Nike is the latest addition to the Action Alerts PLUS charitable trust portfolio. AAP Senior Analyst Jeff Marks tells AAP members why the sneaker icon has a leg up on competitors.
I want to bring [AAP Senior Analyst] Jeff Marks in and I want him to talk about our latest name, which is Nike.
Thanks, Jim. So everyone knows Nike as the blue-chip athletic footwear and apparel maker with one of the most recognizable brands of all time. They also have sponsors, some of the most influential athletes of this era, like LeBron James, Tiger Woods and Cristiano Ronaldo, just to name a few.
But I'm just looking beyond, you know, some of these popular names and consumer trends in athletic and active wear for a moment because I think what's happening at the company right now is truly special and separates them from so many other names in retail. And what is going on is this transformational shift occurring from wholesale to a direct-to-consumer business, and it's all being done by digitization.
And what makes this shift so compelling is that Nike's digital and direct business is financially accretive. What does financially accretive mean? So unlike some other names in retail that rely on e-commerce sales just for survival, digital sales are actually more profitable for Nike, about two times more profitable than the wholesale business, from what that generates.
So as Nike, as they invest further and further into digital, as more consumers adopt e-commerce and online penetration increases from the pandemic, after the pandemic, which I think we will see, what all that means to Nike is that they're going to see margin improvement.
And all of this whole transformation has been going on, but it’s really been accelerating now that John Donahoe, the former CEO of ServiceNow, has taken over the company from Mark Parker. And what he's pushing right now is what they call this consumer-direct acceleration strategy, where the plan is about 30% of Nike's sales come from [direct-to-consumer] right now.
But their plan is to push that up to 50% in the coming years. And that's by creating this marketplace of the future that integrates the online and offline experience and partners with some of their key partnerships like with Foot Locker. So that's one thing. They want to simplify the consumer construct, really target all the different categories like men's, women's, kids, and really simplify things and keep things nimble. And they're just being aggressive with technology as well and really, really focusing on these digital investments.
So I think there's a lot to like to the story. You mentioned before, Jim, the stock does not trade at a cheap multiple. But what I think the key point to remember here is that the investments in the digital side of the business, they're just going to continue to pay off. It's really going to be the source of growth and make the company even more profitable, and that's why you get a higher multiple. You get a higher multiple when there's a visible path, a credible path, for margin expansion and, two since digital is … more profitable than the wholesale business as we see digital sales increase.
I mean, this holiday season, it's going to be e-commerce that's going to be the number one trend. We heard it from FedEx last night. Talk about that. So that's going to expand company margins. And as they’re rationalizing the wholesale business as well. They should be able to get better financial terms in that business. So I think there's a lot to like in this story.
Now the company does report September 22nd. So what I would say with Nike, as it continues to notch new high after new high as we've seen the last couple of days, I would say, if you're interested perhaps you buy a little before the quarter and leave room after. That's how we're approaching it right now. But I just, again, as I said before, I think there's a ton to like long term about this story, especially, I mean, they're going to be one of the biggest winners this holiday season.