Nike shares fall as supply chain havoc leads retailer to slash revenue forecast

Pedestrians walk past the American multinational sport clothing brand, Nike store and its logo seen in Hong Kong.

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Nike shares dropped more than 3% in extended trading Thursday after the sneaker giant said supply chain congestion is hurting its business more than it previously anticipated.

The sneaker giant lowered its fiscal 2022 outlook to account for longer transit times, labor shortages and prolonged production shutdowns in Vietnam.

Nike now expects full-year sales to increase at a mid-single-digit pace, compared with a prior outlook of low double-digit growth. In the fiscal second quarter, it sees sales flat to down low single digits. Analysts had been looking for revenue growth of 12% for the year, as well as a 12% increase for the second quarter, according to Refinitiv data.

Nike’s revised forecast comes in the wake of a mixed first-quarter earnings report. It missed revenue expectations, as demand in North America softened. But the company sold more goods to shoppers at full price, boosting profits.

Here’s how Nike did during its fiscal first quarter compared with what Wall Street was expecting, based on a survey of analysts by Refinitiv:

  • Earnings per share: $1.16 vs. $1.11 expected
  • Revenue: $12.25 billion vs. $12.46 billion expected

Over the next few quarters, Nike anticipates its entire business will see short-term inventory shortages, Chief Financial Officer Matt Friend said during a conference call.

Since mid-July, the company has been working through factory shutdowns in Vietnam, where it produces roughly 50% of its footwear and 30% of its apparel. Facilities have been closed as the government tries to tamp down the spread of the Covid-19 virus. About 80% of Nike’s footwear factories in southern Vietnam and roughly half of its apparel factories in the area remain closed, Friend said.

“We’ve already lost 10 weeks of production, and that gap will continue. … It’s going to take several months to ramp back to full production,” he told analysts.

Once its products are produced, Nike is also running into shipping delays. According to Friend, transit times in North America are double pre-pandemic levels, taking an average of 80 days to move goods from Asia to Nike’s home turf.

Nike said demand worldwide for its shoes and workout apparel remains strong. But with these bubbling inventory issues, near-term performance will be hurt.

Management said fiscal first-quarter results would have been incrementally stronger, were it not for the supply chain snafus. Bottlenecks are resulting in a material lack of supply, leaving some consumers empty-handed.

Nike’s fiscal first-quarter sales climbed to $12.25 billion from $10.59 billion a year earlier but were short of analysts’ expectations of $12.46 billion.

China posted the smallest gain of any of its geographies, climbing 11%. In past quarters, the region had been one of Nike’s biggest revenue drivers.

Revenue in North America rose 15% to $4.88 billion. That was short of the $5.05 billion that analysts polled by FactSet were looking for.

Digital sales for the Nike brand rose 29% year over year. The retailer has been investing in its website and a suite of mobile apps. That has been especially beneficial during the health crisis, when many people have opted to shop from their homes.

“Digital is increasingly becoming a part of everyone’s shopping journey, and we are well positioned to reach our vision of a 40% owned digital business by fiscal 2025,” Friend said.

However, one upside to tightened inventories has been greater profitability on the products that Nike sells, since the company has little incentive to discount. Nike has also been reducing its reliance on wholesale partners that often sell at a markdown.

Net income grew to $1.87 billion, or $1.16 per share, compared with $1.52 billion, or 95 cents per share, a year earlier. That topped analysts’ expectations for $1.11 a share.

Analysts and investors had been expecting sales to take a temporary hit from the drop-off in manufacturing. The lockdowns are also impacting a number of other retailers, ranging from athleisure rival Lululemon to the high-end furniture chain RH.

Wall Street research firm BTIG earlier this month had downgraded Nike’s stock, seeing order cancellations running through at least next spring.

“Over its history, Nike’s stock has been most tightly correlated with sales growth, so with growing evidence that sales will likely stall, we believe Nike’s stock will at best tread water until more clarity is had around its manufacturing issues,” BTIG analyst Camilo Lyon said in a research note.

Nike shares are up about 13% year to date, as of Thursday’s market close, but down about 9% from an all-time high reached in early August. That’s when talk of the supply chain congestion started to pick up.

Nike said it ended the latest quarter with inventories of $6.7 billion, which was about flat from a year earlier, and down slightly from inventories of $6.9 billion in the prior period.

For the balance of this fiscal year, the company said, it sees demand outweighing supply. But it expects to return to more normalized inventory levels in fiscal 2023.

“Over the past 18 months, we’ve demonstrated our ability to manage through turbulence,” Chief Executive Officer John Donahoe said Thursday. “And that’s what we’ll continue to do as we navigate through these current supply chain issues. We’ll focus on what we can control.”

Find the full press release from Nike here.

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