Nike can leverage its booming supply chain to boost direct-to-consumer sales business

Lower sales forecasts, slower growth in China and a bottleneck supply channel - the news from Nike’s first quarter financial results report was not good.

Shares fell more than 6% on Friday afternoon after the report. Prior to the results, stocks had already fallen about 9% from an all-time high of $ 174.38 reached in August.

Amid the massive sell-off, some analysts see an opportunity for Nike to position its business - and its stock - for further growth. Nike’s supply chain woes provide it with cover to accelerate its direct-to-consumer sales strategy, which has been a key driver of profitability in recent quarters.

It now takes approximately 80 days for Nike to get goods from Asia to North America, which is double the transit time before the pandemic. Manufacturing facilities across Vietnam are starting to reopen, but Nike has lost around 10 weeks of production due to pandemic shutdowns. About 43% of its total footwear and clothing units are produced domestically.

For the next few quarters, Nike expects consumer demand to exceed supply. This means Nike will have to be much more strategic about where it stores running shoes and training tops. He will probably opt for his own stores rather than wholesale partners.

“As long as stocks are limited, it’s fair to assume that the pivot to management will be accelerated,” BMO Capital Markets analyst Simeon Siegel said. “They prioritize their own channels with product first.”

Before the Covid pandemic hit, Nike was on track to expand its direct-to-consumer sales business. He broke his partnerships with some wholesale retailers, while growing his online business and opening Nike stores around the world. Over the past three years, Nike has pulled about 50% of its wholesale accounts.

Nike calls the transition a “direct-to-consumer offense,” a sporting terminology game. In fiscal 2021, Nike’s direct revenue accounted for around 39% of Nike brand sales, up from 35% the year before. Selling more goods at full price also helped profits. Nike’s gross margins for fiscal 2021 increased to 44.8% from 43.4% in 2020.

Industry-wide supply chain havoc could accelerate Nike’s DTC push to an even faster rate and, in turn, increase profitability.

“This means Nike now has a free excuse to speed up its DTC transition and say, ‘We don’t have the supplies to get our wholesalers going,’” said Stacey Widlitz, president of SW Retail Advisors, in an interview. “This is a major opportunity because you see all these other brands wholesale, but they don’t have the top line like Nike. Nike always has the demand.”

And while Nike’s shelves are a bit empty in the coming months compared to normal times, Widlitz said, she doesn’t think this will drive shoppers to other retailers for good.

“People will always be drawn to big brands,” she said. “This is the biggest pent-up demand, because they’re basically saying to the consumer, ‘You can’t have it right now.’ You create FOMO [fear of missing out] by not having a supply. It is obvious to take advantage of it. “

During Thursday’s earnings call, Nike’s management team said it was prioritizing its direct channels.

Nike’s main partners are Foot Locker, Dick’s Sporting Goods and Nordstrom, and investors in those stocks are worried about what Nike’s problems will mean for their businesses. Foot Locker’s shares fell more than 6% on Friday, while Dick’s fell almost 2%. Nordstrom’s stock was pretty much flat.

CFO Matt Friend said temporary supply chain disruptions “are likely to trigger an even greater acceleration in market transformation - to Nike and our most important wholesale partners.”

“We are going to have lean stocks,” he said. But he added: “Strong brands get stronger in this environment.”

And according to Citi analyst Paul Lejuez, a temporary supply chain problem is a much better problem than a demand problem. He doesn’t see Nike as having a demand problem.

“We view these supply chain disruptions as transient … and [the delays] have a general impact on the athletic shoe space, “Lejuez said in a research note.” The biggest impacts of factory closures in Vietnam are expected to occur after the holidays. “

The strengthening of Nike’s North American business will be even more significant if growth in China slows. Greater China has long been Nike’s most profitable and important growth market. But in Nike’s last quarter, the region’s revenue grew the most slowly of any geography.

General Manager John Donahoe said Nike is playing the long game in China. Supply constraints will impact the region’s performance in the second quarter, he said, but the company “will invest for the long term and we are confident in the long term opportunity.”

Wall Street research firm UBS said it expects Nike shares to rebound after Friday’s sell-off. UBS has a target price of $ 185 on stocks, with a buy rating. Nike was trading around $ 149 per share on Friday afternoon. The average stock analyst rating is $ 184.35, according to FactSet.

“While some uncertainty remains as to how long it will take to resolve supply chain issues and whether Nike’s sales growth rate in China accelerates, we believe investor sentiment is slowing down. will now improve that Nike has quantified the impact of the plant closure in Vietnam, ”analyst Jay Sole mentioned. “We believe most investors will look to fiscal 2023 and see a rebound scenario.”

- UKTN Michael bloom contributed to this report.