E Why We Sold Nike

Nike (NKE) is often referred to as a quintessential buy and hold. However, we recently sold a sizable portion of our position in the stock for the BAD BEAT Investing portfolio. The reason we sold the name is not because we do not believe in the company, or that we disagree with the buy and hold mantra, but we like to maximize profits. We viewed the company as overvalued at present, and felt the stock would pull back from present levels. Let us discuss the sales results and valuation metrics which led us to the decision to sell the stock for our portfolio

In the most recent quarter, the reported sales figures were decent and were slightly ahead of our expectations by $200 million, coming in $8.99 billion. Our projections for sales of $8.80 billion were a result of our expectations for a sentiment reversal in North America driving sales higher, continued strength in China, new products, and continued momentum in direct-to-consumer sales. Overall, sales were pretty good. So what is the problem?

Well, while we were pleased that Nike Brands outperformed our expectations for growth of 2-3%, coming in at $8.5 billion, revenues were down substantially for Converse and well below our expectations for flat sales in this segment. This was a problem and continues a trend of weakening sales in the quarter. Sales in this segment came in at only $480 million, way below our expectations for $550 million. Ouch. So while overall sales were strong, it was Nike brands that we responsible for the rise, and mostly thanks to a favorable product cycle. So, as a whole,  this was a bit of mixed news relative to what we expected coming into this quarter.

Now, these mixed results on the brand specific data were not the only problem, but where we have ongoing concerns are over the costs to generate these revenues. As we looked into the last few SEC filings for Q3 reporting periods, we once again have noted that the costs to generate sales have been on the rise, and this weighed on margins. So that is another issue. But the real issue we have is with valuation.

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Disclosure: We are long NKE, but sold 75% of the position two weeks ago

Quad 7 Capital is a leading contributor with various financial outlets, and pioneer of the BAD BEAT Investing philosophy. If ...

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