A Look at Nike Direct - repost

Hi,

There is no new newsletter edition this week.

However last week Nike announced its Q3 2023 results. It reported a 14% year on year revenue growth for the whole business and a 17% growth in Nike Direct. In light of those strong results, I wanted to repost an article about Nike Direct that I wrote and posted originally in August 2022.

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Thank you for reading,

Momchil

A few weeks ago Nike reported its annual results for the fiscal year, which ended on 31st May 2022. I took a look at the annual report and wanted to see how Nike's direct to consumer (DTC) business, called Nike Direct, is performing.

Nike Direct has previously been praised as big success and rightly so. Nike started focusing on and investing heavily in DTC in 2017 and it has paid off, as evidenced by its latest annual report.

Unfortunately, Nike no longer reports its revenues across the six categories of Running, NIKE Basketball, Jordan Brand, Football (Soccer), Training, and Sportswear, which doesn't allow a look at the running business only. But it's still very interesting to take a look at the numbers.

Overview

Overall Nike reported $46.71 billion of revenues for FY 2022, which was 4.9% higher than the previous year and 19.4% higher than FY 2019 (FY 2020 was where most of the covid impact happened).

Those revenues include both Nike and Converse. Nike Brand only revenues for FY 2022 were $44.44 billion and Nike Direct accounted for 42% of that number - the highest so far. The rest was wholesale.

Nike Direct consists of two elements:

• Digital - Nike's ecommerce operation, and
• Nike owned retail stores.

I took a look at the annual reports for the last five years to see how those have been trending.

How has Nike Direct been trending

Nike Direct has been growing, to say the least - both as a percentage of the total as well as an absolute value. In FY 2018, it was 30% of total, accounting for $10.43 billion. In FY 2022, it was 42% of total, accounting for $18.73 billion.

Furthermore, the Nike Brand revenues for FY 2022 were $10 billion higher than the ones for FY 2018, and 83.4% of that difference came from Nike Direct.  

Retail stores and Digital within Nike Direct

Well, the picture here is quite clear. Sales via the Nike owned retail stores have grown by 5% over the last five years, while sales from Nike's digital channel have grown 3.8 times over the sale period! In terms of dollar values, retail store sales grew from $7.6 to $8 billion, while digital sales grew from $2.8 to $10.7 billion.

That's not surprising. After all, John Donahoe with his experience at eBay, PayPal, and ServiceNow, became Nike's CEO in January 2020 to

"...accelerate [Nike's] digital transformation and to build on the positive impact of [Nike's] Consumer Direct Offense."

Retail stores

Nike publishes the number of its retail stores in its annual report, so that gives us another perspective.

That does not come free of course. Unlike the stores of wholesale partners, the Nike owned retail stores have a high fixed cost structure and the Nike annaul report calls out the risk of:

a decline in sales, a shift in consumer behavior away from brick-and-mortar retail, or the closure, temporary or otherwise, or poor performance of individual or multiple stores could result in significant lease termination costs, write-offs of equipment and leasehold improvements and employee-related costs.

Ultimately however, the number of Nike owned retail stores has decreased by 9% over the last five years. That shows that Nike is not investing as heavily in its retail stores as it does in its digital operations. But also that Nike has likely made their retail stores (and connected supply chains) more efficient  as evidenced by the creased in number of stores by 9%, but increase in sales by 5%.

Finally, why is Nike putting such a focus on its DTC business? Well, there are at least three reasons: 1) to be able to reach its customers directly and blend the retail and digital experiences, and 2) to have more control of its brand and messaging, and ultimately 3) to command a higher selling price. Its footwear average selling price (ASP) has been a consistent driver of footwear revenue growth over the years and that's due to the higher ASP via Nike Direct.