Markman Capital Insight

Nike Sprints To Become E-Tail Powerhouse

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To learn how to improve your results in the market dramatically by buying options on stocks like Ford and Tesla, take a two-week trial to my special service, Tactical Options: Click here. Members have made more than 5x their money this year.

Every year traders anxiously await the first data on Thanksgiving retail sales. The information shapes analyst models and investment narratives.

This year online sales were flat throughout Cyber Monday, according to data published in the Wall Street Journal. The sluggish ecommerce sales are not as bad as first glance.

Investors should consider buying Nike (NKE). Let me explain.

Each Thanksgiving online transaction data is dutifully compiled by Adobe Systems (ADBE). Its Digital Economy index tracks more than 1 trillion online visits to American retail sites, and in excess of 100 million SKUs. The data is comprehensive and takes inflation into account using the Fisher Ideal Price index, a measure of current and previous price points for the same item.

While some analysts are dwelling on the lack of growth this year, this is an oversimplification. Numbers last year were boosted by the global pandemic and lockdowns in many regions of the country. The Journal also notes that shoppers have been eager to return to physical stores, and big box retailers have seen a surge in foot traffic on Black Friday. Others said that consumers began their holiday purchases early this year based on widespread stories about limited product availability.

A survey from the National Retailers Federation found that 61% of shoppers got an early start.   

Then there is inflation.  

Given supply chain restrictions, most online retailers have severely reduced stock. Adobe notes that digital out of stock messages are up 261% from a year ago. And with products in short supply retailers are not cutting prices to attract sellers. Some popular items, like PlayStations, XBoxes and Air Jordan hoodies and sneakers are even selling at a premium.

In the middle of this year executives at Nike accelerated a 2017 plan to sell more of its goods directly to consumers. The big idea was mostly about taking the middleman out of the transactions with customers for its most coveted goods. This increases profit margins and gives the Eugene, Ore.-based athletic gear maker more control over product inventory.

It also culls the number of undifferentiated resellers. In many ways, executives are reproducing the Apple Store experience, only with high-priced sneakers and branded apparel.

Supply chain checks earlier this year by Sam Poser, an analyst at Williams Trading found that Nike gear is no longer available at Designer Brands (DBI), Urban Outfitters (URBN), Macy’s (M), Big Five Sports ( BGFV) and others. Nike stopped working in 2020 with Dillard’s (DDS), Fred Meyer (KR), and Zappos, an Amazon.com (AMZN) brand.

Through May 2021 only 61% of Nike brand sales originated with channel partners. That number in 2011 was 84%. 

More importantly, a 10-Q filing with the Securities and Exchange Commission shows that during the same time frame Nike Direct sales ballooned from only $2.9 billion to $16.4 billion.

Now jump back to Black Friday, Cyber Monday and the Digital Economy Index report.

Apparel was one of the few categories this year to post a year-over-year gain. The report shows monthly increases for cold weather items such as outerwear, fleece jackets, and hoodies of 720%, 1090% and 805% respectively.

Nike is ideally positioned to win a big portion of this increase.

In addition to moving toward a direct-to-consumer business model, executives have been extremely aggressive with the corporate digital transformation strategy. Nike has a best-in-class mobile application and a robust ecommerce platform where patrons can buy everything from swoosh-branded sneakers and sweatshirts, to skirts, dresses, yoga pants and swimwear. Best of all everything is sold at the full retail price. It’s a terrific business.

The company had $12. 2 billion in sales last quarter, up 16% year-over-year. Nike Direct sales were $4.7 billion, up 28%. Digital revenues shot up 29%, and gross margins surged 170 basis points to 46.5%. 

Nike may not be the first name that comes to mind when investors think about Cyber Monday yet it is the right business for the next era of ecommerce. It’s a big, important brand that is making all of the correct moves to create shareholder wealth.

Longer-term investors should consider buying the stock into any near term weakness.