Why Nike Is Running Away from Amazon

Footwear and apparel giant Nike (NKE) has decided to stop selling its products on Amazon (AMZN). This would end the 2017 pilot program under which the company started selling its products on Amazon to discourage sales through third-party sellers and unlicensed dealers. Nike’s decision comes ahead of the crucial holiday season, which accounts for a significant portion of US retailers’ sales.

Nike stock rose 2% as of 1:28 PM ET today in reaction to this news. Also, Barclays initiated coverage of Nike with an “overweight” rating. As per The Fly, Barclays’s bullish perspective is backed by several factors, including the company’s potential to accelerate its direct-to-consumer business.

Nike’s rationale for leaving Amazon

As per a Bloomberg report, a statement from Nike indicated that it wants to focus on its own direct sales and exclusive partnerships with other retailers. Nike would stop selling its footwear, apparel, and other merchandise on Amazon. However, it would continue to use Amazon Web Services to run its website and certain mobile apps.

Consumers are increasingly looking for online shopping options, given the convenience. And Nike is keen to capture the significant online demand for its products. Also, Nike’s direct business carries a higher gross margin than its wholesale business.

Nike’s direct-to-consumer business comprises sales via company-owned retail stores and digital platforms. The company’s direct revenues accounted for about 32% of overall Nike-brand revenues in fiscal 2019, compared to 30% in fiscal 2018. Notably, digital sales grew 35% to $3.8 billion in fiscal 2019. Within the digital business, mobile has been a major growth area. The company’s sneaker app business doubled in fiscal 2019 and accounted for about 20% of the overall digital sales.

The company is investing in its digital capabilities to boost its e-commerce sales further. In particular, it’s investing in analytics, digital demand sensing, and connected inventory to respond quickly to customers’ requirements.

The company’s investments in e-commerce channels helped drive 42% growth in its digital sales in the first quarter of fiscal 2020. On the first-quarter conference call, the company stated that its NIKE app and sneakers app are now functional in over 20 countries. Plus, the company plans to expand these apps to other geographies in fiscal 2020. 

Nike’s leading position and strong distribution channels give it the power to grow its sales without a presence on Amazon.

Stock movements so far

Nike stock had risen 20.7% year-to-date as of November 12. Skechers and Columbia Sportswear stocks were up 72.4% and 10.9% while Under Armour stock was down 2.2%. Nike stock rose 4.2% on September 25 in reaction to better-than-expected first-quarter earnings results.

The company’s first-quarter revenues grew 7.2% to $10.66 billion, and its adjusted EPS increased 28.4% to $0.86. Strong top-line growth and gross margin expansion boosted Nike’s earnings.

Currently, analysts have a price target of $102.74 for NKE. This average price estimate implies an upside potential of about 13% over the next 12 months.