Nike can turn its snarled supply chain to its advantage
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A pedestrian walks past American multinational sport clothing brand, Nike store and its logo seen in Hong Kong.
Budrul Chukrut | SOPA Images | LightRocket | Getty Images
A lower sales forecast, slowing growth in China and a bottlenecked supply channel. The news coming out of Nike’s fiscal first-quarter earnings report wasn’t good.
After the announcement, shares fell more than 6 percent Friday afternoon. The shares were already down 9% from their August record of $174.38.
Amid the sell-off some analysts see an opportunity for Nike to positions its business — and its stock — for greater growth. Nike is able to use its supply chain problems as a cover for its direct-to consumer strategy. This has been an important driver of profitability in recent quarters.
Nike now has to wait around 80 days for goods to arrive in North America from Asia, which is twice the transit time before pandemic. While manufacturing facilities in Vietnam have begun to reopen, Nike lost approximately 10 weeks of production to the pandemic shut downs. The country accounts for 43% to 40% of the total number of apparel and footwear products.
Nike anticipates that in the coming quarters, consumer demand will surpass supply. Nike will be more careful about stocking its running shoes and work clothes. The company will prefer to stock its own shops over wholesalers.
Simeon Sigel, analyst BMO Capital Markets at BMO Capital Markets stated that “as long as inventory remains constrained it is fair to expect the pivot towards direct to be accelerated.” They are prioritizing product channels and their products first.
Before the Covid pandemic struck, Nike was on a path to grow its direct-to-consumer business. While it has formed partnerships with wholesalers, the company also builds its online business and opens Nike shops around the globe. Nike has gotten rid of approximately 50% of its unprofitable wholesale accounts over the last three years.
Nike refers to the process as a “consumer-direct offense,” an homage to sports terminology. Nike’s revenue from direct sales was 39% in fiscal 2021, compared to 35% the previous year. The increase in sales at full price also has helped to boost profits. Nike’s Gross Margin for Fiscal 2021 increased to 44.8% from 43.4% in 2020.
The industry-wide supply chain chaos could make Nike’s DTC push even more rapid and increase profitability.
Nike ‘still has the demand’
“This means Nike now gets a free excuse to accelerate its DTC transition, and say, ‘We don’t have the supplies to get to our wholesalers,'” said Stacey Widlitz, president of SW Retail Advisors, in an interview. This is an enormous opportunity because all these brands are cutting wholesale but don’t have as much revenue like Nike. Nike has the market demand.”
Even though Nike’s stock shelves may be a little less than usual, Widlitz believes it won’t drive customers away from other stores.
According to Widlitz, “People will always gravitate back to the major brands.” She said, “It’s where there is most demand. They are basically saying to the customer, ‘You don’t want it right now. FOMO can be created by not having enough supply. To take advantage of this, it’s obvious.
Nike management stated on Thursday that they are prioritizing direct channels.
Nike’s top partners include Foot Locker, Dick’s Sporting Goods and Nordstrom, and investors in these stocks are concerned about what Nike’s troubles will mean for their businesses. Foot Locker’s stock dropped more than 6 percent on Friday while Dick’s share fell nearly 2 percentage points. Nordstrom shares were flat.
Chief Financial Officer Matt Friend said temporary supply chain disruptions will “likely trigger an even greater acceleration in the transformation of the marketplace — toward Nike and our most important wholesale partners.”
He stated, “We will have less inventory.” However, he said that “strong brands become stronger in this environment.”
Paul Lejuez from Citi says that a problem in the supply chain is better than having a problem with demand. His view is that Nike does not have a shortage of demand.
“We view these supply chain disruptions as transitory … and [the delays] are impacting the athletic footwear space broadly,” Lejuez said in a research note. Post-holiday should see the most serious impacts of Vietnam’s factory closures.
Another way to shore up growth
Strengthening Nike’s North American business will be even more important if growth in China slows. Nike’s largest and most important market for growth has been Greater China. Nike reported that revenue from the region experienced the lowest growth in its latest quarter.
John Donahoe, chief executive of Nike, stated that the company is playing long-term in China. He said that although supply constraints could impact second quarter performance in China, the company would “invest for long term” and is confident about the long-term opportunities.
UBS, a Wall Street research company said that it expected Nike stock to rebound from Friday’s decline. UBS rates shares as a buy and has set a target price of $185 for shares. Nike traded at $149 per share on Friday afternoon. According to FactSet, analysts’ average ratings on shares are $184.35.
Jay Sole, analyst at FactSet stated: “While there are still uncertainties about how long it will take for supply chain issues and if Nike will see a rapid increase in China sales, our view suggests that investor sentiment will improve once Nike has quantified Vietnam factory closure impact.” “We believe most investors will look to fiscal 2023 and see a rebound scenario.”
—CNBC’s Michael Bloom contributed to this report.
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