Nike can take advantage of a roaring supply chain

Texas News Today

Pedestrians pass a Nike store and its logo, an American multinational sports clothing brand based in Hong Kong.

Budrul Chukrut | SOPA Images | LightRocket | Getty Images

Falling sales forecasts, slow growth in China, and constrained supply channels. The news from Nike’s Q1 earnings report wasn’t good.

Following the report, the stock price fell more than 6% on Friday afternoon. Prior to the result, stock prices had fallen nearly 9% from a record August hit of $174.38.

In the midst of the sale, some analysts see an opportunity for Nike to position its business and its shares for greater growth. Nike’s supply chain struggles provide cover to accelerate its direct consumer strategy, which has been a key driver of profitability over the past quarter.

Currently, it takes about 80 days for Nike to deliver goods from Asia to North America. This is twice the shipping time before the pandemic. Manufacturing facilities across Vietnam have restarted, but Nike has lost nearly 10 weeks of production because of the pandemic. About 43% of the total units of footwear and apparel are made domestically.

Over the next few quarters, Nike predicts that consumer demand will outpace supply. This means that Nike needs to be more strategic about stocking its running shoes and workout tops. You can choose your store instead of your wholesale partner.

“As long as inventory is limited, it’s reasonable to assume that coaching will accelerate change,” said Shimon Siegel, an analyst at BMO Capital Markets. “They prioritize their channels in the first product.”

Before the COVID pandemic, Nike was on track to grow its direct consumer business. While building an online business and opening Nike stores around the world, it has broken partnerships with a few wholesalers. Over the past three years, Nike has withdrawn about 50% of unwanted wholesale accounts.

Nike calls this transition a “consumer direct offense.” This game is a play of vocabulary. Nike’s direct revenue in 2021 was approximately 39% of the Nike brand’s revenue, up from 35% in the previous year. Selling more products at a certain price also helps in profit. Nike’s gross margin increased from 43.4% in 2020 to 44.8% in 2021.

Industry-wide supply chain turmoil could accelerate Nike’s DTC push with an even faster clip, which in turn could boost profitability.

Nike “Still in Demand”

In an interview, Stacey Widlitz, president of SW Retail Advisors, said, “This means Nike gets a free excuse to accelerate the DTC transition, adding, “We don’t have any supplies to deliver to wholesalers.” . “It’s a huge opportunity because we’ve seen all these other brands cut wholesale, but we don’t have a top line like Nike. Nike is still in demand.”

And even though Nike’s shelves may get a little naked compared to normal times in the coming months, Widlitz doesn’t think it’ll take shoppers to other retailers forever.

“People will always be pulled back to the big brands,” she said. “This is the biggest disgusting demand because they are basically telling consumers they can’t get it right now. You are creating FOMO from a lack of supply. Easy to use. “

In its earnings announcement Thursday, Nike’s management said it was prioritizing direct channels.

Nike’s top partners include Foot Locker, Dick’s Sporting Goods and Nordstrom, and investors in these stocks are concerned about how Nike’s troubles will affect their business. Foot Locker’s share price fell more than 6% on Friday, while Dick’s stock price declined nearly 2%. Nordstrom’s list was almost flat.

“The temporary supply chain disruption is expected to further accelerate market transition toward Nike and our most important wholesale partners,” said Chief Financial Officer Matt Friend.

“Inventory will be low,” he said. However, he added, “strong brands will be stronger in this environment.”

According to City analyst Paul Reuse, temporary supply chain issues are far better than demand issues. They don’t think Nike has a demand problem.

“We view these supply chain disruptions as temporary … and . [the delays] “The most significant impact of the Vietnam factory closure should be after the holidays,” Lejuez said in a research note.

Another way to support growth

If growth slows in China, strengthening Nike’s North American operations will become even more important. Greater China has long been Nike’s most profitable and important growth market. But in Nike’s latest quarter, revenue in this segment grew at the slowest pace of all.

CEO John Donahoe said Nike is playing a long game in China. Supply constraints will impact the sector’s second-quarter performance, he said, but added that the company is “confident in its long-term investments and long-term opportunities.”

Wall Street research firm UBS said it expects Nike’s stock price to recover from Friday’s selloff. The price target for UBS stock is $185 and it has a buy rating. As of Friday afternoon, Nike was trading at around $149 per share. The analysts have an average rating of $184.35 on the stock, according to FactSet.

Analyst Jay Soule said, “There is still uncertainty about how long it will take to resolve the supply chain issues, and the impact of the closure of Nike’s Vietnam plant if Nike’s Chinese sales pick up. It is expected that the quantitative determination will improve investor sentiment. “Most investors look to fiscal year 2023 and believe they will see a rebound scenario.”

-CNBC Michael Bloom contributed to this report.


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