Please ensure Javascript is enabled for purposes of website accessibility

Here’s the Slam Dunk in Nike’s Grim Earnings Report

By Adria Cimino – Jul 1, 2020 at 4:36PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Nike has a plan to make the silver lining in the recent earnings report shine.

When Nike (NKE -0.32%) reported a 38% revenue decline in the fiscal 2020 fourth quarter, I'm sure more than one investor cringed. But here's the good news: It isn't indicative of the company's long-term future. With stores temporarily shut in North America and Europe due to the COVID-19 pandemic, a drop in revenue wasn't a surprise.

We'll have to be patient, as Nike -- like most other retailers -- won't recover overnight. The seller of athletic clothing and gear said it expects revenue to decrease in the first half of the fiscal year 2021, and then climb in the second half. For the full fiscal year, the company forecasts sales may be flat or higher.

But there is a slam dunk in the latest earnings report that should lead to even more game-winning points: a stronger-than-ever focus on digital growth.

A basketball player makes a slam dunk at an outdoor court.

Image source: Getty Images.

Online shopping is on the rise

Why is digital so important these days? Prior to the COVID-19 pandemic, online shopping was already on the rise. U.S. apparel, footwear, and accessories revenue from e-commerce is projected to increase by 88% from 2020 figures to $194 billion in 2024, according to Statista.

Then came the pandemic. As the health crisis kept consumers around the world home and forced stores to close, online shopping became the only option for many consumers.

Nike, which saw the opportunity in digital well before the COVID-19 outbreak, launched a direct-to-consumer initiative in 2017. Now, with digital taking off, Nike plans on giving it a push in the form of its Consumer Direct Acceleration plan, which aims to make online and offline experiences seamless.

Membership in its online sales programs and apps is a key focus. Nike made great strides in the quarter, gaining 25 million new members. That's an increase of more than 100%. How can this help revenue? Members who use the Nike Training Club app for workouts or track their runs on the Nike Run Club app don't stop there. Nike says more engagement with its audience translates into product sales.

In the fourth quarter, Nike's digital sales soared 75% and made up 30% of total revenue. In its earnings call, the company said digital sales through the Nike platform and partners could reach 50% of business in the near future.

The new plan

Part of the new plan includes opening 150 to 200 smaller-format stores that only sell the Nike brand to integrate the in-store experience with digital. Nike is also ramping up its ability to fulfill digital orders by opening a new service center on the West Coast before the holidays. Using technology from its purchase of Celect, a predictive analytics platform, Nike will be able to anticipate consumer needs better -- and therefore better manage inventory.

In the months ahead, online shopping may not see the incredible leaps it posted during the height of the outbreak. Momentum should continue, though. It's reasonable to assume that those who shopped online before the COVID-19 outbreak will continue to do so. As for those who started shopping online during stay-at-home orders, some may stick with it after discovering the convenience. In the near term, certain consumers still may be concerned about the virus's spread, and so will continue to opt for online shopping.

Nike's early emphasis on digital helped the company make its way through what we hope was the worst of the health crisis. This new effort to accelerate that initial plan should not only boost recovery but also offer Nike a position of strength in the future.

Nike's shares have recouped most of their losses since the March market crash and are now down only about 5.4% this year. Wall Street expects a 14% gain from this point for the remainder of the year. The stock isn't cheap, trading at nearly 60 times trailing-12-month earnings, compared to 29 for rival Adidas. But considering the long-term gains we can expect from Nike due to digital, this is a reasonable entry point for the retail stock.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.