At Nike’s annual meeting held at its headquarters in Beaverton, OR, John Donahoe, president and CEO, said the company continues to see “structural tailwinds,” including the consumer’s movement toward health and wellness and digital, helping to empower Nike’s Consumer Direct Acceleration (CDA) strategy.
Nike officials also discussed success in innovation, China’s recovery and supply chain disruption.
Nike first announced in June 2020 that it had started its CDA phase as an addition to its Consumer Direct Offense alignment announced in 2017. With this strategy, Nike is ramping up its investments in e-commerce and technology and simplifying its “consumer construct” to better address opportunities across its men’s, women’s and kids’ businesses. It also intends to open 200 smaller, digitally-enabled “mono-brand” stores in North America, Europe, the Middle East, and Africa.
“Our operational transformation is giving us the agility we need to serve consumers more directly as we create a digital-led marketplace of the future,” said Donahoe. “And over the past couple of years, as we’ve repeatedly said in our quarterly calls and other settings, we’ve accelerated our digital transformation to capture higher engagement with consumers and market share. And we’ve seen this in our fiscal 2022 results. Our capabilities and efficiencies allow us to move at the speed of the consumer and to drive continued competitive separation in the market.”
Donahoe noted that the company’s performance in its fiscal year, ended May 31, 2022, was led by double-digit growth in its digital business. The CEO added, “Even as physical retail returns two years after the start of the pandemic, Nike-owned digital continues to increase market share. These results speak to our core belief in always having a direct connection with the consumer no matter how they interact with our brand. Nike continues to drive growth by fueling rich, meaningful one-to-one consumer experiences at scale.”
Donahoe, who succeeded Mark Parker as CEO and president in January 2020, noted that Nike’s app ecosystem over fiscal 2022 grew an “even greater share” of its total digital demand with the shift led by Nike’s ability to deliver personalized shopping experiences. He stated, “We do not take lightly the choice made by consumers to put us in the most prized real estate today—the home screen of their phone. No other athletic or sportswear brand occupies that space globally like Nike. And it remains one of our biggest competitive advantages.”
One key element in building a seamless consumer experience across physical retail is investments in online to offline services, or “O to O,” such as buy-online, pick-up, in-store. He said, “Today, 100 percent of our North American retail stores offer at least one element of O to O. And in addition to our physical retail, we continue to innovate and co-design partner experiences to better know and serve consumers. We started this journey through connected inventory, and we’re increasingly serving our consumers as Nike members, even when shopping through our retail partners. This is an exciting step in our journey within our marketplace strategy because it continues to prove how powerful it is when brands and retailers work together.”
Matt Friend, CFO at Nike, added that the CDA strategy also supports “healthy profitable growth” for Nike. Over the last two fiscal years, Nike’s gross margins have expanded by over 260 basis points to 46 percent, led by digital growth doubling to represent 24 percent of Nike Brand revenue, up from a 10 percent share in fiscal 2019. Friend added, “One of Nike’s longstanding competitive advantages is our deep relationships with our consumers. And we know that our customer wants to connect directly with Nike. We’re excited for what’s ahead as we leverage technology throughout our value chain to enable us to be present and expand everywhere that consumers live in play.”
Innovation Remains Nike’s Biggest Differential
Despite Nike’s sizeable investments in digital, Donahoe said innovation remains Nike’s “greatest competitive advantage.”
He added, “We’re one of the few companies in the world with the ability and the resources to consistently and deeply rethink our product lines with trend-setting designs that deliver both performance and sustainability.”
Examples of innovation success include several women’s programs, including its Dri-Fit polyester microfiber made from Infinalon supporting its yoga business, the Dri-Fit ADV Swoosh Support sports bra and Spark Flyknit footwear upper technology.
Donahoe called the Spark Flyknit “a huge step forward as the Nike sports research lab increasingly focuses on lifestyle products. And this project focused on how we could take performance technology we develop for a performance product and apply it to lifestyle products. And so, we’re continuing to scale use of our performance technology where Nike has a clear and distinct advantage.”
Donahoe also said Nike’s key franchises, including Air Force One, Air Jordan One and Air Max, “remain focused on bringing fresh points of view” to support growth. He added, “Our deliberate strategy to add styles and colors continues the expansion of these popular platforms. And we continue to supplement these powerhouses with innovations.”
He cited the introduction of Dynamo Go technology for kids, which features a collapsible heel so kids can stomp down and easily slip their feet into the shoe.
Among newer apparel technologies, he called out the recent launch of Nike Forward, which the company has called its most significant apparel innovation since Dri-Fit. Moving away from traditional knit and woven processes, Nike Forward’s material claims to have a lighter density than traditional knit fleece and has 70 percent recycled content. Donahoe said Nike Forward “introduces a new aesthetic while showing how Nike takes action to create a better world with major, new breakthroughs in sustainability. You will hear more about that in the coming months, quarters and years.”
Nike’s commitment to innovation was marked in the last fiscal year by adding two buildings dedicated to innovation.
At over 750,000 square feet, the LeBron James Innovation Center houses Nike’s innovation teams and is five times the size of its previous lab. Said Donahoe, “We expect this facility to act as an accelerant as it helps extend our advantage in innovation even further.” The Serena Williams building, at one million square feet, is the new home for Nike’s design and product creation teams and includes more than 200,000 square feet dedicated to lab space. Said Donahoe, “In short, these facilities combine to represent the single greatest investment in sports science, research, innovation, and design in the world.”
Long-Term Commitment To China
Asked about managing the downtrend in China, Donahoe said Nike has “always taken a very long-term view” about China. He said, “We’ve been in China for over 40 years, and it remains an important market with significant growth potential to unlock.”
He said Nike has “very strong equity” with Chinese consumers and continues to focus on a “China for China” positioning to ensure the brand delivers relevant product and messaging to the region. Donahoe elaborated, “These decisions help us to continue to build locally relevant experiences and locally relevant content via the app, which is now local in China, and it enables us to serve our Chinese members even more deeply directly and with agility and speed.”
Donahoe further said Nike had an “outstanding leadership team”‘ in China, led by Nike China VP and GM Angela Dong. He added, ‘They have shown such remarkable focus and resilience and teamwork through a very dynamic couple of years.”
In the fourth quarter that ended May 31, Nike’s sales were down 20 percent on a currency-neutral basis in the Greater China region. The decline was attributed to the region’s most widespread COVID disruption since 2020, impacting over 100 cities and over 60 percent of Nike’s business. As lockdowns lifted in specific trade zones in late April, May and early June, Nike’s store traffic and overall consumer demand in China improved.
For the year, sales in China were down 13 percent. Nike was among the Western sportswear brands facing consumer boycotts in China earlier in calendar 2021 for expressing concerns about the alleged use of Uighur forced labor in cotton production.
At the shareholder meeting, Friend added, “Over the past year, we’ve seen encouraging signs as we’ve re-accelerated investment in the marketplace, and that’s come to life in growing brand strength and deeper consumer connections in China. We were once again rated the number one cool and the number one favorite brand in China with expanding separation in our two global cities in that market of Shanghai and Beijing.”
Friend also noted that Nike’s Tmall Super Brand Day drove approximately one billion impressions and saw 90 percent of member demand penetration during the event. Nike also extended its lead as the number one store and number one brand on the Tmall Sport channel on the 6/18 shopping holiday.
Friend said Nike remained cognizant of the risks related to ongoing disruptions from COVID but is encouraged by the recent brand momentum. Said Friend, “We continue to invest in our consumer direct acceleration strategy to drive growth in this marketplace over the long term.”
Supply Chain Disruptions Easing
Asked by a shareholder to provide an update on supply chain challenges, Friend said Nike continues to prioritize “healthy pull markets across all our geographies.” He shared that over the past three quarters, consumer demand for Nike’s products have outpaced available supply, but inventories have caught up.
Friend stated, “While we faced a number of challenges during this last year, we enter fiscal 2023 with our source base fully operational and with our supply of inventories flowing again into our largest geographies. That said, the situation remains dynamic. And so, we’ll continue to monitor consumer demand for our brands and ensure that we have appropriate supply levels, considering changing transit trends. We have the experience and an established playbook to manage this dynamic environment, and we’re prepared to navigate near-term challenges that we may face.”
At the end of its year, ending May 31, inventories were up 23 percent, driven by elevated in-transit inventories due to extended lead times from ongoing supply chain disruptions, partially offset by strong consumer demand.
Asked about progress on DEI (diversity equity and inclusion) initiatives, Monique Matheson, chief human resources officer, noted that Nike’s board is currently represented by 30 percent gender diversity and 30 percent racial or ethnic diversity. At the corporate level, Nike’s recently-released Impact Report found Nike increasing the percentage of women in its global corporate workforce to 50.4 percent and women in leadership positions to 43 percent, she noted. Nike also increased the percentage of U.S. racial and ethnic minorities at the director level and above to 30.3 percent.
“We expanded diversity recruitment, our focus development for our U.S. racial and ethnic minorities, and continued our use of transparent data-driven talent practices and decisions,” added Matheson. “At the retail level, we are committed to enhancing opportunities and marketing of open roles for first-line athletes to compete for corporate roles. We are also asking suppliers to meet certain requirements that implement strong policies and practices that incorporate gender equity. And finally, to create lasting change, we believe gender equity needs to be approached holistically throughout the organizational culture as well as business operations.”
Purpose Focused On Power Of Sport
Asked by a shareholder about how Nike’s purpose guides the company, Matheson said Nike’s purpose “is to move the world forward through the power of sport. We believe in the power of sport to bring out the best in people and the potential of people to bring out the best in our world.”
She elaborated that the purpose is brought to life through how the brand supports by its employees, the planet and communities.
Matheson added, “Our ambition across our people work is to break barriers and build communities, to change the game for all by building a diverse, inclusive team and culture and living the values that we share. In our planet work, we don’t wait for solutions, we create them. We are focused on innovating in the areas of carbon waste, water, chemistry, and more. We believe that we, along with our industry, have a responsibility to reduce our impact on the planet. And that’s why we’re reimagining how we make products through the lens of sustainability and circularity. Across our communities, Nike takes action to create a better world. We work with more than 330 world-class organizations and grassroots nonprofits that are dedicated to advancing equality, getting kids active and leveling the playing field for all. I would also add that in addition to our approach to people, planet and our community, we value fair play. We believe a world-class supply chain is grounded in demonstrating respect for the environment, the people who make and move our product, and the principles of a healthy and safe workplace. And this belief is reflected in our foundational expectations target. Today, 100 percent of facilities in our extended supply chain are expected to meet Nike’s foundational labor, health, safety, and environmental standards. In the end, we find that when we lead with our values, it not only serves our purpose, it serves the health and strength of our business.”
Photo courtesy Nike