Nike Says Digital Transformation Strategy Working, but Shipping Times Still Elevated

In an industry filled with legendary toe-to-toe competition between rival teams and athletes, Nike finds itself similarly embroiled in a binary contest of its own.

This, as the world’s largest athletic footwear and apparel company faces a battle of opposing business forces, in a winner-takes-all slugfest that is pitting macroeconomic headwinds against the long-running mix of structural tailwinds.

“Elevated ocean freight costs, increased product costs, discrete supply chain investments and normalization of historically low markdown rates,” is how Nike CFO Matt Friend described the company’s primary challenges in speaking to analysts and investors about its fiscal Q4 and full-year 2022 results Monday (June 27).

On the flip side, CEO John Donahoe said continued strength of customer demand, plus the company’s ongoing strategy to transform and grow its digital, direct to consumer sales had left Nike better positioned to drive sustainable long-term growth today than it was before the pandemic.

“Our structural tailwinds, which include the expanded definition of sport, the societal movement toward health and wellness and comfort, and the fundamental shift in consumer behavior toward digital, continue to create energy for us,” Donahoe said. “We’re excited by what we see as we look at our growth opportunities and the strong consumer demand we continue to enjoy and as we look ahead to fiscal ’23, we remain very confident in our long-term strategy and our growth outlook.”

Unique Brand Power

To be sure, there are few brands in any industry that can match Nike in terms of its clout, recognition and loyalty to its namesake, Jordan and Converse brands, as the now 50-year-old company detailed some of the successes it has enjoyed in marking — and socially promoting — that anniversary.

“We continue to have a competitive advantage in digital as one of the few brands that can connect with and directly serve consumers at scale,” Donahoe said, pointing to the recent multimedia success with young consumers via a Spike Lee film, music and viral TikTok campaign. 

Taken together, he said, digital accounted for 24% of Nike’s Q4 business as more consumers pursue personalized shopping experiences on its app and website.

“We do not take lightly the choice made by consumers to put us in the most prized real estate that exists today — the home screen of their phone,” Donahoe said. “No other brand occupies that space globally like Nike and it remains one of our biggest competitive advantages.”

Supply Challenges

As much as Nike’s retail, manufacturing and distribution operations in China were — and continue to be — affected by COVID-related issues, the company’s North American business continues to face its own problem in the form of long, slow and costly shipping and importation. 

“Elevated ocean freight and logistics costs continue to dampen near-term profitability in [North America],” Friend said of the three months ending May 31. While inventory was up 30% versus a year ago, he said 65% of it was in transit or on ships rather than in distribution centers and warehouses.

“We continue to see transit times being elevated relative to pre-pandemic levels, by about two weeks” Friend said, noting that the 85-day transit time for goods getting into its largest market was still a problem, and one that could get worse if 20,000 West Coast union dock workers don’t come to some contract agreement by the end of this week.

“Right at the end of the quarter, we did start to see a little bit of improvement vis-à-vis the boat backlog at the West Coast ports,” Friend told analysts. “But at this point in time, given all the variables that we see there, we’re not planning for a significant improvement in transit times in fiscal ’23.” 

To address the problem, Friend said Nike is adjusting how it manages inventory, including decisions on product assortment and life cycle — such as going seasonless — while leveraging two years of experience the company has gained navigating an environment of supply chain complexity and congestion perspective.