The worst seems to be over for Nike (NKE), thanks to digital sales

Sneaker maker Nike, Inc. (NYSE: NKE) is currently enjoying the benefit of its aggressive direct-to-consumer initiatives that helped in overcoming the fall in store traffic during the pandemic. Also, renewed hopes of the market recovering sooner than expected – thanks to the progress in vaccine development – are encouraging people to spend more these days.

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Read management/analysts’ comments on Nike’s Q2 earnings

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Surprise Gain

Nike’s stock got a boost from last week’s positive earnings report and rose to a fresh high, before pulling back slightly. The company’s impressive brand value and strong fundamentals make the stock a good investment. Its resilience to the virus crisis, despite fears of customers putting their discretionary purchases on hold, has come as a morale booster for the market. The positive sentiment is echoed in analysts’ projection that indicates a double-digit growth next year. The experts are also unanimous in their ‘buy’ recommendation.

Like most apparel brands, the Beaverton, Oregon-based athletic wear giant owes its recovery from the initial impact of coronavirus to the revamped e-commerce platform, especially the direct-to-customer channel that was ramped up before the pandemic. In addition, the early recovery of the China market, where the company has been witnessing strong demand, has helped sales. However, the softness in store footfall will continue until normalcy returns to the market and that could be a disappointment for a section of customers.

New Model

Customers seem to have welcomed the restructuring initiated by the management recently, focused on regrouping the merchandise based on gender rather than activity. Holiday sales have been very encouraging in key markets so far. Interestingly, Nike broadened its offerings in the last two months with back-to-back product launches, which were mostly well-received by customers. It is worth noting that the shelter-in-place orders have made people take up physical activities like sports and fitness, which in turn raised the demand for items like sneakers, though there is limited scope for pursuing such activities away from home.

From Nike’s second-quarter 2021 earnings conference call:

“These are times when strong brands get stronger. The structural tailwinds we’re seeing, including permanent shifts toward digital, athletic wear, and health and wellness, continue to offer us an incredible opportunity, and of course, as organized sport returns around the world, that energy creates yet another tailwind for NIKE. For example, we were excited to see so many runners participating in the Shanghai Marathon two weeks ago.”

Sales Rebound

The core footwear segment registered a 10% growth in the second quarter and pushed up total revenues to about $11 billion, which marked a bounce back after two consecutive declines. Supported by strong contributions from Apparels, the second-biggest business division, earnings climbed 11% annually to $0.78 per share, continuing the recovery from the pandemic-induced slowdown in the early part of the year. Digital sales were up 84% and the uptrend is continuing even after reopening many stores, prompting the management to lift its top-line guidance.

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“It’s clear we’re not just reaching our consumers. We’re creating dialogue and opportunities for action that continue to exceed our own internal benchmarks. This deep and meaningful connection has a direct result on NIKE membership. Since the pandemic began, we’ve added more than 70 million new members globally, and we’re deeply focused on the member funnel outcomes, including new member buying, reactivation, and retention, and it’s working,” said John Donahoe, chief executive officer of Nike.

Stock Peaks

Shares of the company grew about 37% in the past twelve months, mostly outperforming the broad market. They made decent gains soon after the quarterly announcement last week but retreated to the pre-earnings levels in the following session.