Supply Chain Woes Drag Down Nike Sales

Snarled supply chains and lost production from factory closures due to COVID are dampening Nike Inc.'s revenue growth through a combination of lost sales and higher transportation costs. 

Nike NKE reported $12.25 billion in revenues for the quarter ended Aug. 31, a 16% gain from last year that came in lower than analysts expected, and downgraded full-year guidance to mid-single-digit growth due solely to export and shipping difficulties that reduced product availability amid strong customer demand.

Freight transportation delays, primarily associated with port and rail congestion, as well as labor shortages, were worse than executives expected in the fiscal first quarter. 

"Lost weeks of production, combined with longer transit times, will lead to short-term inventory shortages in the marketplace for the next few quarters," CFO Matt Friend said in an earnings briefing for analysts on Thursday. 

The situation is a major blow for the retailer heading into the busy holiday and spring shopping seasons. 

During the last quarter, Nike's inventory in North America increased 12%, but the goods weren't in stores or distribution centers because they were stuck at sea, at import warehouses, or other nodes in the clogged supply chain. Transit times in Europe and other regions also deteriorated, the company said.

The COVID pandemic froze shipping networks for three months last year and when economies sprang back to life, many containers were out of rotation and not in places with the greatest demand. Companies ramped up orders to recover depleted inventories as consumer demand took off, putting more cargo in the system than ocean carriers could handle. COVID health restrictions have limited the longshore, warehouse, rail, and trucking workforces, resulting in huge backlogs at container terminals and delays in unloading vessels. A series of disruptions, such as a six-day vessel blockage of the Suez Canal or port closures in China due to positive COVID tests or typhoons, have exacerbated delays because there is no slack in the system to absorb them.

Friend said transit times from Asia have doubled to 80 days because of the blockages in ocean shipping. 

Logistics industry officials say the order-to-cash cycle is also impacted by the extra weeks it takes to confirm container reservations and secure a shipping unit from carriers even before a shipment arrives at the origin port. 

"We finished Q1 with higher levels of in-transit inventory. That means that we had full-price inventory that was unavailable to use to serve current consumer demand. We would have had an even stronger top-line result if we had more products available. And so, these elevated transit times that we're seeing worsened this quarter and continue to have an impact on our business," Friend said.

Nike will actually have higher quantities of goods to sell this quarter in North America, Friend explained because all the inventory that was stuck in the delivery pipeline is arriving and will go on physical or virtual shelves. 

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Nike has significantly increased its use of air cargo transportation to bypass ocean shipping congestion. (Photo: Jim Allen/FreightWaves)

Nike said shipping costs increased 1% because of additional spending on airfreight and logistics to accelerate deliveries, as well as for extreme rate increases for ocean shipping. The apparel brand also expects lower growth in gross margin during the current quarter because of higher use of air freight, which for Nike likely means chartering entire cargo planes to exclusively move its own products.

Dark Factories

Nike production of athletic shoes and apparel was hit hard by closures of contract manufacturing facilities in Vietnam and Indonesia. 

In Vietnam, 80% of the company's footwear factories and half of the apparel factories remain closed by government order. Ho Chi Minh city is under a strict social distancing policy until the end of September, with a three-phase reopening that won't allow full activities until Jan. 15. Some factories are operating under a "3-in-1" policy that allows factories to operate as long as employees work, eat, and sleep in one location, but government approvals are difficult to obtain and many workers are upset about being isolated from their families.

Friend said Nike lost 10 weeks of production in Vietnam. Factories will reopen in phases beginning in October, but reaching full production will take several months. A few contract manufacturers under contract to Nike had their reopening plans approved by authorities this week. 

The impact of the lost production combined with long delivery times means that North American inventories will be impacted more during the first three months of 2022 than the current quarter.

"Conversely, Greater China, which has lower levels of in-transit inventory and shorter transit times because it's closer to the factories, is going to experience the impact of the lost production earlier in Q2," Nike's CFO said.

Data from Panjiva, a trade intelligence business within S&P Global Market Intelligence, shows that Vietnam accounts for 49% of all U.S. ocean imports by Nike. 

"Our teams are leveraging their experience in our operational playbook and taking actions to try to mitigate these impacts. They're doing things like maximizing our footwear production capacity in other countries, shifting apparel production out of Vietnam to other countries like Indonesia and China and others where viable, strategically leveraging airfreight," Friend said. "And then, we're continuing to employ a seasonless approach to the product to serve incredibly strong consumer demand, given our success that we've had selling at full price, even if the product reaches the market later than we expected.

"So, while the environment is dynamic, these supply chain issues we believe are temporary. And from what we can see today, we're optimistic that available inventory supply will be improved as we head into fiscal year '23."

But logistics and retail industry experts say shifting the production of footwear and winter outwear isn't as easy as it is for simply sewn goods like T-shirts and socks.

Demand for airfreight out of Vietnam "is off the charts," Marc Schlossberg, executive vice president of air cargo and sales for Unique Logistics International, said last month.

Last month, the Vietnam Textile and Apparel Association said about one-third of the nation's footwear and apparel factories had suspended operations. The Vietnam Leather, Footwear and Handbag Association reported three weeks ago that 80% of plants in southern provinces had shut down.

Investment firm BTIG recently estimated that Nike would have a shortfall of 160 million shoes because of the lockdown measures in Vietnam, Sourcing Journal reported. 

The American Apparel and Footwear Association is urging the Biden administration to quickly ship donations of COVID vaccines to Vietnam and Bangladesh to reduce the disease's spread and enable millions of people in the fashion industry to return to work.

Nike's factories are operating again in Indonesia, Friend said.

Click here for more FreightWaves/American Shipper stories by Eric Kulisch.

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Image by c1n3ma from Pixabay