Nike (NKE -0.83%) shares soared by an impressive 40% in 2020 as consumers turned toward online shopping during the coronavirus pandemic. The company is poised for continued growth in 2021 as it focuses on digital sales and expanding into international markets like China. Nike's strong brand (ranked the top apparel brand in the world in 2020) will also help differentiate its products from rivals like Adidas and Under Armour in this competitive marketplace.
Let's dig a little deeper to discover why this iconic apparel giant is such a great buy right now.
Letting no crisis go to waste
As a brick-and-mortar retailer with a substantial international supply chain, Nike risked falling victim to the coronavirus pandemic due to lockdowns and other economic restrictions. But while sales dipped substantially (38%) in the fiscal fourth quarter, management turned the crisis into a long-term opportunity by cutting costs and pivoting to an increasingly digital business model. These efforts are already showing results.
Nike's fiscal-second-quarter revenue jumped 9% to $11.2 billion, with direct sales (first-party and through trusted partners) and digital sales growing 32% and 84%, respectively. Direct sales now represent 38% of Nike's revenue. And over 30% of those sales are digital, according to CFO Matthew Friend.
Nike's digital transition should lead to margin improvements over the long term. In the first quarter, Management revealed that Nike's gross margin on digital revenue is roughly 10 points higher than on wholesale, and it plans to improve operational efficiency through predictive modeling and data-driven personalization (this could include targeted ads). The company also plans to eliminate 700 redundant positions at its headquarters by January as it implements this more streamlined business model.
Pivoting toward China
China has the world's largest population, and it boasts a rapidly growing middle-class increasingly interested in fitness and high-status brands. The country is on track to surpass the United States as the world's largest luxury goods market by 2025. And the sector expanded by a jaw-dropping 45% this year as consumers opted to treat themselves to high-end items instead of international travel amid the coronavirus pandemic.
Nike is poised to capture some of this growth through its strong brands, which increasingly skew toward luxury with high-priced streetwear items such as Jordan Brand shoes, which retail at around $180 and can fetch thousands on resale auction sites like stockx.com. Nike's Chinese sales jumped 24% to $2.3 billion in the second quarter and now represent 21% of Nike Brand revenue. The Chinese business looks poised to drive continued growth because of favorable trends in the market.
Nike boasts a 23% market share in China's sportswear market compared to 20% at the closet rival Adidas.
Justifying that high valuation
With a price-to-earnings (P/E) multiple around 80, Nike's valuation sits at the top of the company's 10-year range and is more than double the S&P 500's average. But I think Nike deserves its valuation because of its strong brand and potential to increase growth and profits by transitioning to a direct-to-consumer business model. The coronavirus pandemic helped management execute their strategy much faster than expected (digital sales were projected to hit 30% in 2023). And this could be behind the historically high P/E ratio.