In this segment of the Motley Fool Money radio show, host Chris Hill, Million Dollar Portfolio's Jason Moser and Matt Argersinger, and Aaron Bush of Supernova and Rule Breakers consider the current state and future woes of the sports retail sector.
Nike (NYSE:NKE) turned in an ugly quarterly report, and industry watchers now think the issues are chronic and run throughout the segment. It's not just an Under Armour (NYSE:UA) (NYSE:UAA) problem; it's not just a retailer problem -- it's a U.S. brick-and-mortar problem. However, Nike is a global brand, and beyond that, when it comes to e-commerce, it's doing all the right things.
A full transcript follows the video.
This video was recorded on Sept. 29, 2017.
Chris Hill: Shares of Nike are hovering close to a two-year low after a first-quarter report that included profits falling 24%. And Jason, you look at all the coverage out there, and there is a pretty healthy dose of pessimism in this regard, that this report from Nike is not a bump in the road, this seems to be a trend that a lot of people think is going to continue for a couple of years.
Jason Moser: Yeah, definitely not a bump in the road. I think now, at least, we can say this isn't just an Under Armour thing. We're seeing, across all of sporting retail, every party in the value chain there is having some trouble. I think the big story with Nike right now is, North American headwinds are likely to persist for the foreseeable future. It's just a difficult retail environment, and a changing retail environment. Now, with that said, that's OK, because Nike is a big company, very well diversified. They make about 55% of their revenue outside of North America. So all in all, they will be fine.
I think the market generally had some concerns on some of the goals that management has set for themselves a little bit further down the road. They have an investor presentation a few months back where they set some goals from 2020 looking to target $50 billion in sales by 2020, and for $16 billion of that to be in direct-to-consumer. Now, the strategy to direct-to-consumer is exactly what they need to be doing, and we're seeing Adidas and Under Armour doing the same things. I think that $50 billion target is probably a little bit lofty. I would be surprised to see them get there. And we were modeling off some more conservative numbers in Million Dollar Portfolio when we added Nike a few months back.
That said, the direct-to-consumer business was up 11%, online sales up 19%; their comp store growth was up 5%. I think the bigger worry for players in this space, it's your Dick's Sporting Goods, it's your Foot Lockers. Obviously, Sports Authority has already had to file. That's the toughest part in this value chain, and I think that's why we're seeing Nike and Under Armour all making such big investments in direct-to-consumer.
Matt Argersinger: I agree. It's really all about the traditional retail channel that we've seen affect so many brands. I just think with Nike, as Jason said, this is a brand with everlasting qualities. It has a global presence. And depending on how long this North American malaise with retail lasts, it could go on for longer, but I would say Nike, a two-year low at the valuation we're looking at today, we actually like it in Million Dollar Portfolio a lot.
Aaron Bush: The good thing about the direct-to-consumer market is, in the long run, that should boost margins of the company over time. So even though we're seeing some shorter-term worries with margins, how things are trending are actually positive if you play it out over a long period of time. Of course, that opens up other problems, such as, Nike might not have as much control over all the consumer touch points. But as for the financial profile of the company, it should be getting better.
Moser: It's also interesting to see how they're making this pivot to direct-to-consumer. On the one hand, in North America with these traditional established retail markets, more brick-and-mortar focused, they're having to pivot into a new strategy, whereas in the emerging markets where they're really just getting started, they're building this part of the business with more of a digital nature from the very start. So it's interesting to see the difference between the two markets in the established versus the emerging, and I think it's kind of neat to see -- they're really building that business for the future in these emerging markets and taking some of those lessons and bringing them over into the more established markets like here.
Aaron Bush owns shares of Under Armour (A Shares) and Under Armour (C Shares). Chris Hill owns shares of Under Armour (C Shares). Jason Moser owns shares of Nike, Under Armour (A Shares), and Under Armour (C Shares). Matthew Argersinger owns shares of Under Armour (C Shares) and has the following options: long January 2019 $45 calls on Nike and short October 2017 $60 calls on Nike. The Motley Fool owns shares of and recommends Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.