Nike’s appeal rests on spending assumptions by millennials, along with moves the company is making to refresh its product lineup and retail shopping experience. The company is deploying its vast financial resources to blend digital shopping with in-store experiences, says Jill Standish, head of retail for Accenture. “The Nike store experience is very Instagrammable,” she says.
READ THE SIDEBAR
Beware of the Misconceptions About Millennials
The ability of consumers to design their own sneakers at kiosks at flagship stores is helping Nike fend off Amazon and other pure online retailers. Nike’s SNKRS app is also resonating with young shoppers, says Camilo Lyon, an analyst with Canaccord Genuity, and the company is doing a good job of driving sales through a combination of digital and in-store experiences.
“Nike is focused on driving the consumer experience across all components of their business,” he says.
Lyon points out that Nike’s innovation machine is cranking up; it includes the launch of a new cushioning platform in running shoes and a renewed focus on women’s apparel and footwear (such as its Air Max Dia shoe).
Nike also plans to drive innovation down from its upscale footwear to “core” sneakers priced below $100, an initiative that could take share from Under Armour (UA) and Skechers USA (SKX).
“Among the publicly traded companies, Nike has made the sharpest turn in strategy to address the millennial demographic and the changing landscape of shopping behaviour,” Lyon says.
Nike stock, to be sure, looks pricey at 33 times earnings for the fiscal year ending in May, according to consensus estimates. That’s well above Nike’s five-year average price/earnings ratio of 23, and it is a steep premium to the market’s P/E of 17. Still, Lyon notes that Nike’s multiple has a history of expanding when profit growth is accelerating. Analysts expect year-over-year earnings growth to jump from 4.9% in fiscal 2019 to 19.2% in fiscal 2020.
The company’s latest quarterly results portray broad-based strength with sales up 11% (in unadjusted currency terms) over the prior year. The company is exhibiting price resiliency with gross margins up 1.3 percentage points, to 45.1%, driven by higher average selling prices and growth in direct-to-consumer sales.
Moreover, Nike is strong enough financially that it can afford to buy back a large amount of its stock. It just embarked on a four-year plan to repurchase $15 billion worth of shares, about 11% of its $134 billion market value. The stock has advanced 15% this year to $85.50, but Lyon sees further upside to $96 over the next 12 months.
That path will be made possible by customers like Quinones, who was picking up his sneakers at the Nike store in New York. He played around with the hundreds of color, material, and embroidery options in the Nike app before heading to the store to get his unique pair.
Visiting the store and seeing everything in action keeps him coming back. “It definitely makes me spend more money at Nike,” he says.