Nike: Even Supply Chain Havoc Has A Silver Lining

On Thursday, first-quarter results revealed that the global supply chain havoc has harmed Nike NKE more than expected. Moreover, longer transit times, labor shortages, and prolonged factory closures due to lockdowns in Vietnam where the sneaker giant produces approximately half of its footwear and a third of its apparel forced Nike to lower its fiscal 2022 outlook. Upon the news, shares dropped more than 3% in extended trading.

Fiscal First Quarter Figures

Revenue amounted to $12.25 billion which is below the $12.46 billion that analysts expected but still above last year's $10.59 billion. However, earnings per share of $1.16 exceeded expectations of $1.11 as net income grew to $1.87 billion.

Management concluded that without the supply chain issues, results would have been significantly better. China, one of the company's biggest revenue drivers over the past quarters, posted the smallest gain of all regions, rising 11%. North America's revenue rose 15% to $4.88 billion whereas digital sales rose 29% YoY.

Issues Go Beyond Factory Shutdowns

Once production resumes, the company is also facing shipping delays as transit times in North America are double compared to pre-pandemic levels as according to Friend, it takes about 80 days, on average to get the goods from Asia to under Nike's turf.

Outlook

For the full year, sales growth is now expected in mid-single-digits compared to the previous outlook of low double-digits. As for the undergoing fiscal second quarter, sales are expected flat to down low single digits. According to Refinitiv, analysts were expecting revenue for the year and the fiscal second quarter to grow 12%.

Chief Financial Officer Matt Friend warned that over the next few quarters, the entire business will face short-term inventory shortages. The operations of other retailers were also not exempt from the impact of lockdowns, from athleisure rival Lululemon Athletica Inc LULU to the high-end furniture chain RH RH. As for the long-term, Nike confirmed it is on track with its vision of a 40% owned digital business by fiscal 2025 as this framework is becoming an integral part of the shopping journey.

The Silver Lining

The bright side of tightened inventories has been greater profitability as they removed the need for markdowns. Nike also reduced its reliance on wholesale partners that often sell at discounts.

A Mixed Report

The mixed first-quarter earnings report came along with a worsened outlook. On one hand, revenue expectations were missed as demand in North America softened. But on the other, profitability rose as the company sold more goods to shoppers at full price.

Troubles Won't Go Away Anytime Soon

As many as 80% of Nike's footwear and approximately half of its apparel factories in Vietnam remain closed. After losing 10 weeks of production, it's going to take several months to resume full production. On a brighter note, the global demand for Nike's shoes and workout apparel remains as strong as ever. But these inventory issues are bound to hurt near-term performance.

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