🗞 Over The Long Run, Fundamentals Are Gravity

Happy Sunday!

Here’s what’s on the docket for this week’s newsletter:

• 📈 In the long run, fundamentals are like gravity

• 👟 Nike: The Battle For Footwear Relevance

Let’s dive in!

In the long run, fundamentals are gravity

At Berkshire Hathaway’s 2007 Shareholder meeting, Charlie Munger said:

"Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return—even if you originally buy it at a huge discount.”

Phrased differently: Over the long run, fundamentals are like gravity.

Here are 5 great examples:

1. Apple

• FCF/Share CAGR: 25.4%

• Stock Price CAGR: 25.7%

2. Visa

• FCF/Share CAGR: 19.5%

• Stock Price CAGR: 20.6%

3. Monster

• FCF/Share CAGR: 20.7%

• Stock Price CAGR: 20%

4. Chipotle

• FCF/Share CAGR: 25.8%

• Stock Price CAGR: 25.5%

5. United Health

• FCF/Share CAGR: 11.8%

• Stock Price CAGR: 11.7%

Featured Story

Nike: A Battle For Footwear Relevance

Nike has been a juggernaut in the apparel and footwear space for more than 3 decades. A $10,000 investment in the iconic brand in 1993, would have netted investors just over $940k at its peak in 2021. For context, the same amount invested in the S&P 500 would have earned just $180k over that same timeframe.

But despite decades of building its brand, it appears the tides might be shifting.

Over the last 2 to 3 years, demand for Nike’s products has slowed across all categories, with the most pronounced slowdown being in its largest revenue category Footwear.

To make matters worse, Nike’s slowdown in footwear revenue has coincided with significant growth of some of its closest competitors in both the US and China (its two largest markets).

On Running, HOKA (owned by Deckers), Anta, and Li-Ning, have all outpaced Nike’s footwear growth.

While they’re each much smaller than Nike in terms of revenue, their relevance in their respective markets are all growing.

In 2019, these 4 competitors combined accounted for 20% of Nike’s Footwear Revenue. Today, they account for 50%!

Nike’s Turning Point?

Over the last several years, Nike’s management team made a series of mistakes that have resulted in the numbers you see above.

For starters, the company was pretty open about prioritizing Nike Direct, most notably through its digital channel. They used Nike digital as a way to get rid of inventory at discounted prices which in turn hurt demand for many of their wholesale partners, as customers could get items cheaper online.

While discounting excess inventory is standard practice for many retailers, it’s not ideal if you want to maintain a reputation as a premium brand.

Insert Elliott Hill.

6 months ago, Nike replaced John Donahoe as CEO with Elliott Hill.

Hill started at Nike in 1988 as an intern in its apparel division and has worked his way up ever since. Prior to becoming CEO, he held 15 different titles at Nike. In other words, he knows the business.

While Hill’s impact isn’t going to show up in the numbers for some time, one of his big strategic priorities is to return NIKE Direct to a premium destination while also supporting their wholesale partners.

And so far, they seem to be taking the right steps.

On the latest conference call, Hill stated:

“We're already reducing the promotional days and discounting at lower rates. In fact, comparing last year's January and February to this year's, NIKE Digital in North America went from over 30 promotional days to zero.”

Time will tell as to whether or not Nike’s problems are solvable, but for now it at least seems Nike has a stronger sense of its strategic direction.

If anyone is equipped to return Nike to its former self, it’d be hard to find anyone with a better résumé than Elliott Hill.

Meme of the week

The S&P 500 dropped 2% to close the week as tariff new once again dominated headlines.

As tariff threats and rumors have been all over the place since the new US presidential administration took over, investors have felt it. The S&P 500 is now officially nearing correction territory as it has dropped 9.3% from its highs.

This is your friendly reminder from us at FinChat to focus on the fundamentals, think long-term, and track the numbers that really matter!