Nike (NKE 2.69%) had an eventful 2020 as the pandemic forced its shops and wholesale partners to close their doors. With so much disruption to the iconic brand's business model, it had to be flexible and creative to continue delivering for shareholders in the new environment. And it did just that.
Let's dive into the operational changes Nike made, and how they could position the company for an even stronger future.
Image source: Getty Images.
Winning in digital
In the company's most recent quarter (ended Feb. 28), total sales rose 3% year over year. While this may not seem significant to some, when dissecting the growth, it becomes much more interesting.
Digital sales soared 59% year over year with double-digit growth in every single geography. Even more encouraging, these numbers would have actually been better if not for global container shortages that affected inventory shipments. In other words, Nike could have sold even more merchandise if it had the inventory available to do so.
From a company demand perspective, Nike CFO Matthew Friend expects the digital evolution to boost key growth drivers such as women's apparel. Each direct-to-consumer sale gives Nike greater visibility into consumer data, allowing it to control inventory more effectively. And Friend "continues to see the value of a more direct, digitally-enabled strategy fueling ever greater potential over the long term."
The outperformance in digital is not just welcomed from a revenue standpoint. A shift from wholesale distribution to digital sales affects the company's margin profile as well. Nike enjoys a gross profit margin roughly 10 percentage points higher for digital sales than for wholesale. With that in mind, a lasting shift to digital business could create a permanent boost to the company's profits.
In the fiscal 2021 third quarter, Nike did see its gross profit margin expand 130 basis points to 45.6%, and it also delivered a 14.0% net income margin versus 8.3% in the prior-year period. This is undeniably positive, and there is likely a runway for further expansion as management expects digital to make up 30% of the business by fiscal 2023.
The margin expansion and revenue boost also allowed Nike to raise its dividend for the 19th consecutive year, despite all of the challenges the pandemic presented.
Nike is in very good hands
John Donahoe took over the chief executive role at Nike in Jan. 2020. He brought with him an impressive resume and deep understanding of what it takes to create a successful digital offering.
For example, he can take his cloud computing know-how from ServiceNow, his payments expertise from PayPal, and his marketplace prowess from eBay to drive success for the sports apparel company. Given how Nike outperformed many of its competitors during the pandemic, Donahoe seemed to handle his tumultuous first year quite well.
Overall, Nike's ability to successfully transform its business model amid the COVID-19 pandemic is admirable. Not every company has the ubiquitous brand, deep pockets, and strong leadership Nike possesses, but most importantly, the global powerhouse leveraged those advantages to prioritize e-commerce and come out ahead in the past year. In my view, investors can feel very comfortable buying shares of Nike stock.
