Store closures took a heavy toll on Nike's (NYSE:NKE) business last quarter, with sales dropping 38% year over year. But Nike was well prepared for the current environment, as digital sales surged 75%. Nike has spent the last few years shifting its business strategy from its dependence on physical-store sales to an enhanced online shopping experience, including its roster of activity and commerce apps. 

During the call, CEO John Donahoe said, "We are seeing a true step-function change in our digital transformation." Workouts on the Nike Training Club app more than tripled, and revenue through the SNKRS app exceeded $1 billion globally for the first time in fiscal 2020. That increased mobile engagement is fueling Nike's digital business. 

Nike's digital business comprised 30% of total revenue in the last quarter, reaching $5.5 billion for fiscal 2020. Digital growth accelerated each month during the quarter, and the trend has continued into June even as stores began to reopen. 

During the call, Nike announced the next evolvement in its Consumer Direct Offense initiative. The new Consumer Direct Acceleration strategy is intended to further separate the Nike brand from the competition, grow digital revenue to 50% of the business, and deliver better profitability over time.

A smartphone displaying the Nike app with the Nike website in the background.

Image source: Nike.

Opening new digital-enabled stores

COVID-19 has accelerated digital shopping trends in retail, and Nike isn't wasting any time to take advantage of the shift in consumer behavior. Nike is moving to give consumers a seamless online-to-offline experience with a new type of store that has integrated digital capabilities and a smaller format. 

Nike has already been investing in these mono-brand stores in China with good results. Between 150 and 200 new mono-brand stores will be opened across North America, Europe, Middle East, and Africa. 

"We believe this will be additive to what's in the market," Donahoe said. "These mono-brand stores will accelerate the growth trajectory of Nike's largest market share opportunity like women's and apparel, driving long-term profitability." 

Investing in data science

In the near term, Nike is reducing discretionary spending to redirect resources to improve its digital capabilities. Specifically, Nike is accelerating its investments in the technology backbone that drives the digital operation, including demand sensing, insight gathering, and inventory management. 

Last year's acquisition of Celect couldn't have come at a better time. Celect has given Nike a team of data science wizards who use analytics to predict retail demand. By being better able to anticipate what customers want, Nike can get the right product to the customer at the right time. 

Most importantly, Celect will enable Nike to gain market share in apparel. As Donahoe explained, Celect's advanced data analytics will help Nike build scale "that others won't be able to match." 

Building a more profitable business

Ultimately, Nike's efforts to beef up its digital operation should fuel the stock price to new highs over time. CFO Matt Friend stated that "the transformation to a more digital and direct business is financially accretive to Nike."  

Friend explained that, on average, an incremental unit sale through Nike's digital channel generates twice as much revenue as a sale made through wholesale. Digital sales generate a higher gross margin and generate double the amount of operating profit compared to the wholesale channel.

Nike's current digital penetration is 30% across the business. Management expects digital sales through company-owned and partner retail stores to reach 50% of the business in the foreseeable future.

Taken together, investing in mono-brand stores and technology, and expanding its fulfillment capacity will improve Nike's long-term growth prospects, as more consumer discretionary spending shifts online.