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Nike levels up digital game in wake of coronavirus hit

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Nike levels up digital game in wake of coronavirus hit

Nike Inc. is doubling down on efforts to grow online operations in the wake of the coronavirus crisis, with plans to strengthen its own e-commerce platforms while intensifying partnerships with leading retailers such as Foot Locker Inc. and Nordstrom Inc. to drive digital sales.

The efforts are poised to create a more agile, digitally oriented Nike amid a pandemic and forced store closures across North America, Europe and China that led to a drop in revenue and a net loss in the company's most recent quarter, experts say.

Even before the pandemic, the global athletic apparel giant benefited from a robust online business that surged as consumers moved online while stores were closed for months.

But Nike announced plans June 25 to further intensify its online business in its current fiscal year, with expectations that e-commerce sales from its own channels, combined with key retail partners, could account for 50% of overall sales in the foreseeable future.

Nike did not provide guidance for its fiscal 2021, but executives said they expect revenue for that year to be "flat to up" versus the prior year. Analysts surveyed by S&P Global Market Intelligence expect revenue to increase to $39.04 billion in fiscal 2021, up from $37.40 billion in fiscal 2020. Nike's revenue should rise to $44.38 billion in fiscal 2022, according to estimates compiled by Market Intelligence.

Nike did not return inquiries about a specific timeline for achieving its digital goals, but company President and CEO John Donahoe emphasized the importance of Nike's e-commerce operations during a June 25 fourth-quarter earnings call, saying it's part of a "true step function change in our digital transformation."

"As you know, this has been an area of investment over the past few years as we built our digital advantage, but COVID-19 has accelerated the pace," he said.

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Nike's target to have 50% of its sales coming from digital channels is a lofty goal but a feasible one given that the company expects digital sales to account for 30% its revenue in fiscal 2021, two years earlier than originally envisioned, experts say.

Despite a 38% drop in total sales during the fourth quarter, Nike's digital sales grew 75%.

Meanwhile, the company's Nike commerce app has been downloaded more than 8 million times since February while revenue through the company's SNKRS app reached $1 billion for the first time in fiscal 2020. Nike also added 25 million new members in the fourth quarter with half coming from activity apps. Women also accounted for half of the new members, Nike said.

"I don't think there's any question that they will get there it's just a matter of when," said Christopher Svezia, footwear and apparel analyst with Wedbush Securities, in an interview.

Market leader

Nike's is accelerating digital efforts after the coronavirus pandemic pummeled the company's fourth quarter and fiscal year that ended May 31. The company's full-year revenue fell 4.4% to $37.40 billion from $39.12 billion a year ago. David Swartz, a Morningstar analyst who covers Nike, said the company's revenue would have exceeded fiscal 2019 sales if not for store closures during Nike's third and fourth quarters. Nike reported a net loss of $790 million during its fourth quarter

But even with that hit, Nike remains the dominant player in the athletic apparel category and is expected to continue holding onto its lead as competitors suffer amid the pandemic, Swartz said.

In terms of annual sales, Nike is still notably bigger than its German archrival adidas AG and it is more than six times bigger than PUMA SE, another competitor.

Adidas is digesting its own COVID-19 impact. It saw its first-quarter net income drop 97% year-over-year and the company pulled its guidance for the rest of the year. Adidas generated $26.47 billion in revenue in its fiscal 2019 year, up from $25.88 billion in the year-ago period.

Similarly, both Maryland-based Under Armour Inc. and Puma withdrew their 2020 outlooks due to uncertainty related to the COVID-19 pandemic.

SNL Image

Even though Nike's overall sales declined for its most recent fiscal year, its digital sales made through the company's e-commerce platforms saw strong momentum throughout the pandemic even as stores began to reopen. In fiscal 2020, Nike's digital sales reached $5.5 billion, up from $3.8 billion in fiscal 2019. Digital sales in fiscal 2018 were $2.8 billion.

SNL Image

Digital-first strategy

Nike is increasingly moving away from vendors that don't strongly promote the Nike brand and cutting ties with weaker players that haven't put digital infrastructure in place, experts say.

"Nike wants to be a premier product so it wants to make sure its wholesale partners are able to fulfill that," said Mike Zuccaro, a Moody’s vice president and senior analyst who covers Nike, in an interview.

That movement away from undifferentiated retail was highlighted in late 2019 when Nike announced it cut ties with Inc. to better control its own brand and inventory. "In the grand scheme of things, Nike doesn't really need them," Svezia, of Wedbush, said. "They have plenty of U.S. wholesale distribution, plenty of avenues to move inventory."

Moving forward, Nike will be eyeing opportunities to team up with new digitally savvy retailers and strengthen relationships with third-party partners like Foot Locker, DICK'S Sporting Goods Inc., Kohl's Corp. and Nordstrom, all of which have brick-and-mortar operations as well as online platforms that Nike can tap into, Swartz said.

"What they are really focused on are these chains that can promote the product in the stores and online the way Nike wants to be promoted," he said.

Nike will also focus on marketing specific products to specific types of shoppers. For example, the Kohl's shopper may be buying a new pair of Nike shoes for his or her children online or in store, Swartz said. Meanwhile, Foot Locker, which has thousands of stores in North America, will cater to the Nike aficionado who "will buy the latest Jordan shoes" for $200 or more, he said.

"When you go into a Foot Locker store, you see Nike all over the place, and their employees are trained to push Nike," he said. "They know what's hot and what isn't."

Meanwhile, the Nordstrom shopper may buy shoes from a mini Nike boutique set up within the department store, or buy them online at later, he said. "They want to get closer to their customers wherever their customers want to shop," Swartz said.

"They have dropped thousands of stores in recent years that used to carry Nike stuff," Swartz said. Nike will continue pulling away from partnerships with smaller independent shoe stores that do not have a strong online business or the marketing muscle to ensure that Nike stands out. That will not include elite running shops in key markets, but rather the smaller mom-and-pop shoe stores that place Nike shoes next to other shoe brands.

Nike may be looking to fill the void of the independent shoe store with its own smaller format stores planned throughout North America, Europe, Africa and the Middle East. Donahoe said during the company's fourth-quarter call that Nike plans to open between 150 and 200 locations that will emulate the "Nike Live" digital concept store in Melrose, Calif., where inventory is determined by Nike digital commerce data to serve a specific local market.

"They are going to use more data, more localized inventory curation and things of that nature to cater toward what's selling and what's hotter and more local," Zuccaro said.

Svezia said the smaller format Nike stores will likely allow customers with a Nike app to pull up immediate information about in-store inventory and buy online without trying items on or interacting extensively with a sales associate. "It's almost like moving the service person out of the equation to a degree," he said.

He said he thinks the future stores will also incorporate technology from the Nike Fit app, which uses a smartphone camera to scan customers' feet and make sizing recommendations. "You can get all the answers on your phone," he said.

Risks ahead

There is a risk that Nike may be overestimating how much consumers will shop online or face the possibility that shoppers will pull back on spending significantly, experts say.

At the moment, however, Nike "[seems] to have the wind in their sails," with a strong online business and a brand image whose Swoosh logo is one of the most recognized in the world, Svezia said. Nike also is affiliated with major athletes across numerous sports including golf and basketball and events such as the Olympics and World Cup.

"There's always some incremental risk, but by and large, those retailers we talk to are eyes wide open about digital," Svezia said. "To me, it's going to skew more heavily in that direction."