Nike (NKE) posted a rare earnings miss, and its stock closed more than 7% lower. At a glance, the report looks ugly. Compared to the same quarter last year, sales were down 38%, and a $1 billion profit turned into a $510 million loss.

Digital Sales Explode

However, there’s one bright spot in the report that should soothe stockholders and make them consider adding to their position on this weakness. The company’s digital sales channel continues to explode with a 70% increase in growth.

Nike is betting its future on digital, direct-to-consumer sales. There are several benefits including bigger margins, more customer loyalty, and additional opportunities to increase the lifetime value of a customer. Once a customer enters the Nike ecosystem, they are much more likely to buy again from the company in that category and adjacent products.

The big-picture strategy is that Nike is looking to deepen its relationship with its customers. It has multiple means of doing so like its running app, workout app, and SNKRS app. Customers or potential customers engage with these apps regularly and yield valuable data that can be used for more effective sales strategies and product development. 

For example, its SNKRS app tells Nike how much time each customer spends looking at each product, the parts they zoom in on, and what they don’t spend any time on. Using this type of user-generated data, they have created products that instantly sold out.

These efforts have been so successful that Nike is planning to roll out specific apps for all types of sports, activities, and communities. It’s heavily investing in this concept and is planning to open 150 mini-stores which will serve primarily as pickup points for online orders. 

Over the last couple of years, it has also upgraded its supply chain and logistics to enable direct sales as it moves away from wholesaling products to retailers. This strategy also gives Nike more control over its brand and pricing. 

Retail Weakness is Temporary

In a sense, the coronavirus and shutdowns of most retail locations allow Nike to accelerate this timeline. Before this quarter, Nike was expecting digital sales to be 30% of revenue by 2023. The other 70% of Nike’s sales come from physical retail stores. Sales through this channel were down due to most stores being shut down for the bulk of the quarter.

Many of its digital customers will be retained, and customers are returning to stores as they reopen. One early indication is from the earnings comments on China. China has been about one to two months ahead of the US when it comes to the coronavirus. As the US was shutting down, they were reopening. In China, sales rebounded strongly from the previous quarter and were only 6% lower compared to 2019’s fiscal fourth quarter.

Retail sales will rebound as stores open back up. Nike’s share of overall retail spending and athletic apparel and footwear spending will all continue to increase. As digital sales increases, margins will increase and long-term revenues will trend higher. Nike is incorporating the best elements of a tech company into its legacy business – sticky, addictive experiences, juicy margins, and high rates of customer retention. Investors shouldn’t miss the big picture.

Our exclusive POWR Ratings are updated daily to provide investors with invaluable insight into the market’s most interesting opportunities. The POWR Ratings have Nike ranked #1 in the “Athletics and Recreation” category. The stock also has “A” ratings across the board in all categories including Trade Grade”, Buy & Hold Grade, Peer Grade, and Industry Rank.

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NKE shares were unchanged in after-hours trading Friday. Year-to-date, NKE has declined -7.05%, versus a -5.59% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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