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Nike intensifying focus on refining operating models

As NIKE Inc. continues to aggressively invest in its online business, the company will also intensify its focus on revamping its operational models, including reevaluating its partnerships with retailers and divesting in some areas, the company's executives told analysts Dec. 19.

"We are editing and shifting how we deploy resources within our marketplaces across our categories and geographically. While we're investing in differentiated Nike brand experiences, owned and partnered, we are also more efficiently managing the broader retail marketplace, leveraging digital tools such as our business-to-business sales platform," Nike CFO and Executive Vice President Andrew Campion said during the fiscal second-quarter earnings call.

Nike has continued to invest in its digital business and supply chain capabilities in an effort to sell directly to consumers through its own stores, website and apps. Nike is also reportedly scaling back its partnership with other retailers with the goal of fully terminating its supply agreement with retailers by 2021.

"Quite frankly, we could sell more in the short term in these undifferentiated channels, but our focus is on building a more compelling marketplace for the consumer and unbreakable relationships with Nike members," Campion said.

Campion's comments come weeks after it was reported that Nike will stop selling its products on Inc. The termination of the partnership comes two years after the pilot launched in 2017.

Nike CEO and President Mark Parker, who is set to resign in January 2020, also weighed in on the company's decision to end the partnership with Amazon, stating that providing Nike customers with an "authentic experience" is key to the company's brand strategy.

"And this means ensuring that we have an environment where the consumer can be certain that they're buying authentic Nike product[s] from authorized retailers," Parker said.

Amazon has grappled with the issue of counterfeit products being sold on its websites by third-party sellers. This has made the online retailer one of the targets of an anti-counterfeiting memorandum by the Trump administration.

Part of Nike's divesting efforts started in the third quarter with the sale of Hurley, a surf apparel brand. Campion said the sale of the Hurley brand will "further sharpen Nike's focus and investment on the key categories that will drive our long-term growth."

The sale of Hurley will negatively impact Nike's revenue growth in North America during the second half of fiscal 2020, Campion said. "That said, this is accretive from a capital deployment and profitability perspective, and our North America business on a comparable basis remains strong, and we're right on plan," he added.

Nike expects reported revenue growth for the third quarter to be in the high single-digit range, and in line with the company's reported revenue growth in the first quarter, Campion said. Nike reported 7% revenue growth during its fiscal first quarter.

Gross margin for the third quarter is expected to be flat compared to the same period in the previous year. Although Nike is expecting continued strong product margin expansion, the growth will be pressured by tariffs and Nike's investments in its supply chain, Campion said.