Nike’s Reliance on Wholesale a Top Risk Despite Digital Growth
Optimism that was building up leading into earnings has been deflated following weaker-than-expected fourth quarter results and a disappointing 1H21 outlook. While digital sales growth served as a silver lining, investors are zeroing in on the 38% sales drop and surprise earnings loss.
Nike, Just Digital: Digital sales in 4Q20 jumped 75%, accounting for about 30% of total revenue for the quarter. Nike’s goal is to reach about 50% over the next few years. The company’s commerce app has been downloaded over 8 million times since February, 3 times that of last year's performance.
Why it matters: Susquehanna analyst Sam Poser emphasizes that “revenue and operating margin of selling 1 unit through NKE's owned e-commerce is double that of selling the same unit to a wholesale partner. Further, owned e-commerce provides NKE more control over: 1) the brand and 2) the ability to harness the pull model that NKE has worked to establish since its inception.”
Wholesale exposure: The bulk of Nike’s sales still come from the wholesale channel. Jefferies analyst Randy Konik says Nike’s exposure to wholesale will be a tangible headwind in the near-to-medium term.
“Its primarily wholesale selling model will weigh on the company's rebound, as the inventory build-up will take time to work through, and DTC will likely be unable to fill the void. We wouldn't chase shares at these levels as we view valuation as full, and therefore we maintain our Hold rating.”
Reopening: About 90% of Nike-owned stores around the world have reopened their doors. Retail traffic is down at these locations, but is improving sequentially each week.
China recovery: Growth in China improved each month of the quarter, thanks to Digital. The Nike app, which was launched in China in the third quarter, has now been downloaded about 11 million times.
Keep tabs on inventory: Inventory grew 31% in the quarter. Konik stresses that Nike’s COVID recovery will depend on the ability of wholesale stores such as Foot Locker and Dick’s Sporting Goods to clear inventory. Konik said “we expect to be an extended process, given consumers' lack of urgency to return to malls, even as they begin reopening.”
