Nike Stock: Reaping the Benefits of its Buy Strategy (NYSE: NKE)


Justin Sullivan/Getty ImagesNews

Main thesis

2022 was Nike’s second full year (NYSE:NKE) Direct consumption acceleration strategy. The company’s new policy is to reduce its presence with wholesale partners and concentrate on developing its own DTC sales. The The company plans to achieve a unified and enhanced customer experience, which should ultimately materialize in the form of accelerated growth, increased efficiency and responsiveness to customer needs.

Nike has made incredible progress over these two years, leveraging its strengths to execute on its strategy.

Direct Consumer Acceleration

In 2020, Nike took a fresh look at its old Consumer Direct Offense strategy and set new goals, while emphasizing the importance of better communication with customers. Nike has focused more on its own channels, which in the long run should strengthen the company’s brand and, therefore, consumer loyalty.

Nike Financial Outlook

FY2025 Lenses (Fuck)

The move to a new stage of strategy was marked by a change of CEO. Mark Parker gave way to John Donahoethe former CEO of eBay (EBAY). The management change highlighted the need to improve online channels as well as the physical store experience. This will unify and improve the shopping experience. For the most part, the organizational and managerial changes aimed at increasing efficiency, which led to staff reductions, have been completed.

A key part of the strategy is to improve overall operational efficiency by investing in end-to-end digital transformation, investments in data analytics, demand forecasting and inventory management. Nike has made several acquisitions in this area. In 2019, the company acquired Datalogue and Celec to improve the processing of raw data.

Focus on DTC

Consumer Direct Acceleration is fueled by increased direct-to-consumer sales. In just 5 years, the company has reduced the number of wholesale partners by 50%. Nike has excluded retailers such as Macy’s (M)Urban Outfitters (URBN), DSW, Dillard (DDS), Zappos and even Amazon (AMZN) among its list of long-term strategic partners. On the other hand, Nike has taken its relationship with retailers like DICK’s Sporting Goods (DKS) to the next level. The ability to sell the company’s sneakers in stores with the same volume is now a privilege, not a right.

Thus, Nike Direct appears to be a more profitable business than wholesale, as the company now has greater pricing power. In 2018, Merriman valued that the company’s DTC gross margin is 62% compared to 38% in wholesale. Given the current Nike target of 60% direct sales by 2025, a 40-year gross margin target is more than achievable. In this case, the gross margin will reach 52.4%.

Nike DTC Sales

table by author

The company can remove its wholesale partners so easily for one simple reason: demand remains incredibly high. Nike continues to increase its marketing spend which is now approaching $4 billion.

Nike marketing spend

table by author

But the main hype is created not so much by skillful marketing or innovative developments, but by the strongest brand and the special value of sneakers. Nike is the only true sports brand among the big players. Nike is talking about something; this brand is something sacred and inviolable with a long history of success. This allows the company to control the resale market by adjusting the supply of drops, creating even more value for the sneaker and the brand respectively. No sports brand in the world has such an opportunity because the demand is not high enough or unstable. It must be understood that this is not a short-lived success, like Yeezy, behind which there is only a personality, not a brand, but a real long-term trend.

A strong brand will help Nike continue to grow DTC sales at a rapid pace.

Results for the 2022 financial year

At the end of June, Nike released full fiscal year 2022 results.

The company reported increases in revenue and earnings per share of 5% and 6% year-on-year, respectively. The brand continues to focus on increasing its own sales share. The Nike Direct sales channel brought in $18.7 billion (+14% YoY) from increased digital sales. The share of direct sales in total revenue increased to 43% from 27.5% in 2016. The company continues to steal sales from retailers and drive shoppers to its own platforms, l Nike and SNKRS app, as well as its offline stores.

The earnings call was full of optimism. Management expressed confidence in its long-term strategy. For fiscal 2023, the company expects low double-digits on a currency-neutral basis.

Nike delivered strong results at a time of runaway inflation, still-troubled supply chains and a weakening economy due to demand, which the company was able to stimulate through the Direct Consumer Acceleration strategy .

Valuation & margins

Nike’s gross margin is lower than its competitors. However, the peers are more numerous due to the higher share of clothing in the total turnover or simply a smaller share of the global market, because their production network is not as large and complex as that great actors.

NKE Gross Profit Margin Data by YCharts

Nike’s advantage is much more visible when it comes to net profit margin. The company has several advantages over its competitors. Scale, strong brand image, effective marketing and developed online channels help sell products at a premium price. Thus, Nike’s profit margin is at an unbeatable 13%.

NKE Profit Margin Data by YCharts

Thus, the company is traditionally valued at a premium to the sector.

Nike forward p/e ratio

Given the shift in focus to direct sales channels and the resulting increase in digital revenue, Nike should be treated more like an e-commerce stock.

Nike Digital Sales

table by author

Comparing Nike to other shoe manufacturers is like comparing Apple (NASDAQ: AAPL) to other mobile phone manufacturers. The Giants are in a league of their own.

So, I don’t think Nike is too expensive right now. With competitors too weak to do anything to such a giant, the company is turning to digital sales primarily through its own channels, which opens up potential for margin growth.

Given historical valuation, Nike generally looks undervalued. The average price/earnings ratio over 4 years is 32.5x compared to 29.7x currently. The upside potential is around 10%.

NKE PE Ratio (forward) data by YCharts


Nike relies on third parties to manufacture its products. China and Vietnam each account for 36% of the total manufactured globally, while Indonesia accounts for 22%. In 2021, the maker of Nike in Vietnam halted production due to coronavirus restrictions, causing the company to lose three months of production, which continued to affect available merchandise. New epidemics or other force majeure events such as geopolitical tensions in the countries that produce most of Nike’s products could negatively impact the company’s financial performance.

Second, a slowdown in global economic growth and a change in consumer activity could negatively impact wholesale and direct sales. High inflation could lead consumers to redirect their budgets to the essentials and reduce their purchases of items like Nike sneakers. However, here the company has a certain protective barrier in the form of a brand, but the negative macroeconomic environment will clearly affect the company’s results.


Nike, which is entering a new phase in 2020, intends to accelerate direct sales and strengthen its position in the digital space. With a strong brand and scale, the company continues to bet on DTC, thereby increasing its margins. The strategy is clear and quite simple. The company wants to use a strong brand to attract customers to Nike’s own channels. Thus, the company intends to unify the shopping experience and make the brand even stronger.

The results for 2022 and the goals set for the future indicate that the company has chosen an effective approach in its Consumer Direct Acceleration strategy. The increase in DTC sales and the strengthening of the brand will be followed by an increase in the gross margin and the capitalization of the company. I would rate Nike as long term quality To buy.


Comments are closed.