Nike: A Multi-Billion-Dollar Bet On Digital

Despite revenue being down, hundreds of layoffs, and an overload of inventory, Nike's stock is still up over 25% this year — but why?

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Friends,

Let’s play a game.

What if I told you the following was true:

• Nike’s 2020 annual revenue came in at $37.4 billion, representing a 5% drop from the previous year.

• Nike reported $6.7 billion in on-hand inventory last quarter, representing a 15% increase year over year.

• Nike’s gross margins came in at 43.15%, a 90 basis point decrease from 2019 and their lowest recorded gross margins in almost 2 decades.

• Nike has announced another 700 layoffs, including 100+ members of their “executive team,” bringing their total number of layoffs within the last 12 months to over 2,000.

Well, you would probably think—similar to their competitors Under Armour and Adidas—that Nike’s business has been hit hard by the continued impact of the COVID-19 pandemic.

To some degree, that’s all true — but context matters.

Despite seeing a drawdown of almost 40% in March, which was even greater than the S&P 500’s 33% drop, Nike’s stock has ripped back — doubling in value from its 2020 low and up over 25% on the year, compared to only 5% for the S&P 500.

So what gives?

It’s simple actually.

Sure, stores are opening back up and maybe the stock was even oversold in the first place, but it really all comes down to one thing.

The equity market is reminding us of its true and intended purpose — to reflect not only a company’s current value, but also their earning potential and future viability.

As for Nike, investors are betting their future includes continued digital transformation.

Point being — if I also told you in the section above that Nike’s digital sales increased 82% last quarter, with double digit growth across North America & Greater China and triple digit growth in EMEA, your opinion would have been much different.

Again, context matters.

(📸 / Nike)

Last month, Nike CEO John Donahoe gave an impressive and passionate speech on their quarterly earnings call regarding the future of digital within the sales ecosystem of Nike.

Rather than break it down in my own words, here are a few of my favorite parts — straight from John Donahoe himself.

“The accelerated consumer shift toward digital is here to stay.”

“We know the digital is a new normal. The consumer today is digitally grounded and simply will not revert back. Our NIKE digital business is already meeting our mix goal of 30%, nearly three years ahead of schedule and we will continue to grow from here. This quarter, our owned digital channel grew 83% on a currency neutral basis, driving almost $900 million of incremental revenue versus the prior year, and an acceleration versus the prior quarter even as our doors at retail reopened.”

The increased adoption of Nike apps:

“Our engagement and membership metrics show incredible momentum. For example, we're seeing almost 200% growth in demand for our Nike commerce app, with triple-digit growth in monthly active users. This is significant for us as it speaks to the increasing consumer adoption of our apps. And while we've had tremendous success in digital and quickly pivoted to the accelerated consumer shift, I truly believe that NIKE is just scratching the surface of what's possible. With our breadth and depth, no one has the advantage in this space that NIKE has to directly connect with consumers.”

Discussing the competitive advantages Nike has through digital:

“NIKE's digital transformation strategy is not easily replicated. Simply put, scale matters and NIKE leads and we will continue to lead in this space for all the reasons I've already mentioned. Our size, our incredible product, our brand strength and infinity, the direct consumer relationships we deepen each day and our ability to create seamless and differentiated shopping experiences, that is how we drive continued separation.”

How digital connections lead to linked transactions:

“Digital is fueling how we create the future of retail. This is the first quarter since the start of the pandemic, where our retail was essentially opened. And as more consumers returned to our stores, we saw impressive conversion in store, even as our digital business accelerated even further. Our store traffic and sales are improving quarter-over-quarter, and we're also seeing consumers increasingly self-identify as a member during checkout, or as we call it a linked transaction, which is leading to even more engagement on our apps and an elevated O2O journey.”

Lastly, a brief reminder on their overall vision:

“This is our vision for the marketplace, a digitally connected experience, where membership is a true differentiator.”

Impressive, right?

The equity market certainly thinks so.

(📸 / Nike)

Impressive speeches and a comprehensive vision is great, but what about the tangible benefits of digital transformation?

There’s a few that come to mind.

Efficient Marketplace & Improved Margins

Nike cut ties with thousands of retailers across the country last month, accepting no new orders and cancelling any outstanding orders for Nike and Jordan Brand Products — even stores that carried the brand for more than 40-years.

Why?

“We are doubling down on our approach with Nike Digital and our owned stores, as well as a smaller number of strategic partners who share our vision to create a consistent, connected and modern shopping experience.”

Simply put, Nike wants to streamline the process and own end-to-end distribution.

The best part?

It will help with obvious things like inventory management and customer service, but the real benefit comes in gross margins.

Nike typically earns 10% higher margins on digital revenue versus wholesale revenue, as customers through digital tend to be more loyal — which enables Nike to lower customer acquisition costs and increase its return on ad spend.

Enhanced Customer Experience

Along with increased financial related upside, digital transformation plays a huge part in the overall experience of a customer.

For example, in Nike owned stores—which they are shifting to almost exclusively—Nike app users have the ability to scan barcodes for pricing, check available inventory, and complete their transaction — all through the easy-to-use Nike mobile application.

Not only does the Nike app claim to offer a better experience for both online and retail customers, but Nike has the data to prove it — a customer who connects with Nike on two or more platforms has a lifetime value that’s 4x higher than those who don’t.

Sophisticated Data

Lastly, and perhaps the most obvious benefit, the data provided, recorded, and analyzed through Nike’s various digital applications gives them a significant advantage.

Among other things, Nike plans to use data from their digital applications to make their operational process more efficient through “predictive modeling tools, data driven member personalization and inventory staging.”

Simply put — the foundation of technological applications used to record customer interests, purchases, and everything in between, is a massive benefit to any company.

So how is their digital transformation going so far?

Given the pandemic acted as an accelerant, it’s been great.

Nike has already reached their 2023 sales target of 30% being transacted via digital, with plans to be within striking distance of a true 50/50 split (wholesale vs. digital) within the next 2-3 years.

Only time will tell the true financial impact of Nike’s digital transformation strategy, but for a company with the size, scale, and scope of Nike, it seems like a no-brainer.

P.S. — Peloton reports earnings after the bell today, look out for a write up tomorrow on their financial results and overall progress.

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