Nike Might Need Wholesale Partners More Than It Thought, Analysts Say

After three years of going all in on its direct channels, Nike might need to reconsider its DTC and wholesale strategies as it looks to capture more demand in a variety of different channels, some top analysts say.

In a Sunday earnings preview for the Swoosh, Williams Trading analyst Sam Poser said the sneaker giant’s growth in its direct business “is not sustainable” and a renewed focus on its wholesale arm might be a necessary next step in 2023. (Nike reports earnings for the third quarter on March 21.)

“We believe Nike is beginning to once again prioritize its wholesale business, especially in the moderate channel, as it realizes that Nike’s direct business is not positioned to capture enough of the demand,” Poser said.

In June 2020, Nike rolled out its “Consumer Direct Acceleration” (CDA) program, which involves zeroing in on DTC and digital channels and pulling out of some wholesale channels. As part of this push, Nike terminated multiple partnerships with certain retailers such as Zappos, Dillard’s, DSW, Urban Outfitters, and Shoe Show and cut back on the amount of product it offered existing vendors, such as Foot Locker, in order to consolidate distribution in its own channels and certain preferred wholesale vendors, like Dick’s Sporting Goods and Hibbett Sports.

According to Poser, the focus on direct sales and the decrease in wholesale was a benefit for Nike when most people were homebound throughout the pandemic. “But now that consumers are out and about, the strategy needs to be reevaluated,” he said, especially as the company’s wholesale business gains momentum.

In December, Nike reported that its wholesale business grew in Q2 by 30%, compared to Nike Direct, which grew 25%. Part of this growth was due to comparisons to the prior-year, in which inventory availability in the wholesale channel was lower than usual.

In a call with analysts in December, Nike CEO John Donahoe spoke to the importance of the company’s wholesale channel and said the company invited its wholesale partners to its campus in September to discuss how they can work together.

“Our whole strategy is to offer [consumers] that choice in a seamless and premium way,” Donahoe said. “And wholesale play is a very important part of that. It provides a very strong footprint, both physical footprint as well as digital.”

Despite a recent industry push towards selling in direct channels, analysts have previously noted that direct channels can often yield lower profit margins than wholesale channels before taxes and interest. A 2021 report from BMO Capital Markets analyst Simeon Siegel noted this possible downside to the retail industry trend of brands like Nike, Adidas and Crocs nixing partnerships with different wholesalers to focus on key accounts and direct-to-consumer channels.

“When brands discontinue retailers, they should not expect to get all that business back in DTC,” explained Matt Powell, an advisor at Spurwink River consultancy. “That’s what happened here. Nike had to promote aggressively in 2022 to make up for the sales shortfall.”

Powell noted that Nike will likely have to resort to more promotions in 2023 to offset this decline. It’s also possible that the Swoosh could increase its allocation to wholesale partners — or even reinstate those it cut off from previously.

“Nike might reinstate some retailers, but not at the same level as the past,” Powell said.

Already, Poser noted that there appears to be a “reallocation of resources and product to Nike’s wholesale accounts, especially in the family footwear channel.”

Not all analysts see these recent shifts as indicative of any change to Nike’s long-term direct strategy. According to a Monday note from Morgan Stanley analysts led by Alex Straton, the wholesale focus is “temporary,” as Nike looks to work through higher than usual inventories by allocating more product to these partners.

“We continue to be believers in Nike’s DTC transformation, which we think should lift top-line growth, EBIT margin and EPS growth over time,” the note read.

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