Nike's online business is booming — 'digital is here to stay,' CEO says - CNBC

American multinational sport clothing brand Nike store seen in Hong Kong.

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Nike is proving during the pandemic that its big bets in digital are paying off, as consumers are turning to its website and app in record numbers to shop for sneakers and workout apparel. 

For the past few years, the company has been pulling away from department stores and other wholesale outlets, instead investing in opening its own smaller neighborhood stores, called "Nike Live," to serve as pickup hubs for online orders, alongside multilevel flagship locations dubbed "House of Innovation." It also is testing a new concept that debuted earlier this year in Guangzhou, China, called "Nike Rise," where visitors can use their Nike app once inside the space to sign up for local soccer matches and running clubs. 

Even as most of its stores were reopened, Nike's digital sales soared 82% during the fiscal first quarter, pushing revenue ahead of analysts' estimates. 

"Nike's decision to evolve into a digital-first organization has proved prudent, as the crisis continues to push consumers toward the digital channel," Susquehanna analyst Sam Poser said. "Digital momentum is sticky. ... [And] Nike has embraced the structural shift of consumer shopping habits from traditional brick-and-mortar to digital and will, in our view, continue to capitalize on this shift." 

Nike shares were up about 9% Wednesday morning, hitting an all-time intraday high of $130.38. 

Before the Covid-19 crisis, Nike had set a goal of having its e-commerce sales represent 30% of total revenue by 2023. But it has already exceeded that. It didn't break out the exact percentage, but said online sales were more than 30% of total sales during the latest quarter. 

Now, it's on track to break 50% in coming years. 

"The accelerated consumer shift toward digital is here to stay," CEO John Donahoe said Tuesday. "Digital is fueling how we create the future of retail." 

"Nike's digital transformation strategy is not easily replicated," he added. "Simply put, scale matters, and Nike leads." 

For many retailers, not just Nike, e-commerce is fueling gains, even driving hiring. Walmart announced Wednesday it plans to hire 20,000 seasonal employees during the holidays to help pack and ship online purchases in its fulfillment centers. Lululemon announced late Tuesday it plans to resume its stock buyback program, which had previously been halted because of the pandemic. Like Nike, Lululemon has watched its digital business explode: Its online sales soared 157% during the latest quarter. 

To be sure, companies that sell workout apparel like Lululemon and Nike are in many ways just finding themselves in the right spot at the right time. Consumers are hungry for home-gym accessories and sweat-wicking clothing during the pandemic. They're shopping for leggings and sweatpants to lounge in and wear while working from home. Nike said its women's apparel sales were up almost 200% during the latest quarter. 

But as more sales move online and out of wholesale channels, Nike is finding a way to make those digital sales more profitable — a feat that many in retail grapple with. Expenses for shipping and handling returns tend to weigh on total sales, driving profits lower. 

CFO Matt Friend said Nike typically earns roughly 10 more points toward its gross margins on digital revenue versus wholesale revenue, finding customers on its website are more loyal, allowing Nike to lower customer acquisition costs and increase its return on ad spending. 

"While we will need to continue investments to expand digital fulfillment capacity, we can improve operational efficiency through predictive modeling tools, data-driven member personalization and inventory staging," he said. 

Nike's net income during the latest period ended Aug. 31 grew to $1.52 billion, or 95 cents per share, from $1.37 billion, or 86 cents per share, a year earlier. Just a quarter earlier, Nike reported a surprise loss of $790 million, as companies were canceling orders of its merchandise and stores in key markets including North America and China were temporarily shut. 

"Nike is a better, more profitable company today than it was a year ago," Deutsche Bank analyst Paul Trussell said. "And there is quite a short list of entities that have been able to achieve that." 

Nike, which has a market cap of $199.4 billion, has watched its shares rally more than 15% this year. 

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Nike's online business is booming — 'digital is here to stay,' CEO says - CNBC
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