you know, athleisure and all that sort of stuff. Lulu's down 40 percent in the last six months from its recent highs or so. So maybe there's something going on in the athleisure sort of space, especially when you talk about dunks in Jordan and all that sort of stuff.

9:53But again, I think that they probably work on some momentum from something like the Olympics. And, you know, we're going to have the Olympics here in the U.S. in 2028. And I think the World Cup is here, too. So this is stuff that works for them over the next few years. All right. We've got a news alert out of the CDC on a Merck vaccine. Angelica Peebles got the details. Hey, Angelica. Hey, Melissa. That's right. We just now are getting news out of the CDC's Vaccine Advisory Committee about Merck's new vaccine to prevent bacterial pneumonia. Now, this committee is recommending that Merck's vaccine should be an option for people 65 and up and some adults 19 and up who are at higher risk of severe disease to get this vaccine if they have not already gotten one already.

10:33Now, the 65 and up is really important here because this vaccine is approved for people 50 and up, but there was a lot of debate whether we should make it 65 or 50. And the committee eventually landed on sticking, keeping it at 65 because they felt like there were too many questions about whether it would be cost effective for 50 to 64 year olds to get this vaccine and whether it would be confusing because there's already a vaccine approved from Pfizer and that's for 65 and up. They will revisit this in October at their next meeting. But for now, this is the recommendation. Melissa. Angelica, thanks.

11:09Angelica Peebles. Guy, you've been on Merck for a while. Yeah, I know if it's necessarily going to be stock moving, but it's, you know, again, it's going to be one more sort of, I guess, arrow in their quiver. I mean, Merck, to me, makes sense. It's made sense. It's not Lilly. It's not Nova. We said that. But this is slow and steady wins the race. And, you know, they're seemingly sort of figuring things out. And they're probably going to sort of have some tuck-in acquisitions along the way. So, yeah, I still like it. All right, let's get now to the broader markets. A rotation out of the AI trade today.

11:36Micron leading the semis lower after its earnings report last night, taking the other chip stocks with it. NVIDIA down over 2 percent. Qualcomm and Broadcom following suit as investors left the red hot sector. Where do they go? Well, maybe surprisingly, they didn't flee tech entirely. Looks like software names like Palo Alto, Palantir, Salesforce and more all posting strong gains. What does this rotation within this tech sector tell you? I mean, presumably it was always all the spend is going there to AI, and so therefore it's going to be pulled from software and SaaS. And so we just have a reversion here.

12:08Well, I'll just say this. In the last couple of weeks since WWDC, you know, Apple has been a huge beneficiary. The stock went from 192 to about 215. And when you think about that, I thought that was pretty bearish. Whatever the excitement was about Apple is that they weren't spending billions and billions of dollars on high-end GPUs to build their own models. And then they were going to get into it. They've been actually licensing or they're going to be licensing a lot of other folks. And when you think about that, OK, what are the use cases right now? And they're not very clear, you know, I mean, to me, the monetization efforts.

12:37And there was an article in the information today I thought was really interesting, said in a surprise, OpenAI is selling more of its AI models than Microsoft is. So when Microsoft reports in a month from now, if they're not given the goods, if they're not saying that all of this investment,$13 billion in OpenAI and, you know, like the budget shift that they've had, right, towards selling these sorts of products and what it means for their enterprise customers. I think the whole trade, I think a lot of error comes out of it, to be very frank. And it won't be too different than what we saw from late July to October of last year.

13:08You know, the S &P sold off about 11 percent, the Nasdaq a bit more. Stocks like Microsoft were down high teens, you know what I mean, from those highs. So, again, I think it's obviously a bit more severe now because there's been so much appreciation. Microsoft's up 47 percent from its October lows. You just do the math on a$3 trillion market cap company. It's pulled forward a lot of excitement about what they may do, how they may monetize these investments. I mean, it's quarter end. It's half year end. I also think there's a lot of medium term investors right now just looking at their portfolios and rebalancing.

13:41And so it might be as mundane as that. Obviously, there's some specific stock news going on as well. And when something rises as much as Dan just described to have some profit taking, I actually see that as really healthy for the market. So I'm not concerned by this at all. Yeah, it does seem like the time frame that you were mentioning, like that Microsoft has to prove that it's working for them in terms of the investment. They're getting that return back. The timeline is not very long. It almost seems unreasonable. But at the same time, the stock is because of the stock's run. Right. The stock's run was unreasonable.

14:11And so therefore, the expectation has to be two. The expectation has to be high. Remember, we're going to see a new Windows operating system later this year, which will be a very likely catalyst for a lot of upgrades. So they're going to need to give some color on that maybe. But exactly what you're saying. I mean, they've pulled forward a lot of the stock return for the hope of this really, you know, selling. I don't know how many millions of co-pilot subscriptions a month. But to the rest of the trade, that wasn't really. I mean, we always look at NVIDIA as the sort of everything. A lot. I mean, Oracle was up a little.

14:43Dell was up a little. AMD was up a little. ARM was up a little. But I don't think it really matters. We sort of don't have a good catalyst right now until somebody starts their earnings announcement. Do you think this was the start of a rotation? Feels like, I mean, without question it was today, and I think it would probably continue. I thought the rotation would be in energy and maybe health care. It obviously was in software. But throw Amazon in the mix as well in those miserable Super Bowl commercials. One of them was this, what do they call it when you get a brain worm thing? Wasn't that Timo?

15:16Remember that whole, wasn't that a Super Bowl commercial? Do you have one now? I have one constantly. I hope not. Anyway, but yesterday was on Rivian. Today there was more news. I mean, Amazon very quietly is actually bucking some of the trend here. Yeah, and, you know, to NVIDIA, we know the story here. It's Microsoft, it's Meta, it's Amazon, it's Google, and it's Dell make up 50 % of their revenues. And so in a month from now, we're going to hear from all of those companies. We're going to hear about their guidance. You know, and Micron, you know, make no mistake about it. I mean, this stock joined the party a few months ago.

15:45It had tremendous appreciation. They were telling a story how memory is going to be hugely important in these data centers and the like. Dell was also telling that story about servers. Both of those stocks got nailed after they gave guidance that wasn't better than expectations. And so to your point, Karen, it's like you have that sort of appreciation over a period of time. You have a multiple that's severely stretched at 13.5 times sales and 35 times earnings. it doesn't leave a lot of room for disappointment or not beating far better than what the consensus is. Do you think that the ROI expectation also applies to NVIDIA, though?

16:21Sure. Listen, I'm going to tell you guys this. We're five pretty intelligent people who have, you know, like we know what, well, four and a half. You know what I mean? There's no use case in my life right now other than a little perplexity here and there of summarizing something for work or whatever. And that's not doing a whole heck of a lot because I have to check all the facts. You're a consumer. You're not an insurance company that's using AI to go through a lot of paperwork. Years away. Oh, I think I'll take the other side. Dallas Fed just did a survey of 400 companies in their region, and they found that 40 % of them already are using AI on a daily basis and something like another 10 % plan to in the next 12 months.

17:02I think there are a lot of users out there across lots of different industries. I'm with you. Consumer-wise, what do I use? I use chat GPT or perplexity or one of those to make my life faster and easier. Okay. But there's going to be a huge data issue on one of these big enterprise companies. Everybody's going to pull back from it. The hallucinations that this, that that. And I'm not saying that enterprise is using for that, but there's mission critical stuff that has to go. If you're going to adopt this sort of technology, you better make sure that it's working correctly. And I just, that's what takes years before there's mass adoption of it.

17:33before companies, the C-level suite, can say, yes, we're replacing thousands and thousands of employees. But do you think we're priced for that right now? No, we're not. I mean, to me, I think we're priced for it in three years. You know what I'm saying? That's what we pulled forward. And it's no different than the excitement that we heard about how the Internet was going to transform every industry. Like, this is 25 years ago. It's the same thing, people. I'm just telling you. So the enterprise thing, it's going to take a while to see that drop to the bottom line. And the consumer use cases, I think Apple has the potential to be the biggest fail when they release this 16 in the fall, because I don't think you're going to see an upgrade cycle based on what they showed us, especially given the cadence of the rollout of a lot of these products.

18:15I think it's going to be a 2025 thing. So, you know, have at it, people. That's my favorite. On that note, coming up, Walgreens' worst day ever. The pharmacy retailer tanking after a really rough earnings report. Is the company running out of time to turn its restructuring plans into reality? We'll dive into today's disaster next. Plus, him and hers plunging on a scathing short, a short seller report. We'll dig into the findings and debate the winners and the losers of the GLP One trade next.

18:45This is Fast Money with Melissa Lee, right here on CNBC.

18:58Welcome back to Fast Money. Walgreens getting booted to its lowest levels in 27 years today after a rough earnings report sent it to its worst ever single day percentage drop. The pharmacy operator beating revenue expectations but missing EPS estimates and slashing full year guidance as sales growth slows. CEO Tim Wentworth telling CNBC that he hoped the consumer would have gotten stronger in the second quarter, but that didn't pan out. Obviously, it also said it's going to close a significant share of its stores in the United States, which total just about 8 ,600. So these are major moves here, Karen.

19:31They are. Yeah. And he's a relatively new CEO. Right. We saw Rose Brewer was fired. And but this is this is a great example of the melting ice cube. Right. So we have the front of store, which has been just hammered by Amazon over the last few years. And now the back of store, the pharmacy as well, hammered, but also actually by Amazon and Walmart, who are really just, you know, beginning to enter in a big way, what I think will end up being a big way. So so they're talking about, you know, slashing number of stores. And, you know, it's generally hard to grow your way out of a problem like this when the fixed cost base cannot shrink as much as the is the revenue base.

20:13And so, I mean, I looked more closely. They don't have as much debt as I thought, but they certainly have a fair amount of debt. It's cheap at five times earnings. It should be cheap. It wouldn't shock me at all if it gets cheaper. I was just struck by the CEO's comment that they had expected the consumer to accelerate over the last couple of months. I mean, what was going to drive that? For a small segment of the population, you have equities and home values, but for most of the population, they're feeling pinched. And we're seeing that left, right, and center in earnings and in guidance. I mean, the Amazon thing that you mentioned a minute ago, Guy, talking about having this super, super cheap arm of Amazon where it takes longer to get your goods, but you save money.

20:51Or McDonald's doing the$5 value meal. I mean, we're just getting more and more data points that consumers are saying, no more. Right. I'm not paying more. I want cheaper prices. And I'm being more cautious. And we saw that in the data this week as well. It's both on the micro side from the companies and on the macro. The jobless claims going up, pending home sales going down. I'm not saying we're about to see a recession at all, but we are seeing a moderation. So I'm not surprised at all it slowed down. Why is the CEO surprised? I wonder how he missed it. You know, why forecast an uptick when that wasn't for sure a thing?

21:27It's one more. I mean, again, it's just one more anecdotal thing about the consumer slowing down. And you're right. I mean, he absolutely should have seen that. And we've talked about it every night for the last six months. However, I mean, cut your way to profitability with 8 ,600 stores. We plant a significant share of stores. What does that mean? I mean, is it? 1 ,100, I think, 28? Yeah, so I mean, that is pretty significant. So, again, this is a 27-year low in the stock, and it deserves to be. A lot of it is WBA-specific, but a lot of it's sort of the environment as well. It definitely can go lower from here.