Sales Are Surging -- and Things Are Better Than They Look

Image source: Nike

Shares of Nike (NYSE: NKE) have been hammered in the past few quarters. The recent fiscal Q1 didn't give the market much confidence, as worries over margins and future growth expectations were some of the reasons analysts and investors backed off the stock. What the market doesn't seem to be giving Nike credit for, though, is its surge in sales, which could help on both accounts. Here's why this metric matters going forward and why Nike still looks like a strong long-term play.

Why the market didn't like Nike's Q1

During its fiscal Q1, endedAug. 31, Nike reported $9.1 billion in sales, an 8.3% year-over-year rise. After reporting just 6% growth year over year in Q4 and fiscal 2016, this slight rise was a welcome surprise.Even though the overall sales number was positive, many analysts worried about the "futures orders" numbers, which are orders placed for wholesale shipments to be filled in the following few months. Those orders were down to just5% growth worldwide year over year and just 1% in North America.

Futures orders are a Nike-invented system that indicates the short-term growth the company expects by getting distributors to agree to futures contracts on gear before Nike ships it. However, these contracts are becoming a thing of the past, at best, and misleading at worst. Nike has decided to stop reporting futures orders after this quarter. One of the main reasons the figure is misleading is that it represents just one of many revenue streams for the company, and importantly doesn't take into account Nike's direct-to-consumer sales, particularly e-commerce sales through sales surge

While total sales rose 8%, sales increased a full 49% year over year. This follows a 46% rise in fiscal year 2016 over 2015. The surge in online sales comes not only from the growing trend toward online shopping, but also from some key investments Nike has made.

The Nike+ mobile shopping app launched earlier in 2016. Image source: Nike.

A few such investments include creating seamless ways to shop both in Nike stores and online by having tablets in store to order anything not in stock at that time. Another investment has been building out a series of mobile apps that connect with consumers more personally and to allow them to make purchases easily from their smartphone. The next generation of Nike's mobile shopping plan was launched this year, when Nike announced Nike+.

Nike+ is a mobile app that allows users to track workouts, contact Nike support, see trending news, and utilize the in-app shopping feature, which makes recommendations based on the user's activities and habits.

There are three reasons, other than organic sales growth, Nike's online sales could benefit the company's bottom line:

1. Higher margin:When Nike sells its clothes through a third-party retailer, those distributors get a cut of the total sale price. That means the gross margin Nike enjoys on its direct-to-consumer sales is higher than when its items are sold wholesale.

2. Customization options:Another way Nike has been adept at increasing both sales and gross margin is through its customization options online.NikeID, an online tool that allows consumers to customize some Nike items with their own words, colors, and so on, means that Nike gets to charge a higher selling price on this gear without much change in material or manufacturing.

3. International expansion:Nike management said in the 2016 earnings call that it had doubled its number of local online storefronts in specific countries from 20 to 40. Particularly in countries where Nike doesn't have strong retail partners, a localized e-commerce strategy worldwide could help to boost Nike's international expansion.

Nike has been doing a great job of building out a more robust online sales channel, which will help the company not only through the points listed here, but also in terms of inventory management, customer data collection, and much more. With sales surging and continuing to show signs of growth ahead, this revenue stream looks impressive and should quell some fears around lowered futures orders.

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Seth McNew owns shares of Nike. The Motley Fool owns shares of and recommends Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.