When Nike (NKE 0.38%) reported its fiscal 2022 third-quarter financial results on March 21, investors were impressed with the strong demand evident in North America. Despite ongoing inflationary pressures and supply chain issues, sales increased 9% in Nike's largest market. Wall Street viewed this very positively, as the stock popped 5% in after-hours trading.
I think an even bigger point of strength for this top apparel stock was the success of Nike's digital channel. The business has been making great strides in being at the forefront of consumer expectations for retailers to offer seamless and interconnected shopping experiences.
Let's take a closer look.
Nike's digital push
In 2017, Nike's management team launched Consumer Direct Offense, an initiative to "leverage the power of digital." The company started to focus more on speeding up product innovation and developing deeper connections with consumers. And it's been paying off.
In the most recent fiscal quarter, Nike's digital sales jumped 19% year over year, while overall sales increased 5%. Of the $10.9 billion in revenue received in the three-month period, 26% came from the digital channel. John Donahoe, Nike's CEO, predicts that the digital mix will hit 50% of the total business in the not-too-distant future.
From Nike's perspective, generating more sales from its website or suite of mobile apps adds flexibility during a global pandemic when physical shopping is temporarily restricted. It benefits the company financially. CFO Matt Friend previously said that e-commerce sales add 10 percentage points to the gross margin compared to using wholesale partners. That's a sizable difference, and it foreshadows a future in which Nike's profitability soars if it can hit its target of a 50% digital mix.
Perhaps nothing showcases the company's digital prowess more than the monster success of SNKRS, a mobile app that helps sneaker enthusiasts stay up to date on any upcoming releases. Nike introduced new features like live streaming product drops and partnering with social-media services that drive higher levels of consumer engagement. This ultimately leads to increased purchasing behavior. Nike's total digital membership across all its apps is easily in the hundreds of millions today.
Image source: Getty Images.
"Our growing participation in new digital platforms lets us create innovative ways to connect with consumers ... letting them unlock virtual experiences, products, and rewards as we expand access points to Nike across the digital ecosystem," Donahoe mentioned in the Q3 2022 earnings call.
Nike's recent acquisition of virtual sneaker maker RTFKT demonstrates a push to be a major player in the metaverse. And it underscores just how innovative and forward-thinking this business is when it comes to integrating technology to propel the company.
Is Nike stock a buy?
There's no doubt that Nike is the leader in the global sports apparel market, and it has rewarded shareholders because of this dominance. The stock has produced a 138% return over the past five years, easily beating the S&P 500 during the same time. And with shares down 20% year to date, investors can buy the stock at a more reasonable price-to-earnings ratio of 35. This might still seem expensive, but management is expecting mid-to-high teens annual growth in earnings per share over the next few years.
Nike is an innovative business that is always finding ways to push the needle. Its digital success proves that this strategy is working.
