Nike: A Continued Commitment To Digital Transformation

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Last Friday, sportswear giant Nike reported quarterly earnings — beating even the most optimistic of Wall Street exceptions, driven by lower expenses, rising profit margins, and triple-digit growth online in North America.

CEO John Donahoe said, “These are times when strong brands get stronger.”

Here are the highlights (Source):

• Revenue of $11.24 billion, which was up 9% year-over-year and beat estimates of $10.56 billion.

• Earnings per share of 78 cents vs. expectations of 62 cents.

• Digital sales up 84% year-over-year.

• Greater China saw sales increase 24% year-over-year

Following the positive earnings report, which analysts were uncertain about given the unusual timing of Friday afternoon, Nike’s stock rose ~4%.

On the year, Nike’s stock is up over 34% — despite a 35% drawdown at the onset of the COVID-19 pandemic.

For those of you who aren’t already aware, Nike has been deploying a strategic “shift-to-digital” playbook for years — the COVID-19 pandemic has simply served as an accelerator.

Here’s a quick summary…

In an effort to become a “digital-first organization,” Nike has spent the last few years strategically shifting their retail strategy.

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

Rather than selling inventory though department stores & wholesale outlets, Nike has built smaller stores called "Nike Live," which serve as pickup hubs for online orders, and multi-level flagship stores called "House of Innovation.”

Nike CEO John Donahoe says:

Simply put, they want to own end-to-end distribution.

Why?

Well, it helps with obvious things like inventory management & improved customer service, but the real benefit comes through digital transformation.

Nike stores allow customer to scan barcodes for pricing, check available inventory & complete their transaction — all through the Nike app.

By creating an end-to-end distribution model that reinforces digital interaction, Nike can improve the underlying economics of their business.

Not only does Nike earn 10% higher margins on digital sales, but a customer who connects with Nike on 2+ platforms has a lifetime value that’s 4x higher than those who don’t.

The best part?

It’s working.

Nike reported a 84% increase in digital sales on Friday, which now represent over 25% of their sales in North America — a goal they didn’t expect to hit until 2023.

In the coming years, they expect digital sales to represent 50% of their overall business — a remarkable achievement.

Even better?

Nike CEO John Donahoe says:

Outside of digital, Nike also saw outsized returns on their continued expansion effort in China.

Nike saw revenue growth of 24% year-over-year in Greater China, compared to just 1% in North America.

With Nike reporting another quarter of positive year-over-year revenue growth, while other clothing retailers like J. Crew and Brooks Brothers are filing for bankruptcy, one thing has become clear.

Nike’s ability to utilize their existing size and scale to transform their business digitally is paying massive dividends.

As retail foot traffic continues to sit at depressed levels throughout the world — including North America & Europe specifically — look for Nike’s digital sales to continue to accelerate.

My guess?

Nike’s continued investment in digital will provide them with the data necessary to increase the efficiency of their predictive modeling tools — ultimately allowing them to accomplish a true 50/50 revenue split (retail vs. digital) sooner than anyone imagined.

If you’re interested, you can read Nike’s press release here and a transcript of the earnings call here.

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Extra Credit

ICYMI — The PNC Championship was held over the weekend, which saw current and former professional golfers like Justin Thomas and John Daly team up with their dad and son respectively.

The most popular pairing?

Tiger Woods and his 11-year-old son Charlie.

Here are a few of the highlights.

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