Pedestrians pass by the Nike Store and its logo, an American multinational sports clothing brand found in Hong Kong.
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Declining sales forecasts, slowing growth in China, and bottleneck supply channels. The news from Nike’s Q1 earnings report wasn’t good.
Following the report, stock prices fell more than 6% on Friday afternoon. Prior to the result, stock prices had already fallen about 9% from the August hit record high of $ 174.38.
In the midst of the sale, some analysts are seeing the opportunity for Nike to position its business and its shares for greater growth. Nike’s supply chain struggle provides cover to accelerate its direct consumer strategy, which has been a major driver of profitability in the last 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 begun to reopen, but Nike has lost about 10 weeks of production due to a pandemic outage. About 43% of the total units of shoes 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 much more strategic about where to stock its running shoes and workout tops. You may choose your store over your wholesale partner.
“As long as inventory is limited, it’s reasonable to assume that the shift to coaching will accelerate,” said Simeon Siegel, an analyst at BMO Capital Markets. “They first prioritize their own channels in the product.”
Before the Covid pandemic, Nike was on the road to growing its direct consumer business. While building an online business and opening Nike stores around the world, it has broken partnerships with some wholesalers. Over the last three years, Nike has withdrawn about 50% of unwanted wholesale accounts.
Nike calls this transition a “consumer direct crime.” This is a play of sports terminology. Nike’s direct revenue in 2021 accounted for approximately 39% of Nike brand revenue, up from 35% in the previous year. Selling more products at a fixed price also helps profits. Nike’s gross margin in 2021 increased from 43.4% in 2020 to 44.8%.
The industry-wide supply chain turmoil could accelerate Nike’s DTC push with even faster clips, which in turn could increase profitability.
Nike “still in demand”
In an interview, SW Retail Advisors President Stacey Widlitz said, “This means Nike gets a free excuse to accelerate the DTC transition and says,” We have no supplies to deliver to wholesalers. ” “This is a big opportunity as 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 if Nike’s shelves get a little naked in the coming months compared to normal time, Widlitz doesn’t think it will drive shoppers to other retailers forever.
“People will always be pulled back to big brands,” she said. “It’s the biggest disgusting demand because they’re basically telling consumers that they can’t get it right now. You’re creating FOMO by lack of supply. Is 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. On Friday, Foot Locker’s share price fell by more than 6%, while Dick’s share price fell by nearly 2%. Nordstrom inventories were almost flat.
“The temporary supply chain disruption is likely to further accelerate market transformation towards Nike and our most important wholesale partners,” said Matt Friend, Chief Financial Officer.
“Inventory will be low,” he said. However, he added, “Strong brands will be stronger in this environment.”
According to Citi analyst Paul Rejuez, temporary supply chain issues are far superior to demand issues. He doesn’t think Nike has a demand problem.
“We see these supply chain disruptions as temporary … and [the delays] “The most significant impact of the Vietnam factory closure should occur after the holidays,” Lejuez said in a research note.
Another way to support growth
If growth in China slows, it will become even more important to strengthen Nike’s North American operations. Greater China has long been Nike’s most profitable and important growth market. But in Nike’s latest quarter, revenue in the region grew the slowest of all regions.
CEO John Donahoe said Nike is playing a long game in China. Supply constraints will affect the region’s second-quarter performance, he said, but said the company “is confident in its long-term investment and long-term opportunities.”
Wall Street research firm UBS said it expects Nike’s share price to recover from Friday’s sold-out. The price target for UBS stock is $ 185 and it has a buy rating. Nike was trading at around $ 149 per share by Friday afternoon. According to FactSet, analysts have an average rating of $ 184.35 on stocks.
Analyst Jay Sole said, “There is still uncertainty about how long it will take to resolve supply chain issues, and if Nike’s Chinese sales growth accelerates, the impact of Nike’s closure of its Vietnam plant. We expect that investor sentiment will improve by quantifying. ” Said. “Most investors look to Fiscal Year 2023 and believe they will see a rebound scenario.”
-CNBC Michael Bloom Contributed to this report.
Nike can take advantage of the roaring supply chain
Source link Nike can take advantage of the roaring supply chain