One way Nike (NKE 2.00%) has continued to boost earnings recently is through increases in its direct-to-consumer sales, or DTC, particularly through online sales from Nike.com. Here's how this strategy is helping Nike to boost sales, get higher margins, and help the company win overall.
Nike.com boosts growth
DTC sales grew to 22% of total sales in the quarter ended Feb. 28 (Nike's fiscal Q3), compared with 20% for the same time last year. While DTC sales include both online sales as well as Nike-owned retail stores (NikeTown, Factory outlets, etc.) the boost seems to be mostly due to what the recent quarterly earnings report called "targeted investments in infrastructure and consumer-focused digital capabilities."
In the recent quarter's earnings call, CEO Mark Parker said:
[I]n Q3, we continue to see tremendous growth in our e-commerce business, as nike.com was up 42% in the quarter. Traffic and conversion both increased. And for the first time in our history, mobile traffic exceeded desktop traffic, helped in part by the introduction of the SNKRS app. Going forward, we will continue to invest in this area to best serve our consumer.
Nike's new SNKRS app for creating and buying Nike shoes. Image: Nike.com.
Nike's margin growth
When Nike sends its products to a department store or other reseller, that reseller buys Nike's products at wholesale prices and raises the sale price to turn a profit. The main benefit of using a reseller is that more product is moved, meaning higher overall sales. But as Nike has been able to move its selling mix to more and more DTC sales, it's been able to cut out the middle reseller and sell its own products at the elevated retail price, benefiting from that extra profit margin.
The jump in DTC sales helped Nike's margins to increase 1.4 percentage points year over year in the recent quarter. That may not seem like a lot, but when total revenue is $7.5 billion as Nike's was last quarter, 1% makes up about $75 million in added gross profit.
Nike's margin still trails that of Under Armour, but in looking at the past two years, while Nike's gross margin is lower, it's climbing and quickly catching up.
UA Gross Profit Margin (TTM) data by YCharts
Nike for the future win
It's not only the higher percentage of sales coming directly from consumers instead of department stores that's helping Nike's margin and bottom line. It's also the sales mix, including selling higher-priced items, that helped increase Nike's gross margin. Altogether, these efforts and total sales growth led to a 16% rise in net income year over year in the recent quarter, beating analyst estimates.
Nike seems to be continually proving how it can continue to grow its sales and profits, regardless of its already massive market position and competitive field. This great recent quarter looks like just one more example of how Nike is setting itself up for more wins going forward. With DTC sales and even more investment in online infrastructure, expect Nike's margins to go even higher. This stock looks more and more like a great long-term play.
