David Swartz, Morningstar Research Equity Analyst, joins Yahoo Finance Live to breakdown Nike's latest financial results, supply chain challenges and the company's move to cut revenue forecasts.
JULIE HYMAN: All morning long we have been highlighting the supply chain challenges at Nike that caused the company to cut its sales forecast. A lot of the supply chain issues happening from Vietnam, where the company is seeing factory shut downs.
Let's get some more perspective on this. David Swartz is with us now. He is Morningstar Research equity analyst who covers Nike. David, thanks for being here. So, it doesn't seem like there is a demand problem for Nike, but could it end up becoming a demand problem if consumers are stymied from getting the products that they want?
DAVID SWARTZ: Yeah, it could. I do think that demand for Nike's products right now is very high, and the demand for all athletic apparel and footwear is high and has been high for, really, the last year plus. But it is a problem that if there are popular styles that are sold out, then consumers might buy other products from other producers, and that could, in time, prove to be a problem for Nike. But, ultimately, I do think the problem is transitory and that consumer demand for Nike is high.
BRIAN SOZZI: David, so you have supply chain problems at Nike. Appears to be continuing. You have the slowdown-- another sequential slowdown-- in sales coming out of greater China. Would it make more sense to move to a short term sell on Nike shares?
DAVID SWARTZ: Yeah, well our fair value estimate on Nike is $128, so at the current price we still think it is overvalued. Going into the quarter, Morningstar was one of the few firms that had the equivalent of a sell rating on Nike, so I do think that Nike stock is still pretty expensive. And the short term issues cannot be resolved, you know, any time soon. It's going to be well into 2022 I think before these supply chain issues are solved. But, you know, we do try to take a long term view at Morningstar and one, you know, difficult year or, you know, difficult stretch doesn't really change the valuation of Nike that much in the long term.
JULIE HYMAN: And so David, let's talk long term. I mean, Nike has been dominant. As you say, demand has been high for the company's products. And it's really been the dominant shoe brand-- athletic shoe brand-- certainly in the United States. One could argue globally as well. There are a lot of competitors. Do you see anything that is really going to be substantial in the coming year, sort of supply chain issues aside? Is there anyone who's know threatening to take their crown?
DAVID SWARTZ: Well, nobody's going to take Nike's crown, I don't think, in the short term, but there certainly are areas where Nike is weaker. So, you know, women's, you know, Nike has, in some sense, trailed Lululemon. It's not that Nike's women's sales are small because they're not. They're quite large. But it does not have the same kind of brand heat, you know, that Lululemon does in women's like yoga apparel and leggings.
Now, on yesterday's earnings call, Nike called out its leading position in sports bras and I think that was partly just to remind people that Nike is bigger than Lululemon and other firms like Athleta. But everybody is getting into this women's activewear. I'm sure you've seen that Levi's bought Beyond Yoga. You've got Wolverine bought this company called Sweaty Betty. So everybody's trying to get into women's activewear and that's an area where Nike is not so dominant.
And there are certain categories where Nike is not as strong as some others, you know. So, in athleisure in general Nike perhaps trails some companies. And there are, you know, brands like Champion, for example, that are doing well in athleisure. And that does have some effect on Nike.
BRIAN SOZZI: David, if Nike, the king daddy in the space, the leader in this category, is feeling margin pressure from supply chain issues, what other companies should investors be concerned about? Those smaller companies? Because with the way I see it, we could be seeing a good number of earnings warnings from smaller players in the apparel and footwear sector after this Nike quarter.
DAVID SWARTZ: Yeah, and I think it will affect larger companies, too. You know, Adidas, I think, is quite overvalued. And Adidas does production in the same part of the world at Nike does. Now Nike's exposure to Vietnam is extreme because Vietnam produces about half of its footwear and about 30% of its apparel, and that is higher than for other companies. But most companies in this space do source from, you know, Vietnam.
And, you know, I think that Under Armor, Lululemon, and others like Gap, VF Corporation, which owns Vans and other brands, I mean, I do think that there's going to be effects everywhere because the shipping problems are worldwide. It's not just that the factories have been closed in Vietnam, but you've got ships stacking up in the ocean off the coast of California. You've got rail problems. This will ultimately affect all the companies that do their sourcing from Asia, both large and small. And so I do think that Nike's not the only one.
JULIE HYMAN: Yeah, you had Costco also saying it's chartering its own ships to do some of its transportation of goods. So, obviously, companies are acutely aware of all this. David, thank you so much. Interesting perspective this morning. David Swartz of Morningstar.