Investors Are Making a Big Mistake by Overlooking Nike's Ace in the Hole

So far, 2023 has been a strong year for the broader stock market. Unfortunately, Nike (NKE 0.19%) has not shared in that growth. The sports apparel giant's stock is down by more than 15% year to date and off by a painful 45% from its all-time high.

Nike stock has been under pressure thanks to mounting concerns that consumers are pulling back on spending, particularly on discretionary purchases like premium-priced shoes and athletic wear.

The good news is that Nike is in a league of its own, both in terms of the strength of its brand and its ability to engage directly with consumers. Here's why this blue-chip stock is worth buying now.

Image source: Getty Images.

The rise of Nike Direct

In the past, Nike depended almost entirely on its wholesale business. More recently, the company has been energetically growing Nike Direct -- a direct-to-consumer (DTC) option that bypasses retailers and allows customers to purchase products from Nike's website, its app, and other avenues. Sales through Nike Direct tend to be higher margin. Plus, Nike Direct allows the company to directly engage with customers when it comes to promotions, product releases, and sales.

In its fiscal 2023 (ended May 31), Nike Direct made up 41.6% of total revenue, wholesale made up 56.2%, and the rest came from global brand divisions.

Data source: Nike. 

Over the last five years, Nike Direct sales have nearly doubled and have made up a larger share of total revenue every year. On its own, Nike Direct now generates more revenue than all of Nike earned in its fiscal 2011. 

A resilient apparel business

When you think of Nike, the first thing that comes to mind for many people is its shoes. And while footwear remains the core Nike segment, apparel and equipment now make up around a third of Nike brand sales.

Data source: Nike. 

The above table may seem a bit unimpressive at first glance because apparel and equipment sales have been growing at a slower rate than footwear sales, and therefore make up a lower share of revenue than a few years ago. But apparel and equipment are far more disruptable than footwear.

Nike is famous for making shoe deals with top athletes, especially in basketball. Nike's Jordan line is arguably the most valuable sneaker brand in the world. And while Nike sponsorship deals with athletes don't always include a shoe deal, the most effective ones do.

Top athleisure brands that have grown in recent years such as Lululemon Athletica directly compete with Nike's apparel business. But they compete with its footwear business to a far lesser extent.

If the growth of Nike's apparel and equipment segment lags behind that of its footwear, but can steadily grow over time, that's still a win for the company overall.

The right way to look at Nike

When it comes to Nike, focusing too much on consumer spending trends and retail sales can lead an investor to underplay the importance of Nike Direct. Similarly, putting too much emphasis on the slower growth of its apparel and equipment sales risks overlooking the resilience of those businesses in the face of mounting competition.

An unavoidable challenge when it comes to digital DTC sales channels for shoes and clothing is that customers can't try on products before they buy them. But the growth of Nike Direct, as well as the growing popularity of DTC options from Lululemon and other top brands, proves that consumers are increasingly comfortable buying these products before they try them on due to smooth return processes and their familiarity with brands' sizing. This is bad news for brick-and-mortar retailers, but excellent news for Nike and its ability to better control its sales funnel.

Getting too caught up in the strength of the consumer can also lead an investor to miss the point that Nike is a much better business today than it was even five years ago. Even if Nike has a weak few quarters, the stock's sell-off creates a compelling buying opportunity for patient investors.