The company announced today it will temporarily close stores in the United States, Canada, Western Europe, Australia and New Zealand to limit the spread of COVID-19.
Source: Nike Coronavirus Statement
A conundrum is an “intricate or difficult problem.” On the surface the closing of Nike stores is a reasonable and logical step in stemming the spread of COVID-19. This initial two weeks is good for employees and customers, as Nike stores remained crowded even yesterday (3-15-2020). The responsible decision shows that the brand is aware of the perception and the reality.
Why is this a conundrum? Nike’s Consumer Direct Offense is an elegant strategy that has strengthened Nike to the tune of “$39.1 billion, up 7 percent on a reported basis and up 11 percent on a currency-neutral basis, as strategic investments in innovation and digital drove global consumer demand led by NIKE Direct in both periods.” When compared to the year I began to see the CDO take shape in 2014 until last fiscal year 2019, Nike has increased over 11 Billion dollars, “Revenues for NIKE, Inc. rose 10 percent to $27.8 billion, up 11 percent on a currency neutral basis.”
Nike’s growth is successful and no one should argue the benefit to shareholders who saw their shares go from a low of 47 dollars in 2017 to a high of 102.00 per share. The Consumer Direct Offense on the surface is great. Beneath the surface is the closure of The Sports Authority. The bankruptcy of Sheikh, the closure of hundreds of Finish Line locations and the company being sold to JD Sports, the sale of City Gear to Hibbett Sports, the combining of Villa and DTLR and the recent bankruptcy of Modells.
How is the closing of stores for two weeks due to COVID-19 a conundrum? As Nike goes, so goes the smaller chains who have to avoid the perception of being money hungry. Smaller chains are facing the reality of seeing comps collapse as Nike moves towards their 50 Billion dollar goal. Smaller stores will have to close as well to allow for social distancing to help decrease the number of cases of the virus. This is expected, but the reality is many smaller chains are being crushed under the weight of inventory already and slow sales. These stores have had to cut hours due to a slow holiday season and a slow tax season. Chains aren’t Billion dollar businesses. They are multi-million dollar businesses and evidenced by Modells recent bankruptcy, many are operating on credit and are being forced to rob Peter to pay Paul. A two week closure for smaller chains could lead to the death of chains already operating on tight budgets.
The research here is difficult as private companies don’t share data, but if I look at the recent City Gear sale to Hibbett Sports. The price was around 90 Million for 100+ stores. That’s an average per store of 900,000 per year or 75,000 per month. I really hate to use averages, but this section is for you to consider. Those stores are probably operating at a 15% margin, which is actually being generous. That’s 11,250 per store profit. Take away two weeks of income when stores are already down on the year and a two week loss of 37,500 for small stores could bankrupt a chain.
In 2014 Nike still used Futures. “June through November 2014 totaled $13.3 billion, 11 percent higher than orders reported for the same period last year, and 12 percent higher on a currency neutral basis.*” When Nike removed Futures this shaped retail considerably, but more important Nike was able to move those dollars into their income. Futures are wholesale orders. As Nike rolled that 13.3 into their business you get to the growth they are showing in Fiscal 2019. (Instead of selling a Jordan Retro to a wholesale account at 95 dollars, Nike sold the shoe itself for 190.)
I hope this is clear. For Nike to reach 39 Billion in FY2019, they had to take away enough accounts to do this. Remember in 2017 when Nike stated they were going from 30000+ accounts to 40? What if Nike decided to double down on those 40 accounts with exclusive product over the last few years. The small chains and big chains that still remain could take on a two week hit without any problems at all. As it stands, when we look at these two weeks as smaller chains begin to close, if they close, COVID-19 will earn the blame for businesses going bankrupt or closing stores, but the reality will be something I discussed in my book. The retailers who rely on the Nike wall were already infected with CDO-2017. COVID-19 simply put the chains on life support.
