Nike Inc.'s (NKE) digital strategy that brings its products directly to consumers has been paying off, as evidenced by a 20% jump in online sales during its third quarter of fiscal 2021 after a 32% jump in the previous quarter.
In the last twelve months, Nike has shifted increasingly to a direct-to-consumer distribution model from a wholesale distribution model, cutting the middlemen and the markup that has been cutting into the company's bottom line. That means higher profit margins and increased cash flows for Nike.
On Thursday, the company reported fiscal third quarter net earnings of $1.45 billion, or 90 cents per share, beating analysts' average expectations of 76 cents. According to the company, things could have been even better if it wasn't for bottlenecks in the global supply chain, which undercut North American revenue:
"North America revenues declined 11 percent on a currency-neutral basis, largely driven by global container shortages and U.S. port congestion, which delayed the flow of inventory in the third quarter by more than three weeks, impacting the timing of wholesale shipments.
Nike's strong Q3 performance continues to reflect the success of its digital-first direct selling strategy," says Kurt Trauth, SVP of Customer Experience and Analytics at Stratifyd. "In the athletic apparel industry, Nike is currently a leader in digital customer experience, offering free shipping as well as an industry-leading return window of 60 days."
Nike's digital strategy isn't confined to direct sales. It extends to augmented reality, which allows the company to personalize its products. "Nike has been at the forefront of mobile technology – through aspects like augmented reality and "shop the look" features – and I expect they will continue to push the envelope and integrate their app strategy into their stores," says Mousumi Behari, Digital Strategy Practice Lead at Avionos. "Prioritizing their omnichannel presence and continuing to invest in digital initiatives to perfect personalization and mobile capabilities will set Nike up for success in 2021 and beyond."
Digitalization is a more recent addition to Nike's multiple advantages that form "moats" around its business, limiting new competitors' entry into its market and allowing the company to deliver solid economic profits as determined by the return on invested capital (ROIC) minus the weighted average cost of capital (WACC):
| Company | ROIC | WACC | Economic Profit |
| Nike (NKE, Financial) | 17.41% | 6.53% | 10.88% |
| Adidas AG (ADDYY, Financial) | 4.22% | 2.85% | 1.37% |
Disclosure: I own shares of Nike and Adidas.
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