NIKE’s shares soar as it delivers strong Q2 - it’s all about ‘connected membership’

Derek du Preez Profile picture for user ddpreez December 21, 2022
Summary:
NIKE CEO John Donahoe said that the retailer’s 160 million members are key to the company building a personalized, direct relationship that beats out the competition.

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NIKE has delivered a stellar quarter, sending its share price up more than 13% in after-market trading on Wednesday. The retailer met Q2 expectations on revenue, profitability and inventory - and said that its digital strategy to build a direct relationship with its customers is what’s fuelling growth. 

CEO John Donahoe, formerly CEO at ServiceNow, said that the company’s priority is focusing on its ‘connecting membership’, which is allowing NIKE to build personalized relationships with customers, no matter what channel they choose to shop across. 

Commenting on the quarter, Donahoe said: 

We delivered a strong quarter in Q2 with revenue growth of 17% on a reported basis and 27% on a currency-neutral basis. 

In this current environment, our consumer demand stands out. Today, we're creating more separation between us and our competition. Thanks to the meaningful relationships we have with consumers and the continued success of our strategy.

Our Q2 growth was broad-based across our brands, channels and geographies. We had strong double-digit growth across both our partners and our direct business, which was once again led by our industry-leading digital performance.

NIKE’s key numbers for Q2 2023, include: 

  • Second quarter reported revenues were $13.3 billion, up 17 percent compared to the prior year and up 27 percent on a currency-neutral basis

  • NIKE Direct sales were $5.4 billion, up 16 percent on a reported basis and up 25 percent on a currency-neutral basis

  • NIKE Brand Digital sales increased 25 percent on a reported basis, or 34 percent on a currency-neutral basis

  • Wholesale revenues grew 19 percent on a reported basis and 30 percent on a currency-neutral basis

  • Gross margin decreased 300 basis points to 42.9 percent

NIKE last year decided to break off its partnership with Amazon, shifting to a focus on taking a more direct-to-consumer approach (much like other retailers). This strategy is being complimented by consumer trends in the market. Donahoe said; 

Our current headwinds, such as foreign exchange and inventory challenges are transitory, but our tailwinds are structural. Like the expanding definition of sport, the consumers move toward digital and the cultural shifts toward comfort and health and wellness. 

More importantly, our results speak to how we've leveraged our competitive advantages which include a relentless innovation pipeline, match brands and deep consumer connections to build relative strength and stay ahead of competition.

And the direct-to-consumer strategy is paying off too. Donahoe added: 

Consumer Direct Acceleration is fueling our marketplace approach in which we directly connect with the consumer no matter where they shop. 

Our work to directly connect with consumers is founded on a simple consumer insight. Consumers want to get what they want, when they want it and how they want it. And consumers have told us they want a consistent, seamless and premium experience both digitally and physically around mono-brand and multi-brand. 

And so we're serving consumers digitally with our suite of apps. We're extending our reach and convenience through our strategic wholesale partnerships and leveraging mono-brand doors to fill the gap for underserved opportunities like women's fitness and Jordan.

A connected membership

In Q2, NIKE Direct grew by 25%, which Donahoe said was led by 34% growth in NIKE Digital. But during the call with analysts, Donahoe explained in more detail how NIKE’s membership strategy, which is enabled by NIKE’s digital development and key to building the retailer’s personalized customer experiences. Donahoe said:

The key is building meaningful direct lifelong relationships with consumers. We deeply believe this will be an important source of differentiation going forward. Why? Well, for one, having a direct connection with consumers avoids the risk of disintermediation. 

In other words, with the consumer base that comes directly to our apps, to our website and to our owned and partner stores, we are in a position to control our own destiny. And ultimately, this direct connection enables us to understand consumers better so that we can serve them better with the right assortment, with the right partners and at the right touch points.

And what showcases the success of this strategy is our membership base. Membership was a key reason our digital business grew an industry-leading 34% this quarter. 

Q2 was our biggest member demand quarter ever, and we saw double-digit growth in member engagement. Today, we have roughly 160 million active members who engage with us on a regular basis. 

Why is this so important? Well, NIKE knows that its repeat buying members, those who are more engaged, spend more and spend more frequently. These members are growing at a faster pace than others - with “high double digits” - and are key to NIKE’s “growth engine”. 

The end goal is for NIKE to build highly personalized experiences for connected, engaged members. Donahoe believes that the retailer is just at the start of this journey and has plenty of momentum to come. He explained: 

In addition to digital, a key member on ramp for us is through our NIKE stores. In fact, more than 50% of store demand comes from members and cross-channel members are even more valuable with higher demand per member than single channel members. 

An important enabler of giving consumers a personalized shopping experience regardless of channel is our connected membership program with our strategic partners. 

NIKE is already learning more about our members, which helps us elevate in areas such as product creation, line planning and the experiences we deliver. And our partners are telling us that these engaged members are driving improved traffic, conversion and mutual profitability for them as well. 

And so while it's still early days on this journey, we're excited by the foundation we're creating. The ability to give consumers a personalized experience across channels, fueled by data and insight opens up a whole host of opportunity for us. 

It positions us to empower consumers with their own choice while keeping the scalability and strengths in digital marketing, product creation, distribution and more, which results from knowing them so well. So ultimately, it will make NIKE a better retailer and also a better wholesale partner.

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