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Prospects Look Upbeat for Nike’s Direct-to-Consumer Channel Stores

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Direct-to-consumer channel performance

The DTC (direct-to-consumer) channel has taken on an increased importance for Nike (NKE) and its peers in recent years. In fiscal 2015, Nike’s DTC revenue came in at $6.6 billion—a 25.1% year-over-year growth. Nike derived 23.1% of its total sales from this channel in fiscal 2015, compared to 16.2% in fiscal 2012. Nike’s targeting $8 billion in DTC sales by fiscal 2017.

DTC sales consist of sales made through the company’s owned stores and online. Part of the reason for the popularity of DTC channels with athletic gear firms is that they enable more contact with the customer. This is particularly relevant as e-commerce channels are an increasingly large component of total retail sales worldwide. (In the next part of this series, we’ll delve further into Nike’s e-commerce drivers and those of its competitors.)

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Store performance

Nike’s store (XLY) (FXD) count (including Converse) rose by 73 to 931 in fiscal 2015. Same-store sales rose by 16% in 4Q15, in constant-currency terms.

In contrast, global rival Adidas (ADDYY) saw its net store count reduced by 67 in 2015 year-to-date, as efforts were made to rationalize the Reebok brand. Reebok hasn’t been able to gain traction in the US market and is seeing declining sales for footwear and apparel.

Peer performance

The store count for Under Armour (UA) and Lululemon Athletica (LULU) has risen by 30 and 34, respectively, in their current fiscal years. Under Armour is targeting to open over 100 Brand House stores globally in 2015 and almost one a day this September. According to Kevin Plank, Under Armour’s CEO, Most of these will be located in Latin America and Asia (75%). Most new stores in Asia—about 85%—will be via tie-ups with distributors, with most of these located in China.

Profitability considerations

Despite the increase in sales contributions from its DTC channel, Nike trails its rivals in DTC channel sales contribution. Under Armour (UA) and VF Corporation (VFC) derived ~32% and 26% of their sales from DTC channels in 2Q15. Lululemon derives almost all its revenue from direct sales to customers.

The DTC sales mix is an important profitability determinant. In Part 9 of this series, we’ll examine its profitability impact further.

But first, in the next part of the series, we’ll look at the recent trend among consumer companies to snatch up fitness app firms.

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