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Nike deserves a curtain call and it’s just getting started

Image: TY Lim / Shutterstock

This is an excerpt from Monday’s (6/28) Point of Sale retail supply chain newsletter sponsored by ArcBest.

Executives across retail apparel are confidently stating their companies are emerging from the pandemic stronger and better positioned than they entered it, but I question how many actually believe it. During his video keynote address last Thursday at the NRF Retail Converge, Macy’s CEO Jeff Gennette said, “The headline is that Macy’s is a healthier business coming out of the pandemic than we were going into it.” Kohl’s CEO Michelle Gass, while speaking at the same event, gave similar remarks about Kohl’s strength leaving the pandemic. 

It’s difficult to discern which companies are stronger currently amid a spending boom lifting nearly every apparel retailer, and the growth is exaggerated when compared to last year. The acid test will come when spending growth falls to more normal levels. Both Macy’s and Kohl’s are seeking to drive more direct sales through owned brands and both continue to invest in online and omnichannel capabilities, but I suspect many of the persistent pre-pandemic issues at department stores will become more apparent as demand normalizes. 

The makeovers at Macy’s and Kohl’s are turnaround stories of bloated retailers that were late to adjust to shifting consumer behaviors. The makeover at Nike is much different. And after listening to Nike’s fiscal Q4 earnings call Friday, I’m certain CEO John Donahoe and CFO Matt Friend believe it when they say Nike is better positioned now than prior to the pandemic. In Nike’s fiscal Q4 (ended May 31), the company hauled in a record $12 billion in revenue, including a(nother) record $5 billion in the U.S. alone. 

This helps: At the end of Q3, Nike was navigating significant supply chain snafus that kept its highly demanded inventory in transit. In February, Nike’s North American inventory was up 31% yoy, but much of it was stuck in containers. At that time, Nike’s inventory at distribution centers was actually down 20% yoy. CFO Friend said the company is still managing supply chain headwinds, but said delayed revenue from the third quarter was recaptured during the fourth quarter. 

Nike isn’t alone in its push for higher direct sales. Nearly every brand and retailer is working toward this. Brands are opening stores and cutting off undifferentiated retailers. Retailers are launching private label and digitally native DTC brands left and right. And one look at Nike’s results tells you why: 850 basis points of gross margin expansion yoy. Indeed, Nike is lapping one of the worst quarters in its history, one in which the company took major actions to manage supply and demand in the face of the COVID-19 pandemic, but the expansion is remarkable. 

How? Nike’s direct business is now approaching 40% of the total NIKE Brand revenue, according to Donahoe. This is a milestone Nike reached “several years ahead of our prior plan,” Donahoe added. Over the past 15 months, Nike has leveraged the pandemic disruptions to accelerate its transformation to a more digitally connected, direct-to-consumer brand. It has cut ties with dozens of retailers, while planning to open both full-size and concept stores. Nike’s digital brands, which I have my personal qualms with (damn you, SNKRS), are on fire. Even as physical stores reopened, Nike Digital saw 37% growth over last year. 

In every brand boardroom, the DTC vs. wholesale argument is being hotly debated. For Nike, which has decades of supply chain and operational excellence to build upon, the answer is simple and here’s why:

Owning the entire sales channel enables:

Higher average selling cost.

Higher margin.

Maintaining control of 100% of the data (the experience).

The financial benefits are apparent: Sell to consumers, cut out the middleman and keep the revenue and margin in house. The data, however, will only become more and more valuable. The data is key to building digital supply chains. Amazon understands this. And Nike plans to utilize the data in ways very similar to Amazon. Owning the process from manufacturing to purchase (and delivery) gives Nike the data necessary to build a digital supply chain. 

What’s a digital supply chain? To Donahoe, it’s “having the intelligence to know, having the right product in the right place at the right time, so that we can deliver that product in a low-cost, convenient and speedy and in a climate-friendly way.” He added, “And last, but not least, that insight — consumer insight helps fuel product creation. I mean the more we know about our consumers, the more we can build the kind of compelling product that they want and need.” Sound Amazonian to you? 

It should and it’s working. The strategic and financial benefit of shifting to a higher mix of business through NIKE Direct is just becoming apparent. By leveraging enhanced data and analytics, Nike can optimize inventory to drive higher full price sales and lower digital fulfillment costs. Nike expects to expand margins further by 125 to 150 basis points this year, despite higher product costs and supply chain investments. Nike confidently projected gross margins reaching the high 40s by fiscal 2025. 

The consumer data’s value has a multiplier effect throughout the supply chain. Because Nike is so in tune with consumers’ behaviors, it’s letting demand outpace supply. (You’ll know this if you’ve ever tried to win a SNKRS draw.) It’s generating record sales while running inventories cleaner than ever. Across Nike, Jordan and Converse, inventory is down double digits versus this time last year. The company is still managing widespread delays and longer lead times and says in-transit inventory remains elevated, but sales are crushing it across the portfolio. Nike said it expects supply chain delays and higher logistics costs to persist throughout much of fiscal ’22, but it also projected a record $50 billion in sales. 

Final thoughts. There’s a lot to learn from Nike’s strategic decisions already and the fruits of them are just now being reaped. Nike is battling supply chain disruptions just like everyone else, but it’s focusing solely on two things it can control: how its product is sold and how much of it is sold — i.e., its sales channels and its inventory. 

Nike first began to reestablish its brand as the world’s premier sporting line when it cut ties with Amazon and has continued by slashing its availability at wholesalers, off-pricers and undifferentiated retailers. It’s continued to build its world-class brand by building best-in-class digital storefronts and applications that create unique and personalized customer experiences. And even if that experience ends without a sale as mine normally do, the data generated is invaluable and Nike leverages it to make better products, optimize inventory and lower fulfillment costs. 

If you enjoyed this piece, try Point of Sale, my twice weekly newsletter about the rapidly evolving retail supply chain covering consumer trends, retailer strategies, supply chain challenges and more. Join more than 2,500 supply chain nerds like myself for trends, news, and analysis of every corner of the retail supply chain. Sign up for free here: