Nike (NKE 0.66%) is one of the most recognizable athletic brands worldwide. Understandably, retailers would jump at the opportunity to carry its merchandise in their stores.
However, Nike is getting more selective as to who it partners with -- restricting inventory to the chosen few. Surprisingly, making products available to fewer retailers has not hurt Nike's sales. The trend highlights the power of its brand; consumers will seek out Nike products.
Image source: Getty Images.
Nike wants a closer connection to its customers
Indeed, Nike has cut half of its wholesale partners over the past four years. Surprisingly, it has not hurt sales. On the contrary, between 2018 and 2021, Nike's sales increased from $36.4 billion to $44.5 billion.
Typically, reducing the number of retail partners would decrease sales. If a customer visits a store that doesn't carry Nike inventory, then the chances of that customer buying a competitor's product increases. However, from Nike's results, it looks like what's happening instead is that if a customer visits a store that doesn't have Nike inventory, they leave to store to find one that does have Nike.
NKE Revenue (Annual) data by YCharts
Or better yet, some customers are going to Nike.com or visiting the Nike app to buy directly from the iconic brand. That's an added benefit for Nike because it realizes higher margins for products sold directly to consumers. Wholesalers typically require lower prices so they can then make a profit on reselling. In its most recent quarter, which ended Feb. 28, Nike's direct-to-consumer sales increased by 15% to $4.6 billion. To put that figure into context, overall sales for the quarter were up 5% to $10.9 billion.
Nike's direct-to-consumer channel is more critical in North America, where it grew 27% in the most recent quarter, consisting of 33% of overall sales in the region. North America is Nike's most prominent geographic segment when measured by sales. It's great news for Nike's profit margins that its most extensive geographic base of consumers is coming to it directly.
Cutting out some middlemen has helped Nike increase its gross profit margin from 43.8% in 2018 to 44.8% in 2021. In addition to better profit margins, a direct connection to its customers will help inform Nike of their tastes and preferences. Nike can collect such data as what products folks have in their online shopping carts and which items they spend the most time browsing. The information can help management understand where to innovate, where to build inventory, and what colors and models consumers are gravitating toward.
NKE Gross Profit Margin data by YCharts
Modest margin expansion is only the beginning
Nike's transition away from 50% of its retail partners without losing sales puts it in an excellent position to thrive over the next several years. The more profound connection with customers is already showing signs of bearing fruit, but the increases in gross margin are likely only the beginning. Nike's innovation engine could become even more powerful, informed with the additional customer data. It's a great time to be a Nike shareholder.
