Nike thrives on digital and marketing investments

Abundant investments in digital capacity and marketing have helped Nike to outperform its own projections for the three months to the end of August, with wide-ranging increases in sales and profits.

The Nike group raised its quarterly profit by 15 percent to $1,092 million on a sales jump of 10 percent to $9,948 million, up by 9 percent in constant currencies. While the Nike brand's underlying sales moved up at double-digit rates in international markets, it returned to shape in North America with a sales rise of 6 percent.

The Nike group's gross profit margin increased by 0.5 percentage points to 44.2 percent, as a more favorable price mix and more own retail sales made up for inflated product costs. Some of the sales increase was apparently driven by extra spending on marketing. It jumped by 13 percent for the quarter, driven by sports marketing investments and brand campaigns.

Nike's share price has been on the rise in recent weeks, as the advertising campaign with Colin Kaepernick created extra support and engagement for the brand (read the article below). But investors were apparently disappointed that, despite the momentum and Nike's outstanding performance in the first quarter of its fiscal year, the group refrained from adjusting its forecast for the full year. It continues to predict a high single-digit sales increase for the full fiscal year – albeit at the lower end of this range, due to global trade uncertainties and unfavorable currency exchange rates.

Mark Parker, the Nike group's chief executive, told analysts in a conference call last week that some of the performance could be attributed to Nike's strategy to scale up its product technology platforms, such as React, Zoom and Flyknit.

Another fundamental growth driver was the investment in Nike's retail business and its digital capacity. Its direct to consumer sales gained 12 percent and its online sales jumped by 36 percent for the quarter as it widened its digital reach. Parker boasted that the SNKRS app has become the leading global footwear shopping app. The group will continue to expand it with launches in Mexico, Brazil and South East Asia in the next quarter.

At the same time, Nike pursued investments in brick-and-mortar retailing, such as its Nike Live store in Los Angeles. Nike is trialing various features at this shop, such as product assortments that update regularly based on what is trending with local consumers, and personal smart lockers for pick-up of products reserved through an app.

Such investments are accompanied by intensified partnerships with “differentiated” retailers. They include predominantly offline partners such as Foot Locker and Nordstrom, as well as online retailers. Nike has started a fully operational program with Flipkart in India. Earlier this month it formed a partnership with Jet.com in North America, for both the Nike and Converse brands. Its Chinese team arranged to combine Nike Plus member accounts with T-Mall accounts, and the number of Chinese members could soar in the months ahead, after Nike launched a partnership with WeChat.

The turnover of the Nike brand reached $9,417 million for the quarter, up by 10 percent with or without exchange rate changes. It was up across the brand's sports fashion and performance ranges, with increases of 10 percent for footwear and 11 percent for apparel in constant currencies.

Perhaps most reassuring was the sales jump of 6 percent to $4,145 million for the Nike brand in North America. The company indicated that this performance marked a stronger and faster rebound than anticipated. Nike said that the growth was spread across footwear and apparel, and driven by own and other digital retailing, but its North American wholesale was on the rise as well. Nike's operating profit in North America gained 7 percent to $1,077 million.

The Nike brand's sales were up by 11 percent to $2,607 million in Europe, the Middle East and Africa (EMEA), with a rise of 9 percent in constant currencies. While claiming that Nike has become the leading brand in EMEA, the group said that the quarterly performance was driven by a strong double-digit sales jump for its digital business. Sportswear, running and the Jordan brand all contributed robust growth in EMEA. Sales in the football category were buoyed by the World Cup as well as subsequent campaigns around the Phantom franchise and a Jordan-branded outfit for Paris Saint-Germain's football team. The Nike group's operating profit in EMEA reached $501 million, up by 11 percent.

The Chinese market generated a sales hike of 24 percent to $1,379 million for the Nike brand, up by 20 percent in constant currencies. Nike's digital business has again been a key factor in this increase. Apart from its partnerships with T-Mall and WeChat, the company mentioned its efforts to drive digital sales in partnership with retailers such as Belle, which has rolled out connected inventory. The Nike group's operating profit in China surged by 27 percent to $502 million – slightly surpassing EMEA.

Asia-Pacific and Latin America (APLA) delivered sales growth of 7 percent to $1,270 million, up by 14 percent in constant currencies, led by Japan, Mexico and South Korea. The group has increased its regional focus on female consumers and its digital business, which raised its sales by 70 percent in the quarter. Its operating profit across APLA amounted to $323 million, up by 24 percent.

The Nike Live retail concept launched in Los Angeles will be brought to Tokyo later in the fiscal year. The group said it would continue to invest in this diverse region as the 2020 Tokyo Olympics are moving closer.

As for the Converse brand, its sales firmed up by 9 percent $527 million, with a rise of 7 percent in constant currencies. The increase was driven by double-digit growth in China and a strong double-digit rise in online sales. Converse's operating profit for the quarter landed at $98 million, up by 10 percent. The plan for the brand this year is to expand its product range and to upgrade its branded digital ecosystem.