Facebook Pinterest Search Icon SourcingJournal_horiz Tumbler Twitter Shape photo-camera graph-trend Shape latest-news icon / user

Here’s Why Nike’s SNKRS App May Spell Trouble for its Retail Partners

Now accounting for roughly 20 percent of Nike’s entire digital business, the brand’s popular SNKRS app more than doubled its sales in FY19—and its gains may have come at the detriment of some of Nike’s closest retail partners.

In a new report, Piper Jaffray analysts Erinn Murphy and Eric Johnson argue that Nike’s SNKRS app, which gives users access to explore, buy and share the best Nike sneakers, is currently undervalued as an asset and is likely to drive growth for the brand in the future.

“We’ve dug deeper on one of the key differentiators within Nike’s business model—its digital business which now generates $3.8 billion,” Murphy and Johnson wrote. “Of note, the company’s SNKRS app last year accounted for 15 percent of the dollar growth of global revenues and 43 percent of digital revenues. What’s even more impressive is that the growth the SNKRS app has fueled has been within footwear; apparel is an incremental opportunity with time.”

If successfully combined with the pull of Nike’s apparel, the analysts believe SNKRS, which also offers inside access to the latest kicks, including launches, drops and stories, could become one of Nike’s primary weapons in the quarters to come, a factor the brand seems perfectly prepared to capitalize on.

Nike recently announced the addition of the app to three more markets in Europe and, as the brand continues to add more inventory depth to its offering, more markets are likely to come. According to the firm’s data, SNKRS is already one of Nike’s best investments, providing significant return while reducing volatility and improving inventory efficiency.

Recent product launches, like the Nike Joyride, are advertised through the app, complete with push notifications that alert the user immediately to take a peek at the new product. Murphy and Johnson said that this gives the app “considerable runway,” thanks to the large number of users who log in the app on a daily basis. In the third quarter, 17 of Nike’s top 20 product launches had a 100 percent sell-through on SNKRS.

However, as good as that sounds for Nike’s digital business, the same analysis suggests current Wall Street expectations misjudge the effect the growth of the SNKRS economy may have on some of Nike’s strongest retail partners—namely Foot Locker.

“A rising tide in 2018 helped all boats,” Murphy and Johnson wrote, referring to Foot Locker’s exceptional FY18 sales performance. “But we believe multi-line retailers will see less visitation in less vibrant times.”

Remarking that Foot Locker continues to be in a “challenging” circumstance as long as Nike’s digital business continues to grow, effectively pulling sales from its stores, Piper Jaffray now predicts lower same-store sales (3 percent vs. 3.3 percent) and a lower EPS (62 cents to 67 cents) for the retailer in its upcoming second-quarter financial report.

As Nike continues to put more merchandise into its app, a key driver of its growth going forward, that shift toward digital merchandise could also decrease Foot Locker’s future gross margin. Already, the firm said, Foot Locker has increased its clearance levels to compensate for a less-advantageous mix of goods—which Murphy and Johnson describe as “essentially peak.”

In any case, both admit there’s still ample reason to celebrate the athletic category in 2019—as long as you aren’t a retailer.

“We remain constructive on the athletic category despite escalating investor concern around the U.S. retail environment and ongoing fear around global trade tensions,” the report notes. “Despite near recession-level multiples for traditional softline brands/retailers, we see the valuation gap between the global power brands (Nike, Adidas, V.F. Corp, Under Armour, etc.) and retailers continuing to widen as digital revenue mixes higher.”

More from our brands