Nike: Just Do It, DTC

Even though Nike reported higher than expected third-quarter profits, its stock has been trending down since that earning call. The primary reason for the decline is sales growth, which was hurt by widespread port congestion in the United States and ongoing store closures in Europe.

Although the global health crisis still leaves an overhang of uncertainty, Nike said it anticipates lockdowns will start to ease in Europe in April, and delivery windows will slowly improve in North America through the remainder of the year.

But what got me so hyped about Nike is its direct-to-consumer (DTC) business which grew 20% YoY, to $4B putting Nike is on track to sell $16B DTC – more than a 40% of all Nike brand revenue. Online sales are fueling this growth. They surged by another 59% in this quarter after the 82% in the last quarter, enabling Nike to book $1B in sales online in North America for the first time. This is super impressive.

As mentioned in a previous article, Nike's ability to thrive during the pandemic when physical visits to retail stores have collapsed is down to its investment in its DTC business. You see the upside of DTC is alluring – it allows you to cut out the middleman (wholesale retailers) and, in theory, capture a higher profit margin for your business. But for Nike, it has been less about capturing higher margins and more about owning and controlling the full customer experience.

What kind of company is Nike?

They started with shoes, but their product line has extended far beyond that. They are certainly a marketing company, one of the best in the world, but they also make many genuinely innovative products. Over the last few years they’ve been expanding their push into software and wearables, yet no one thinks of them as a technology company. And, despite self-owned and franchised stores in almost every neighborhood in the world, no one thinks of them as a retailer either.

One could make a similar point about Apple. Both Apple and Nike have markedly similar business models. They are both selling commodity products at gross margins well above their industries' averages (~40% for Apple, and ~45% for Nike).  They can do that because they are both Experience companies.

What Nike is selling is the experience of being a runner (or a basketball player etc.) It’s not just the athletes in their advertisements, or the quality of their shoes, the sportiness of the clothes, or the sophistication of the apps. It’s the whole, and it’s greater than the sum of its parts. They sell a commodity product, and make their profit off the differentiation provided by the Nike Experience. And they’re better at it than just about any company in the world, except maybe Apple.

Nike has been investing more in digital DTC, including its popular SNKRS app, to reach younger consumers online and reduce its reliance on third-party partners and that's the way to go. Despite its stock drop and current logistics challenges, I'm very bullish about Nike and I expect their good times to keep on rolling.

Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.