Nike could launch its Sunnard supply chain to its advantage

A pedestrian is crossing an American multinational sportswear brand, Nike Store and its logo seen in Hong Kong.

Budrul Chukrut | SOPA Pictures | Light Rocket | Getty Images

The low sales forecast, the slowdown in growth in China and the news coming out of a supply chain-Nike’s financial first-quarter earnings report were not good.

Shares fell more than 6% on Friday afternoon after the report. Prior to the results, the stock had already fallen nearly 9% from its all-time high of 4 174.38, which it hit in August.

Among the sales, some analysts see Nike as an opportunity for its business position and its stock-wider growth. Nike’s supply chain Struggles is providing cover to accelerate its direct-to-consumer strategy, which has been the main driving force behind recent quarterly profits.

It now takes Nike about 10 days to bring goods from Asia to North America, which is double the pre-epidemic transit time. Production facilities across Vietnam have begun to reopen, but Nike has lost nearly 10 weeks of production due to the epidemic. About 43% of its total footwear and apparel units are made in the country.

For the next few quarters, Nike predicts that consumer demand will exceed supply. This means Nike needs to be more strategic where it stocks running shoes and workout tops. It will probably choose its own store rather than wholesale partners.

“As long as inventory is limited, it can be assumed that directing to Pivot will accelerate,” said Simeon Siegel, an analyst at BMO Capital Markets. “They are first prioritizing their own channels with products.”

Before the Covid epidemic hit, Nike was on track to grow its direct-to-consumer business. It is partnering with some wholesale retailers, while building its online business and opening Nike stores around the world. In the last three years, Nike has rolled out about 50% of its wholesale accounts.

Nike called the transfer a “consumer direct crime,” a drama in sports terms. Nike’s direct revenue in fiscal year 2021 represents about 39% of Nike brand sales, up from 35% in the previous year. Selling more products at full price has also helped. In 2021, Nike’s total margin has increased from .8..8% to 44..8%.

The industry-wide supply-chain crash could accelerate Nike’s DTC push to a faster clip and consequently increase drive profits.

Nike ‘still in demand’

“This means Nike now has an open excuse to expedite its DTC transition and says, ‘We don’t have the supply to go to our wholesalers,'” Stacey Widlitz, president of SW Retail Advisors, said in an interview. “It’s a big opportunity, because you can see that these other brands have been cut wholesale, but they don’t have the top line like Nike. Nike still has demand.”

And even if Nike’s shelves are a bit empty compared to the previous month, Widlitz said, he doesn’t think it will take buyers permanently to other retailers.

“People always come back to the big brands,” he said. “It’s the biggest paint-up demand, because they’re basically telling consumers, ‘You can’t get it right now.’ You are creating FOMO [fear of missing out] Due to lack of supply. It is not wise to take advantage of this. “

In Thursday’s earnings call, Nike’s management team said it was prioritizing its live channels.

Nike’s top partners include Foot Locker, Dix Sporting Goods and Nordstrom, and investors in these stocks are concerned about what Nike’s problems will mean for their business. On Friday, shares of Foot Locker fell more than 6%, while shares of Dick fell nearly 2%. Nordstrom’s stock was almost flat.

Matt Friend, chief financial officer, said the temporary supply chain disruption would probably “accelerate the transformation of the marketplace – towards Nike and our most important wholesale partners.”

“We’re going to make a thin list,” he said. But he added, “Strong brands are strong in this environment.”

And according to city analyst Paul Lezuez, a temporary supply chain problem is a much better problem than a demand problem. He does not see Nike as a problem of demand.

“We see this supply chain disruption as transient … and [the delays] “Athletes are greatly affecting shoe space,” Lezuez said in a research paper.

Another way to increase growth

Strengthening Nike’s North American business will be even more important if growth in China slows. Greater China has long been Nike’s most lucrative and important growth market. But in Nike’s latest quarter, revenue in the region has grown at a slower pace than all other geographies.

Chief executive John Donahue said Nike has been playing a long game in China. He said supply constraints will affect second-quarter performance in the region, but the company will “invest in the long term and we are confident of long-term opportunities.”

Wall Street research firm UBS said it expects Nike’s stock to return from Friday’s sale. UBS has a target price of $ 185 per share, including a buy rating. Nike was trading around $ 149 per share as of Friday afternoon. Analysts’ average rating is 4 184.35, according to Factset.

“Although there is still some uncertainty as to how long it will take for supply chain issues to clear up and if Nike’s China sales growth rate accelerates, our view is that investor sentiment will improve now that Nike has measured the impact of the Vietnam factory closure,” said analyst Jay Sole. Said. “We believe most investors will look to FY 20223 and see a return scene.”

– CNBC’s Michael Bloom Contributed to this report.

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