Supply chain issues drag down Nike sales
Angry supply chains and lost production due to plant closures due to COVID are holding back Nike Inc. revenue growth due to a combination of lost sales and higher transportation costs.
Nike (NYSE: NKE) reported revenue of $ 12.25 billion for the quarter ended Aug.31, a 16% gain from a year ago, lower than analysts’ forecast, and lowered the forecast for the full year at mid single-digit growth due solely to export and shipping difficulties resulting in reduced product availability in a context of high customer demand.
Delays in freight transport, mostly associated with port and rail congestion, as well as labor shortages, were worse than expected by executives in the first fiscal quarter.
âLost weeks of production, combined with longer transit times, will cause short-term inventory shortages in the market for the next several quarters,â CFO Matt Friend said in an earnings briefing on Thursday. for analysts.
The situation is a big blow to the retailer as the busy spring holiday and shopping seasons approach.
During the last quarter, Nike inventories in North America increased 12%, but the goods were not in stores or distribution centers because they were stranded at sea, in import warehouses or at other nodes in the supply chain blocked. Transit times in Europe and other regions also deteriorated, the company said.
The COVID pandemic froze transportation networks for three months last year and when economies came back to life, many containers were no longer on rotation and not in the most demanded places. Companies increased their orders to recoup depleted stocks as consumer demand took off, putting more freight into the system than ocean carriers could handle. COVID-related health restrictions have limited the labor force of longshoremen, warehouses, railways and trucking, resulting in huge delays at container terminals and delays in unloading ships. A series of disruptions, such as a six-day blockade of Suez Canal ships or port closures in China due to positive COVID tests or typhoons, have compounded the delays as there is no slack in the system to absorb them.
Friend said transit times from Asia have doubled to 80 days due to shipping blockages.
Logistics industry officials say the order-to-cash cycle is also affected by the extra weeks it takes to confirm container reservations and secure a shipping unit with carriers even before a shipment. arrives at the port of origin.
âWe ended the first quarter with higher levels of inventory in transit. This meant that we had a full inventory that was not available to meet current consumer demand. We would have had an even higher result if we had had more products available. And so, those high transit times that we’re seeing have deteriorated this quarter and continue to impact our business, âFriend said.
Nike will actually have larger amounts of merchandise for sale this quarter in North America, Friend explained, as all the inventory that was stuck in the delivery pipeline arrives and will go on physical or virtual shelves.
Nike said shipping costs rose 1% due to additional spending on air freight and logistics to expedite deliveries, as well as extreme price increases for shipping. The clothing brand also expects lower gross margin growth in the current quarter due to increased use of air freight, which for Nike likely means chartering entire cargo planes to exclusively carry. its own products.
Nike’s production of footwear and sportswear has been hit hard by the shutdown of contract manufacturing plants in Vietnam and Indonesia.
In Vietnam, 80% of the company’s shoe factories and half of the clothing factories remain closed by government order. Ho Chi Minh City is subject to a strict social distancing policy until the end of September, with a three-phase reopening that will not allow full activities until January 15. Some factories operate under a “3 in 1” policy that allows factories to operate as long as the employees work, eat and sleep in one place, but government approvals are difficult to obtain and many workers are upset that they are isolated from the environment. their family.
A friend said Nike lost 10 weeks of production in Vietnam. The factories will gradually reopen from October, but it will take several months to reach full production. A few manufacturers under contract with Nike had their reopening plans approved by authorities this week.
The impact of lost production combined with long delivery times means North American inventories will be more impacted in the first three months of 2022 than in the current quarter.
“Conversely, Greater China, which has lower in-transit inventory levels and shorter transit times as it is closer to factories, will be impacted by the loss of production at the start of the second quarter. “said Nike’s chief financial officer.
Data Panjiva, a business intelligence firm within S&P Global Market Intelligence, shows that Vietnam accounts for 49% of all U.S. maritime imports by Nike.
âOur teams are leveraging their experience in our operational playbook and taking action to try to mitigate these impacts. They do things like maximizing our shoe production capacity in other countries, shifting clothing production from Vietnam to other countries like Indonesia and China and others where it’s viable, by exploiting strategically air cargo, âFriend said. âAnd then, we continue to use a seasonless approach to the product to meet incredibly high consumer demand, given our success in selling at full price, even if the product hits the market later than expected.
âSo while the environment is dynamic, these supply chain issues, in our view, are temporary. And from what we can see today, we are optimistic that inventory on hand will improve as we approach fiscal 23. â
But logistics and retail experts say shifting production of winter footwear and clothing is not as easy as it is for simple sewn items like T-shirts and socks.
Demand for air cargo from Vietnam “is off the charts,” said Marc Schlossberg, executive vice president of air cargo and sales for Unique Logistics International.
Last month, the Vietnamese Textile and Clothing Association said about a third of the country’s shoe and garment factories had suspended operations. The Vietnamese Leather, Shoes and Handbags Association reported three weeks ago that 80 percent of factories in southern provinces had closed.
Investment firm BTIG recently estimated that Nike would have a shortfall of 160 million shoes due to the lockdown measures in Vietnam, Reported supply log.
The American Apparel and Footwear Association urges the Biden administration to quickly ship donated COVID vaccines to Vietnam and Bangladesh to reduce the spread of the disease and get millions in the fashion industry back to work .
Nike factories are operating in Indonesia again, Friend said.
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