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Nike can take advantage of its poor supply chain

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Nike can take advantage of its poor supply chain

A pedestrian walks past a Nike store, an American multinational sportswear brand, and its logo as seen in Hong Kong.

Budrul Chukrut | SOPA Pictures | LightRocket | Getty Images

Weaker sales forecasts, slower growth in China and a disrupted supply channel. The news from Nike’s first quarter financial results report was not good.

Shares fell more than 6% on Friday afternoon after the report. Prior to the results, stocks had already fallen nearly 9% from the all-time high of $ 174.38 reached in August.

Some analysts see an opportunity for Nike to position its business and stocks for higher growth amid the sell-off. Nike’s supply chain woes provide it with cover to accelerate its direct-to-consumer sales strategy, which has been a key driver of profitability in recent quarters.

Now, it takes about 80 days for Nike to get goods from Asia to North America – double the time it took before the pandemic. Manufacturing facilities across Vietnam are starting to reopen, but Nike has lost nearly 10 weeks of production as the pandemic comes to a halt. About 43% of its total footwear and clothing units are produced domestically.

For the next few quarters, Nike expects consumer demand to exceed supply. This means Nike will need to be more strategic about where it ranks in running shoes and training tops. He will probably opt for his own stores rather than wholesale partners.

“As long as stocks are tight, it’s reasonable to assume that the pivot will be straightened out,” said Simeon Siegel, analyst at BMO Capital Markets. “They prioritize their channels with the first product. “

Before the Covid pandemic hit, Nike was on track to expand its direct-to-consumer sales business. It is also cutting partnerships with some wholesale retailers while growing its online business and opening Nike stores around the world. Over the past three years, Nike has removed about 50% of its wholesale junk accounts.

Nike calls the transition a “direct consumer offense,” a game of sports terminology. In fiscal 2021, Nike’s direct revenue represented approximately 39% of Nike brand sales, up from 35% the year before. Selling more goods at full price has also made a profit. Nike’s gross margin for fiscal 2021 increased to 44.8% from 43.4% in 2020.

The woes of an industry-wide supply chain could accelerate Nike’s DTC push to an even faster rate and, in turn, increase profitability.

Nike is “always in demand”

“This means Nike now has a free excuse to speed up its DTC transition and say, ‘We don’t have supplies for our wholesalers,’” Stacey Widlitz, president of SW Retail Advisors, said in an interview. “It’s a huge opportunity, because you see all these other brands doing wholesale, but they don’t have a high end line like Nike. There is always a demand for Nike.

And while Nike’s shelves may be a bit empty compared to normal times in the coming months, Widlitz doesn’t think this will definitely drive shoppers to other retailers.

“People are always going to come back for the big brands,” she said. “It’s the most blocked demand, because they’re basically saying to the consumer, ‘You can’t have this right now.’ You are creating FOMO due to a lack of supply. No headaches to take advantage of it.

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

Nike’s main partners are Foot Locker, Dick’s Sporting Goods and Nordstrom, and investors in those stocks are worried about what Nike’s problems will mean for their businesses. Foot Locker’s shares fell more than 6% on Friday, while Dick’s shares were down almost 2%. Nordstrom’s stock was almost flat.

CFO Matt Friend said the temporary disruption in the supply chain “is likely to further accelerate the transformation of the market – to Nike and our most important wholesale partners.”

“We’re going to have lean stocks,” he said. But added: “Strong brands are strengthening themselves in this environment.”

And according to City analyst Paul Lejuez, a temporary supply chain problem is a better problem than a demand problem. He doesn’t see Nike as a demand issue.

“We see these supply chain disruptions as fleeting… more [the delays] have a huge impact on the athletic shoe space, ”Lejuez said in a research note. “The biggest impact of the plant closure in Vietnam is expected to be post-holiday.”

Another way to accelerate growth

If growth slows in China, it will be even more important to strengthen Nike’s North American business. Greater China has long been Nike’s most profitable and important growth market. But in Nike’s last quarter, the region’s revenue grew at the slowest rate of any geography.

General Manager John Donahoe said Nike is playing the long game in China. Supply constraints will impact the performance of the industry in the second quarter, he said, but the company “will invest for the long term and we are confident in the long term opportunity.”

Wall Street research firm UBS said it expects Nike shares to rebound after Friday’s sell-off. UBS shares have a buy rating with a target of $ 185. As of Friday afternoon, Nike was trading at around $ 149 a share. According to FactSet, the average analyst rating for the stock is $ 184.35.

“While some uncertainty remains as to how long it will take to resolve supply chain issues and if Nike’s sales growth rate in China accelerates, we believe investor sentiment will improve. now that Nike has closed its factory in Vietnam. ” Let’s trigger the effect, ”said analyst Jay Sol. “We are confident that most investors will look to fiscal 2023 and see a rebound scenario.”

—CNBC Michael bloom contributed to this report.

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Driver hits cyclist and barricades himself in Huntington Park home

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California News Times
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