Vietnam Supply Chain Disruption Puts Nike Earnings 'At Risk': BofA Analyst

Supply chain disruptions are wreaking havoc on the athletic apparel industry, but Bank of America analyst Lorraine Hutchinson said Thursday there could be a silver lining for large-scale apparel companies like Nike Inc NKE and adidas ADR ADDY.

Vietnam Shutdowns: The athletic apparel industry is currently dealing with at least two-week supply chain delays due to a combination of a spike in demand, West Coast power delays and COVID-19 factory shutdowns in Vietnam. In addition to the delays, industry insiders say ocean and air freight costs are up to 500% higher than is typical.

Related Link: If You Invested $1,000 In Nike Stock One Year Ago, Here's How Much You'd Have Now

The good news is that Vietnam is could return to at least 60% production capacity as soon as mid-October, Hutchinson said. Yet reopening dates remain fluid and are entirely contingent upon the pandemic. Vietnam is allowing a partial factory reopening at roughly 30% to 40% production capacity. Local industry insiders have heard that capacity could be expanded as soon as Sept. 29.

After discussions with executives from New Balance, Hutchinson said that expanded reopening will likely get pushed back to Oct. 11, but Vietnam should approach full capacity by the end of the year if the government lifts its “zero COVID” policy at some point.

Scale Is King: While the entire industry is taking a hit from the disruptions, Hutchinson said large-scale operators like Nike and Addidas are faring relatively well.

“Suppliers generally favor the companies that offer better order predictability. Lead times are shorter as well, enhancing the brands’ ability to recover production and inventory levels,” she said.

Hutchinson said the apparel industry hasn’t been hit as hard from the disruptions as the footwear industry, which has production heavily concentrated in Vietnam.

Despite Nike’s scale advantages, the sports footwear industry has lost between 100 million and 150 million units of production over the last two months, which Hutchinson says could put Nike’s third-and fourth-quarter earnings at risk.

Bank of America has a Neutral rating and $168 price target for Nike.

Benzinga’s Take: Nothing about supply disruptions or spiking demand is bad news for Nike’s long-term growth trajectory. Long-term investors can take advantage of any weakness in the stock related to supply chain disruptions to add to their positions.