Nike cuts guidance as supply chain woes worsen in Q1

The Nike group cut its guidance for fiscal year 2022 despite strong consumer demand, as it warned of inventory shortages over the next few quarters in the face of continuing supply chain headwinds that already took their toll on its sales performance in the first quarter ended Aug. 31.

Nike’s sales grew by in the quarter by 16 percent as compared to the year-earlier period, reaching $12,248 million. They were up strongly from the $10,660 million level reached in the comparable quarter of 2019, but they were below an analysts’ consensus of $12,460 million, leading to a 3 percent drop in the company’s share price. The growth at constant currency rates stood at 12 percent.

“Consumer demand for Nike, Jordan and Converse remain incredibly high and our first quarter financial results would have been even stronger, if not for supply chain congestion resulting in lack of available supply,” said Matt Friend, the group’s chief financial officer, in a conference call with analysts.

Nike now expects revenues for the full year to grow by mid-single digits versus its prior guidance of low-double digit growth, attributing its downsized expectations solely to supply chain strains. For the second quarter now underway, revenues are expected to be flat to down by low single digits versus the year-earlier period. Because of the supply chain disruptions, Nike’s inventories were flat at the end of the quarter compared with one year earlier.

The company’s weakest retail partners will no doubt bear the brunt of the supply chain disruption, in line with Nike’s more selective distribution policy. The management clearly stated that it will not relent its Consumer Direct Acceleration strategy under the circumstances.

While Nike had already warned that delivery times were likely to remain high for the remainder of the year, the management said conditions had deteriorated in the first quarter, with the EMEA region and North America seeing increases in transit times, mainly due to port congestion and labor shortages.

As previously indicated, the situation has been compounded by government-mandated closures of factories in Vietnam and Indonesia due to the Covid-19 pandemic. While Indonesian plants have reopened, Nike said 80 percent of footwear factories in Vietnam and nearly half of all apparel factories were still closed as of Sept. 23. After having already lost 10 weeks of production, factory re-openings in Vietnam are set to take place in phases starting in October, and Nike cautioned that a ramp-up to full production could take several months.

“Lost weeks of production combined with longer transit times will lead to inventory shortages in the marketplace for the next few quarter,” Friend said. While all regions will be affected, Nike said geographies in Asia with less in-transit inventory at the end of the first quarter will be disproportionately impacted, starting in the second quarter. In North America, instead, most the shortages will take place next spring.

The digital channel is expected to be the biggest growth driver during the current financial year. In the first quarter, total Nike Direct revenues rose by 28 percent to $4.7 billion, with a 25 percent increase on a currency-neutral basis. The digital business increased by 29 percent in dollars and by 25 percent in local currencies, led by a 43 percent jump in North America, while Nike-owned stores posted growth of 24 percent in dollars. Digital represented 21 percent of total Nike brand revenues of the quarter, an increase of 2 percentage points on the year earlier. Wholesale revenues increased by just 5 percent in the latest quarter, negatively affected by lower inventory supply due to worsening delivery times.

The group says it remains well-positioned to get 40 percent of its revenues from its own digital business by the fiscal year 2025, three years earlier than in its latest five-year plan, thanks to shifts that have taken place in consumers’ buying habits during the pandemic. Nike is seeing more and more strong online-offline connectivity at its own stores and those of key partners such as Foot Locker, making the consumer experience more seamless than before. New store concepts such as Nike Live and Nike Rise that have been tested in the U.S. will make their way overseas. They will also serve as guiding trends in third-party retail around the world.

The group’s net income for the quarter climbed by 23 percent to $1,874 million, with diluted earnings per share rising by 22 percent to $1.16, above an analysts’ consensus of $1.11. The operating profit (Ebit) increased by 22 percent to $2,163 million. Spending on demand creation rose by 36 percent in dollars, and digital marketing was ramped up, but was still relatively low at 7.5 percent of revenues. Overhead expenses increased in line with revenues.

The gross margin went up by 1.7 points from the year-ago quarter to 46.5 percent, driven by margin expansion in the Nike Direct business, a higher mix of full-price sales and favorable foreign currency changes that were partially offset by higher product costs, mainly due to increased ocean freight surcharges. During the quarter, Nike said it exceeded its 65 percent full-price sales realization goal announced at its latest investor day.

Revenues for the core Nike brand in the latest quarter increased by a reported 16 percent to $11,640 million and were 12 percent higher at constant exchange rates. The Nike brand’s Ebit grew by 19 per cent to $2,504 million. At Converse, sales increased by 12 percent to $629 million and were up by 7 percent at constant rates, driven by DTC revenues in North America and Europe, while the brand’s Ebit rose by 21 percent to $204 million.

Across the group, revenues from apparel and footwear were up by 16 percent and 10 percent, respectively. Apparel outperformed footwear in North America and Europe. The opposite took place in the rest of the world.

The athletic wear group’s sales in the EMEA region increased by a reported 14 percent to $3,307 million, with growth of 8 percent at constant currency rates. Nike Direct grew 10 percent on a currency-neutral basis, with Nike Digital up by 2 percent. Ebit rose by 26 percent to $875 million in the region.

In North America, sales grew by 15 percent to $4,879 million, with Nike Direct growing by more than 45 percent, including a growth of over 50 percent at company-owned stores. Running, fitness and basketball scored the biggest gains. Nike-owned inventory increased by 12 percent versus the prior year, mainly as a result of highly elevated in-transit inventory levels as transit times deteriorated over the last quarter to reach a level that is now almost twice as high as the pre-pandemic level. Ebit in North America grew by 10 percent to $1,434 million.

Sales in Greater China increased by a reported 11 percent to $1,982 million during the quarter but were only 1 percent higher in local currencies, with retail sales affected in late July and August by retail closures and lower foot traffic as a result of Covid-19 containment measures. Prior to July, management said that physical traffic had been approaching the year-earlier level. Nike Direct declined by 3 percent on a currency neutral basis, partially due to the store closures. Nike Digital decreased by 6 percent due to a negative comparison against the previous year’s liquidations. Ebit for the region inched up by 2 percent to $701 million.

In the rest of Asia-Pacific & Latin America (APLA), the group’s sales grew by 33 percent to $1,465 million and were 31 percent higher at constant exchange rates, led by growth in the Southern Cone (Argentina, Chile and Uruguay), Japan, Mexico and Korea, with growth more muted in the Pacific, Southeast Asia and India as a result of Covid restrictions and government-mandated store closures. Ebit in the APLA area soared by 72 percent to $481 million.

For the full year, Nike still expects the group’s gross margin to expand by 1.25 percentage points as compared to the year earlier, at the low end of its prior guidance, reflecting stronger-than-expected full price realization, an ongoing shift to its more profitable Nike Direct business model and price increases in the second half, which are expected to more than offset more than 1.0 percentage point in additional transportation, logistics and air freight costs to move inventory. The gross margin in the second quarter is anticipated to expand at a lower rate than in the full year, due to higher planned investments on air freight for the holiday season.