Nike (NKE): Physical and digital channels to work hand-in-hand to drive growth

Nike Inc. (NYSE: NKE) reported the end of another fiscal year on Thursday and as expected, the results had taken a hit from the COVID-19 pandemic. Revenues for both fourth quarter and fiscal year 2020 decreased due to disruptions in business operations brought on by the health crisis. The digital platform, however, saw strong growth as shopping shifted more towards online channels and the company expects this momentum to continue going forward.

Performance

Nike has delivered consistent revenue growth over the past years and did the same in fiscal year 2019 with a 7% increase in total revenues to $39.1 billion, driven by growth in the Nike brand and Converse. The company saw broad-based revenue growth across all its geographies. On a currency-neutral basis, revenue growth was 11%.

In the first half of fiscal 2020, before the coronavirus outbreak, Nike’s revenues grew 9% (11% on a currency-neutral basis) helped by strong consumer demand and growth in digital sales. The back-half of the year, particularly the fourth quarter, saw store closures and business disruptions due to the health crisis, which led to a 4% drop in revenues to $37.4 billion. The decrease was 2% on a currency-neutral basis.  

The company saw revenues drop in footwear, apparel and equipment across all its geographic regions barring Greater China, which alone recorded increases in all three categories for fiscal year 2020. One more example to show how this pandemic brought yet another high-performing giant to its knees.   

Digital channel growth  

In fiscal year 2019, digital commerce sales grew 35%. This momentum continued in fiscal year 2020 as well with digital sales increasing 47% fueled by double-digit growth across all geographies. In the fourth quarter of 2020, Nike had to close 90% of its stores for around 8 weeks due to the health crisis. During this period, digital sales rose 75%, making up around 30% of total revenue. Here too the lockdown pushed more people to shop online.

In the fourth quarter, Nike surpassed $1 billion in annual digital revenue in Greater China and EMEA. The digital channel saw growth during each month of the quarter with May recording triple-digit growth. These trends continued through the first three weeks of June and even accelerated in some markets.

“As physical retail re-opens, NIKE’s strong digital trends continue, a testament to the strength of our brand and the investments we’ve made to elevate digital consumer experiences. Amid macroeconomic uncertainty, we will continue to operate with agility, focused on optimizing marketplace supply and demand, cost management and leveraging our financial strength to drive long-term sustainable, profitable growth.” – Matt Friend, EVP and CFO

In North America, the digital channel saw 80% growth while in EMEA it rose nearly 100%. Greater China registered a 53% increase while the APLA region also witnessed an increase of around 80%.

Several experts have already predicted that the trend of transacting online is here to stay. Nike too believes this momentum in digital reflects an ongoing shift towards a new marketplace in future. The company believes the transformation to a digital and direct business will be financially accretive.

Nike had previously aimed to reach 30% digital penetration by fiscal year 2023 but in the light of its current performance, the company believes it can reach this mark this coming year which would be over two years ahead of plan. Looking ahead, Nike expects its overall business to reach 50% digital penetration.

However, Nike believes that customers are looking for a seamless shopping experience which combines both physical and digital capabilities and not one that is centered around digital alone. In other words, the customer may want to order or reserve goods online and pick them up or try them out at the store. The company believes that physical and digital capabilities must go hand-in-hand in order to create a marketplace that meets customer demands both now and in future.

Outlook

Looking ahead into fiscal year 2021, Nike expects revenue in the first half of the year to be below prior-year levels but the decrease is expected to be lower than the fourth quarter as the company re-opens stores and grows its digital business.

In the second half, revenue is expected to increase significantly versus the prior year. For the full year, revenue is expected to be flat to up compared to the previous year.

Click here to read the full transcript of Nike’s Q4 2020 earnings conference call