Motley Fool Money - Nike’s Turnaround Story

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Starting point is 00:00:18 What? Oh, boy. Fantastic. You guys go hard, man. Daredevil Born Again, official podcast Tuesdays, and stream season two of Marvel Television's Daredevil Born Again on Disney Plus. the Nike turnaround story, you're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Jim Gillies. Jim, good to see you. Good to be seen, Ricky. Today's a good day to zoom out.

Starting point is 00:00:57 There's some little news going on, but to be honest, it's a little bit of a slow news day. And I think it's a good time to talk to you, especially because you, you like looking at valuation stories. And I think today's a good day to talk about turnaround stories, especially with Nike, where Nike CEO, Elliott Hill is now trying to appeal to retailers again after the previous administration focused on a direct sales route. Here's the newsy hook. Nike is back to selling its products on Amazon. This is five years after pulling its products from the e-commerce giant. So we'll get into the turnaround story, but what do you think of this move, Nike's move to reverse course on direct sales and say, hey, actually outside retailers are good at selling our shoes and

Starting point is 00:01:39 apparel? I'm going to put it kind of what Winston Churchill said way back in the day. It's nice that Nike does the right thing after trying all the other alternatives. It was dumb to pull it off. I mean, it's only the biggest marketplace, you know, online marketplace in the world. Why would you want to sell your products through there? I mean, who knows, right? In other news, why would anyone want to sell in Costco, for example, or through Walmart? Because, you know, why would you want that kind of relationship? But yeah, no, I have fond memories of looking at Foot Locker after Nike pulled. Kind of the same thing. We're going to, emphasize direct-to-consumer sales. So we're going to sell less through Foot Locker.

Starting point is 00:02:22 And a Foot Locker, of course, now in the process of being taken over by Dick Sporting Goods, you know, and so Foot Locker had some, you know, long, dark tea times of the soul there before basically striking things with like deals with Adidas or Adidas, depending on, you know, how pretentious you want to sound. And, you know, and kind of got on with their business. And so with Nike kind of deciding they could do it themselves and trying to disintermediate people and trying to take the profit for themselves. Now they're kind of coming back, scrunching back to people. And thank goodness it hasn't been a complete and utter failure. I know we're going to really drive towards turnaround stories. But I mean, like, this is an iconic brand. It's an iconic company

Starting point is 00:03:03 with products and athletes that people identify with, obviously Michael Jordan, you know, Tiger Woods and various lesser beings as well. And this is a company that maxed out. It's been, I think, three, three and a half years since it topped out. And that's, I know we're going to go in down the turnaround thing. So one thing I'm going to say about when you are playing in turnaround stocks, realize most of the time turnarounds take a long time to turn around. That's not a unique insight. That's Peter Lynch said that.

Starting point is 00:03:36 And I think one up on Wall Street, which was published in, what, 87 or something like that? You know, like turnarounds take a while. And, I mean, Nike's shed almost two-thirds of its value over the past four years. And now, I mean, have we made the turn yet? I'm not entirely sure. And Nike is also in a tough environment to turn around, announcing that it's going to hike prices on June 1st. The company did not mention tariffs. But CNN reports that they just said, we are regularly evaluating our business and making pricing adjustments

Starting point is 00:04:12 is a part of our seasonal planning, end quote. Jim, I think we're going to see a lot more of that, especially from retailers. Just we're not going to put blame on anyone, but we are going to raise prices coming into the summer. Well, that was the lesson of, that's the lesson of Walmart and President Trump jawboning them down last weekend, right? You know, I mean, the second they say, well, we can have to, you know, our costs are higher, so we're going to have to pass along the costs, you know, caused by tariffs. And they got spanked. And the signal that sent was, okay, everyone else who is always.

Starting point is 00:04:42 going to raise prices. Everyone's going to do it. Come up with literally any other explanation. Don't blame, you know, it's going to happen and people are going to have to pay for this. Just don't point blame in the general DC area as all. So, I look, I mean, they've also, of course, if they're going to do price hikes, I mean, part of that's, you know, you got to pay the Amazon Vig now too, right? So I mean, that's part of it. But no, I think it's going to be interesting times for Nike in this new higher cost environment. I'll leave it at that. And it's also incredibly difficult for a brand to come back from being a discount brand,

Starting point is 00:05:24 back to we're going to sell you things at full price again, because you've trained your customer base to wait for the discounts to come, and then good luck to you if you can stop that game. It's incredibly difficult. I don't want to discount Nike's ability, but there's also a pricing game that's going to be tough for them. 100%. Let's talk about the turnaround story itself. It is difficult for companies to turn around. Nike has the Win Now plan, which is focusing on retail partners, as we mentioned. There's some focus on brand.

Starting point is 00:05:54 There's a shakeup in the technology division. You've seen a lot of turnaround plans, and it's easy for investors to get excited about them, to want to hop on board and see an undervalued stock and get on that train. So what do you specifically think of Nike's Win Now plan? I don't know what to think about the win now plan. I will say I've seen various other win now. I guess no one could see the air quote. So it was wasted motion. I've seen other turnaround plans. And we remember the ones that work and the ones that don't work tend to disappear into the ether along with the executives that trundled them out. I have very fond memories. This is a technology space. This is a few years ago. Someone had come from a very high profile technology company. We'll just put it at that. And I saw a presentation from them, which was their version.

Starting point is 00:06:43 Again, the technology space. It's not important who it was. But the plan, they stood up and spoke very confidently about their version of the Win Now program, how they're going to win back customers for the technology products that they were offering. I remember watching this and really noting the enthusiasm of the executive would come over from a much larger company. and how much deference he was being given in the room, because, you know, this guy was a very, very important executive from a much larger company than us now. And I think the plan and the person lasted less than 18 months. You know, no, I'm not talking about Pat Gelsinger and Intel.

Starting point is 00:07:22 We have seen this story before. And the principles that I have when looking at turnarounds, any turnaround. First of all, turnarounds are difficult, and a lot of time, turnaround doesn't happen. And it's not that the company turns around. It's the company turns around on the person who's trying to drive the turnaround. We go get the latest, you know, savior. But the second thing is it's probably going to take you a long time and longer than you expect. So you have time to go into a turnaround story.

Starting point is 00:07:47 You have time to kind of, you know, maybe gauge a few quarters. Don't even throw any money at it or throw, you know, 0.1% tiny starter position just to make sure you keep paying attention. In my, in my career when I've looked at, like I give you a couple other turnaround scenarios. Right now, there's a lot of people getting very excited about United. health group, you know, which has fallen like 50% in a month or whatever it is. There's a bunch of executives who have committed capital in the open market and everyone's, yay. You know what? Let's just see how this plays out. I'm going to point you in the direction of Boeing as well, which those two, the two airliner crashes of the max 737 max, which kicked off a lot of the problems with Boeing.

Starting point is 00:08:31 Those were in late 2018, early 2019. And people were rushing. in 2019 and 2020, it's like, oh, this is one of the great American success story companies. It's an intrinsically required company in the defense industry as well as in the airline. It's part of an airline duopoly. If you rushed in in the first year of that, boy, you've been waiting a long time for your money. And even like I mentioned earlier with Nike, Nike's probably three years into their turnaround. I'm not sure they're going to turn yet. Certainly if you look get expectations. You know, this is a company that as recently as 2021 was, had revenue growth over 20%. It's going to decline this year. And if you believe consensus estimates, going to

Starting point is 00:09:18 decline next year and going to decline the year after. One of the bigger turnarounds, I think, or one of the one of the turnarounds that actually turned that I can appreciate is Chipotle. You know, Chipotle in 2015. The very, what's the phrase? Very bad, terrible. awful, you know, year? They kept giving people food poisoning. Well, in various locales and different types of food poisoning, too. It's nice that they went for diversification. You don't like E. coli, no problem. We've got neurovirus. By the time you come along in 2016, the stock had already been knocked down by about 40 or 50 percent. You come along in mid-2016, it's like, okay, like, you know, valuation's much better. They're still got good growth plans. They've at least

Starting point is 00:10:03 paid lip service to improving the quality. We understand why they had a lot of the food-borne illness issues that they had. Ironically, a lot of it was tied to their whole food with integrity thing, where you can't get one type of potato to make your potato chips or make your French fries like McDonald's does, where they have a very specific French fry specification and they go everywhere. A lot of it was because local farms has had tainted lettuce and they tried to do local. But you come in about mid-2016. You know, you've well cleared the 50% drop. And, you know, they've paid lip service.

Starting point is 00:10:40 They've closed the stores to do a proper clean at everyone. They introduce more, more, you know, training. And they come out and say all the right things. It was still dead money for another two and a half, almost three years. You know, and it was only after founder Steve Ells has gone. And they bring in Brian Nicol from Taco Bell, which is still hilarious to me. You know, only then did Chipotle have its renaissance. and it's done very, very well.

Starting point is 00:11:05 But, you know, the people who ran in in the first couple months, you know, probably paid more than they needed to. And they were very early. So I look at a Nike and go, okay, we're about three years into this. Is any of the moves they're doing gaining traction? I don't know. But I'm still like, eh, you know what? I'm still taking my time because I'm not sure there's a lot going on. Elliot Hill came in his CEO in 2024.

Starting point is 00:11:27 It was John Donahoe, who is there from 2020 to 2024. So he is not, you know, the new leadership has not had three years. to really implement a new plan. It's been less than that, Jim. It doesn't sound like you're interested in Nike. I'm not getting you to bite on Nike. It's at a historically low multiple. It's like 20 times earnings for an iconic brand.

Starting point is 00:11:47 I think that, you know, I would bet that in 10 years from now, 20 years from now, people are still buying Nike shoes. Now, to the degree that is, I have no prediction. But you're not biting on Nike. These things are difficult. Are there any current turnaround stories that are you're more interested in? I know you like looking into dark. corners of the market where not a lot of other people like paying attention, but when you grab your

Starting point is 00:12:08 flashlight and search around the attic, are there any better situations for retail investors than Nike right now? Oh, I'm going to give you one that's going to get me some grief. But that's okay, because I, you know, I live on grief and tears. So that's good. In the spirit of trying, of Charlie Mungers try to destroy a cherished belief at least once a year, a company that I very, very, very, very, publicly mocked on Fool 24, Fool Live at the time, called out their now former CFO as being, I'll say suboptimal. I said nastier things, but that's okay. If you had told me that I would be an owner of Peloton today, I'm not sure I would have believed you. But the whole concept of Peloton is post-COVID because, you know, Peloton spent the COVID bubble completely overbuilding and pushing

Starting point is 00:13:02 as far away as possible, any suggestion that they were nothing more than a COVID growth story. No, no, no, we're fine. And of course, they overbuilt all of their fitness gear, which is very low margin, as opposed to their subscription business, which is very high margin. They plowed all their capital into their treadmill and bike business and then had to sell it at just brutal discounts. The CFO, again, had no idea what the F and her name meant. She very publicly said, we have no need to raise capital 12 days before the company raised a billion dollars in capital. When the CFO doesn't know what's coming, you know, you don't exactly engender optimism

Starting point is 00:13:43 and that they know what the hell is going on. But, flash forward to today, the froth has been largely cut. The people who were intent on empire building are gone. They have hired a guy who on paper looks great. from Apple Connected Fitness. It was one of the pioneers there. That's the new CEO. He's been a Peloton member since 2016, himself, some subscribers, so he uses the product. And they're basically, it's basically boils down to the new management, finding and nurturing the real business hidden underneath this COVID-era empire excess. And, you know, for though, and of course, Peloton was

Starting point is 00:14:25 down 99% at one point. You know, like, this has been bombed out. Why would anyone go here? Right. Well, if you look at the last three quarters, they have beaten and raised their guidance each time. You look at the full year quarter. They came into 20. They have a June fiscal year. So, there are three quarters into fiscal 2025. They came into fiscal 2025 with a prognostication of various things. The main things I'll say is adjusted debit up, $200 to $250 million and free cash flow,

Starting point is 00:15:02 which is not something this company was familiar with for a lot. couple years, generating at least 75 million in free cash flow. After one quarter, so that's what they came into. After one quarter, they bumped their guidance up and the free cash flow guidance became at least 125 million. After two quarters, again, bumped guidance up and cash flow became at least 200 million for the year. After the third quarter, and by the way, after three quarters, they've actually done 211 million in free cash flow, which is, again, kind of not what people were expecting from the corpse of Pelham. This most recent thing is they're going to do free cash flow in the vicinity of $250 million.

Starting point is 00:15:41 So, and they've already got, you know, 211, like I said. They are now trading for about 13 times, at least as of a couple days ago I've looked at today, trading at about 13 times free cash flow. They have $1.5 billion in debt and some of its very expensive debt, but, you know, I think they're going to pay it off fairly quickly. They got $1.5 billion in debt with about $900, $910 million cash against it. They're going to take out about $200 million in convertible debt, which it matures next year. That'll be gone.

Starting point is 00:16:09 Probably going to take out a couple hundred million dollars on the credit line, which is a very high interest rate. When they do that, it'll automatically drop their interest rate down. So they've got another engine contributing to the cash generation story. They're really focused on keeping the subscriptions that they have now. They've de-emphasized the hardware model. And I just look at this and go, I think Peloton not only can be a multi-bagger from here, here being $6 when I was looking at it fairly recently. I think you could have, I think you could see a world in less than five years where Peloton goes from six to, you know, 25 to 30.

Starting point is 00:16:44 And it's bought out during that interim. And so I'm more interested in that kind of a turnaround where like the bombing happened and it's just rubble everywhere rather than the fits and starts at like at a Boeing, at a Nike, at an Intel. I mentioned Pat Elsinger earlier. You know, I'm more interested in, you know, I want to see like, you know, blood in the streets from my turnaround target. Then I get interested. I don't see that with Nike. And importantly, free cash flow. You used a free cash flow metric for Peloton.

Starting point is 00:17:15 That means that company is generating a profit for listeners making sense of that word salad. That's a great place to end it. How about that? Jim Gillies, thank you for your time and your insight. Appreciate you joining us on Motley Full Money. Thank you. Some of the best lessons don't come from a classroom. They come from experience.

Starting point is 00:17:33 Power of advice, a new podcast series from Capital Group. You'll hear from CEOs, investors, and founders about how they built careers, took risks, and reinvented themselves. If you're starting your own journey, this is the kind of advice you won't want to miss. Available wherever you get your podcast, published by Capital Client Group, Inc. What does a more open internet mean for ad sellers? Motley Full Chief Investment Officer Andy Cross and senior analyst Asset Sharma interviewed the CEO of Pubmatic Rajiv Goel on our full 24 live stream. We're just going to play a portion of the conversation where they talk about ad buyers shift to streaming and what investors need to know about this ad seller's future revenue growth. Reggie, one thing we love to dig in through is really the

Starting point is 00:18:29 competitive advantages of the companies we invest in and we follow in Pubmatic is a recommendation across many of our services. So I want to talk a little bit about activate, convert, and connect. just some of the new initiatives you've brought to the platform, especially tied to AI, but really as you're looking to serve different parts of this market, that is just kind of all blending together with all the different players that are connected into serving advertisers to consumers as the advertising market is not just growing, but as you mentioned, really evolving towards more programmatic spend. Yeah, so I think the great thing about our platform is how we connect all of these different

Starting point is 00:19:06 segments of the market together so we can enable their businesses and enable them to transact. So Convert is our commerce media platform. I gave a couple of examples earlier of Instacart data, for instance, is available on our platform. So if a marketer wants to target people that are shopping for specific products, or maybe it's a conquest where you say, okay, if they bought Campbell Soup, then we want to show them an ad for the alternative. But Instacart doesn't have a huge amount of digital ads. inventory, right, in that people go on Instacard and they purchase, you know, their basket of groceries,

Starting point is 00:19:44 but then that data can actually be applied outside of Instacart itself, right? And so we can extend the value of that data. Now, streaming inventory is a great place to extend that in, the value of that data. So we can play on Instacart data onto, let's say, Roku inventory. You know, that's a huge win for everybody involved, you know, in that process, including the consumer, by the way, is going to get a much more relevant ad, you know, as they're watching content on Roku. So the beauty of our platform, convert for Commerce Media, activate for buyers. We have a core SSP for publishers, and then we have a product called Connect, which I'm sure we'll get into, Andy, which has to do with curation and sell site targeting.

Starting point is 00:20:24 More and more of this targeting is moving to the sell side of the ecosystem rather than the buy side. So we can bring all of these pieces together to enable a customer, you know, to very efficiently and with a high degree of performance drive the transactions and the outcomes that they want to drive. Rajee, I wanted to ask you a question about where advertising is going in the current sort of macro environment and maybe some longer-term trends. And I think you've like peripherally touched on this as you've been talking. In your last earnings call, you mentioned a shift in marketing funnels from sort of top of the funnel activities to lower level activities. So it's curious, So if advertisers are shifting from brand building activities to more performance marketing,

Starting point is 00:21:09 how does this benefit Pubmatic and how are you all positioned to help advertisers go a little bit lower down the funnel? There's no doubt, right, that there's a degree of uncertainty out there, right? U.S. trade policy, terrorists, all that kind of stuff. That is, you know, causing some unease. Now, the good news from my perspective is, you know, having been doing this as long as I have, we've managed through multiple economic cycles, right? And so we've kind of seen this playbook of, okay, when the cycle shift happens, like,

Starting point is 00:21:35 how does that play out into advertising? So the good news is that advertising always comes back bigger and better, and in particular, digital advertising. Advertising has been around for hundreds of years, and it's not going away. And so what typically happens is the underlying shifts that were happening maybe slowly in the ecosystem, those get accelerated. So a couple of things that I'm anticipating. So number one is, I think we're going to see a more pronounced shift of dollars from linear TV into streaming. So no secret that obviously the eyeballs

Starting point is 00:22:09 have shifted into streaming, right? And the COVID pandemic, you know, was a big accelerant for that, but, you know, new households at form, right? If you're in your 20s or your 30s, nobody's subscribing to Comcast or something like that, right? They're all going for streaming. And so the eyeballs have shifted, but the dollars have lagged, right? And so, So right in the middle of the upfronts, right? This is when the big TV companies, the broadcasters and the streamers, they go and they present, you know, what's their content slate and try to get advertisers to commit, you know, big budgets.

Starting point is 00:22:40 And I would think, and when I talk to advertisers and agencies, I'm hearing, you know, who's willing to step up their commitment, you know, given the uncertainty, particularly because if you don't buy in the upfront, there's what's called the spot market, right? That's the real-time market where you can buy without having made a commitment. And so the spot market is available to you. So I think we're going to see a lot of dollars move into the spot market, in particular around streaming. And spot tends to be much more heavily programmatic dominated. And so we think that's a big upside potential for us. The second offset is what you mentioned around performance. So the other thing that happens is usually a CFO is now

Starting point is 00:23:20 getting into the CMOs here and saying, hey, we got to make sure every dollar of ad spend is super accountable, right? We need to know granularly what's the ROI. Otherwise, you know, it's potentially on the block for being cut. And so that means that I would expect to see a shift of ad dollars from brand orientation towards performance. And so what does that mean in terms of performance channels? CTV is a performance channel. Commerce media is a performance channel. You have, you know, closed-loop reporting, the ability to measure, you know, what kind of sales happened. We have a lot of advanced data and targeting. I'm sure we'll talk about cookies, but there's been a big transition, and we've been a leader in that transition away from cookies. It's a lot more advanced

Starting point is 00:24:02 data like people logged in. And so I think we're in a good position to be able to manage through that shift for our publishers to drive more performance at spend. And then I think the third thing we're going to see, actually I'll give you two more things. The third is more supply path optimization. So, you know, if your CFO comes to you and says, hey, we're going to have to, you know, ratchet back the ad spend by 5, 7, 10%, then the first place you're going to lean to is to say, well, how can I protect actually the media spend, but how can I get more efficient? But how can I take cost out of my supply chain, out of my buying process, and supply path optimization and our activate solution with its AI capabilities is a great way to do that. And then lastly, I think, you know, we're right at the cusp of this. AI revolution, right? And so usually what happens in a macro cycle is people are much more willing to try new solutions, right? When you're making 100, 110% of your plan, your motivation to try

Starting point is 00:25:05 something new is very low, right? It's like, hey, why rock the boat? But if you're coming in at 80 or 90% to plan, if you're a publisher or an advertiser, you know, trying to drive your sales, then all of a sudden you're willing to try new things. And I think there's a lot of AI solutions out there in general, But we've been doing a lot in AI, our new buyer platform that we announced last week with AI-driven workflows. So I think we're going to see an acceleration of interest in trial of a lot of these new AI solutions. Roger, we've talked about a lot of technological advancements and potential tailwinds up until

Starting point is 00:25:42 now. We're about halfway through. So before we jump into questions about AI, I want to draw everything together. Can you give us from a financial perspective, sort of a sense of the rest of the rest of the Revenue, Kager, we should be expecting. Shareholders should expect, let's say, over the next three and then maybe five years. Sure. So I'm happy to share what I can in terms of, you know, forward-looking projections. Let me give a little bit of context on the business just from the last couple of quarters. So in May of 2024, so almost exactly a year ago, one of our large

Starting point is 00:26:16 DSP buyers, they made a technical change to how they, you know, how they bid. So I won't go into too many details on it, but they went from first and second price auctions to really managing first price only. And so that was a significant headwind for us. At the same time, we saw a nice tailwind in political ad spend, right? So obviously last year, presidential cycle, big cycle. So there was a lot of political ad spend, particularly in the second half of the year. So there's a lot of noise in the numbers right now. And so what we started to do middle of last year is just a breakout. If you look at our business, excluding that DSP and excluding political, so the put and the take, what is the growth in the business look like, so that investors

Starting point is 00:26:57 could get, you know, kind of a clearer picture of what is the underlying business, you know, how is it performing? And that underlying business, by the way, is about 70% of our revenue, so obviously a very significant chunk of it. So in the second half of last year, that underlying business grew 17% on a year-over-year basis. Pretty good. That growth accelerated in Q1 to 21%. So we're seeing a really nice trajectory in the business. Our reported revenues, you know, the entire business, they've been uneven, right? Uneven because we took that hit in Q2 of last year and that persisted into Q3. And then we had uptick from political.

Starting point is 00:27:35 So Q3 looked pretty good and Q4 came back down. So when you look at the total kind of reported numbers, there's some unevenness. You know, we are really targeting to grow at over 15% per year on a sustained basis. And we think, you know, when we look at our underlying business again and the trends there with that 21% growth in Q1, and we think about even in the near term, you know, with the macro uncertainty, we think we can continue to grow at that rate, at that 15% plus rate. I think there will be quarters where we're, you know, where we're above that. But I think that, you know, 15-ish percent is a good number.

Starting point is 00:28:13 So the market is also, you know, our market is growing in the 8 to 10% range. digital advertising, programmatic digital advertising, so that 15% also implies, you know, sustained market share growth. I'll put a link to the whole interview in today's show notes, which members of any Motley Fool service can access. As always, people on the program may have interests in the stocks they talk about in the Motleyful may have formal recommendations for or against. Don't buy yourself stocks based solely on what you hear.

Starting point is 00:28:41 All personal finance content follows Motleyful editorial standards and are not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only to see our full advertising disclosure. Please check out our show notes. I'm Ricky Malvey. Thanks for listening. We'll be back tomorrow.

Motley Fool Money - Nike’s Turnaround Story

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