Thanks to its robust direct-to-consumer (D2C) sales strategy, better inventory management and a rebound in China, Nike is finding itself in a better position than expected.
The company reported its revenue for the third fiscal quarter to be $12.4 billion, above projections of $11.48 billion, marking a 14% increase from the previous year, during the company’s Q3 earnings call Tuesday (March 21).
Nike also noted that its direct sales, which include its website and owned-and-operated stores, outperformed, with member buying frequency increasing and store sales growing across all geographies, leading to a rise of 17% year over year to $5.3 billion. Its brand digital sales rose 20%.
“Nike’s strong results in the third quarter offer continued proof of the success of our Consumer Direct Acceleration strategy,” Nike President and CEO John Donahoe said in an earnings release.
One of Nike’s significant challenges in the past year was its surplus inventory, which the company has made strides in addressing. To offload excess merchandise, the company dabbled in discounts during the holiday season. And despite China’s “zero-COVID” policy, Nike was able to obtain single-digit growth in the country, which is deemed notable as the policy imposed by the government caused store closures and lockdowns affecting Nike and its competitors.
After several quarters of struggle, Nike began to see progress in the region when China eased some of the restrictions in November and December. Nike also leaned into developing new products and partnerships.
According to Nike’s earnings release, the company holds $8.9 billion worth of inventory, which is 16% higher than in the same period last year. The increase is mainly attributed to “higher product input costs and elevated freight costs.” However, the sportswear giant noted this is an improvement compared to the previous two fiscal quarters, when Nike had $9.7 billion and $9.3 billion in inventory, respectively.
Executive Vice President and Chief Financial Officer Matt Friend mentioned on the call that in January, Nike witnessed an increase in in-store traffic, especially around the Chinese New Year, and this momentum continued into February. This was due to Nike’s clean inventory, which allowed the company to provide customers with fresh seasonal assortments. Despite its challenges, China remains one of Nike’s top three markets by revenue, and the company is optimistic about its growth prospects in the region.
Nike has seen a favorable position in the market as its competitors face their own set of difficulties. The growth is noted as a complete contrast to its rival Adidas, which has faced challenges and is projected to experience its first annual loss in 30 years this year.
“[The year] 2023 will be [one] of transition to set the base to again be a growing and profitable company,” Adidas CEO Bjorn Gulden said in February. “We will put full focus on the consumer, our athletes, our retail partners and our Adidas employees.”
Adidas ended its partnership with Ye, the musician-turned-fashion entrepreneur formerly known as Kanye West, Oct. 25, citing widely reported controversies around Ye. It also terminated production of Yeezy branded products.
To remain competitive, Nike’s efforts to reduce inventory go hand-in-hand with its product innovation.
The company has launched several new products, such as the Air Max Scorpion shoe, the Pegasus Trail 4 shoe and the Forward apparel line. It has also unveiled new color options and collaborations for some of its best-selling models, including the Air Jordan, Air Max and Dunk Low.
Nike also unveiled several new products and collaborations, including the Sabrina 1 shoe in collaboration with basketball player Sabrina Ionescu and the Air Max 270 Go, a new kids’ development. Nike also teased upcoming “retro” styles of the Air Jordan 3, and its Jordan Tatum 1 shoe with basketball player Jayson Tatum is set to launch April 7.
Nike’s mission is to allow consumers to get what they want, when they want, how they want it, and that’s a sentiment the company is looking to embellish on through its membership program, which has 150 million active members.
“Some of the early examples with Dick’s you’re seeing is where we can provide a personalized experience to a shared Nike and Dick’s Sporting Goods member in a way that can’t get elsewhere that benefits us and benefits Dick’s,” Donahoe said on the call. “A simple example might be baseball season. We can find a baseball consumer or a Dick’s baseball consumer, and we can send an email focus with Nike baseball cleats, along with a Dick’s bat and mitt. And consumers are responding to that very personalized messaging from Nike and Dick’s.”
While Nike did not discuss its relationship with Foot Locker specifically, Mary Dillon, the CEO of the sportswear retailer, touted a “renewed” and revitalized relationship with the Oregon-based company during an earnings call Monday (March 20).
“The fruits of our renewed commitment to one another will begin to show up in holiday this year as we build increasing momentum to 2024 and the 50th anniversary of Foot Locker,” Dillon said.
Over the past few years, Nike has been focusing on expanding its D2C operations and reducing its reliance on wholesale accounts. This strategy involved strengthening its eCommerce channels and launching new stores.
However, Nike faced challenges with the supply chain during the pandemic, resulting in a surplus of inventory over the past few quarters. Subsequently, the company relied on its wholesale partners to sell off its inventory. In the fiscal second quarter ending Nov. 30, Nike’s wholesale revenue increased by 19% after being stagnant for several quarters.
When asked about Nike’s D2C plans, Donahoe emphasized the significance of an omnichannel approach.
“Our strategic wholesale partners, partners like Dick’s Sporting Goods or Foot Locker or JD, are very, very important because consumers want to be able to try on products, they want to be able to touch and feel,” Donahoe told CNBC. “And so, we’ve invested in strengthening those strategic relationships.”
Nike’s Q3 success reflects on its ability to continuously innovate its products, connect with consumers, and tell compelling brand stories. However, the company said it is aware of the growing pressure on consumer confidence and the unpredictable macro environment.
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