1 Bright Green Flag for Nike

Nike (NYSE: NKE) is one of the most iconic athletic brands in the world. The company bounced back strong in 2021 after the pandemic hurt sales in 2020. Management is confident the momentum will continue.

Interestingly, Nike is undertaking a significant strategy shift that could be a bright green flag for investors. Nike is focusing on direct-to-consumer sales, jumping wholesalers sometimes, which could boost gross profit margins in the long run.

Nike focuses on direct-to-consumer sales

Recall that Nike sells directly to customers through its website, app, and owned retail locations. It also generates revenue by selling products to wholesalers, who then sell its products to customers worldwide. Of course, Nike’s profit margins are more significant when it sells directly to consumers rather than through wholesalers.

In fiscal 2020, management felt confident enough in Nike’s direct-to-consumer business to allocate a greater percentage of its inventory to that channel. As part of that transition, it informed several of its wholesale partners it would no longer be working with them. Additionally, it told others that they might receive less of Nike’s inventory than in the past.

NKE Gross Profit Margin data by YCharts

In Nike’s fourth-quarter conference call, management noted that since implementing this strategy shift, its gross profit margins are 260 basis points higher. That includes the 100 basis-point headwind from the elevated shipping costs since the pandemic’s onset. That means the strategy is accountable for a 360 basis-point increase in the company’s gross profit margin. To put that figure into context, Nike’s gross profit margin averaged 44.6% in the last decade, so a 3.6% increase is a meaningful sum.

Of course, whenever you’re discussing growth in profit margins, you want to check if it’s coming at the expense of revenue growth. It’s no noteworthy accomplishment to raise prices and increase profit margins while experiencing declining sales in the process. That has not been the case for Nike. Following the 4.4% sales decrease in 2020, attributable to the pandemic, sales increased by 19.1% in 2021. The momentum continued in its recently completed fiscal 2022, in which revenue increased by 5%.

What this could mean for Nike investors

NKE EPS Diluted (Annual) data by YCharts

Management is confident that the focus on direct-to-consumer sales could boost its gross profit margin percent into the high 40s. If sales growth persists and Nike achieves the higher gross profit margin targets, that will mean higher earnings overall, a bright green flag for investors.

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Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool has a disclosure policy.

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