Nike downgraded by BTIG amid continuing COVID-related supply chain disruptions
As a result of worsening supply chain disruption in Vietnam, BTIG has downgraded Nike’s (NKE) rating from Buy to Neutral.
“We believe the risk of significant cancellations beginning this holiday and running through at least next spring has risen materially for NKE as it is now facing at least two months of virtually no unit production at its Vietnamese factories which accounted for 51% of footwear and 30% of apparel units,” said BTIG senior analyst Camilo Lyon, in a recent note.
Over the past few months, COVID-19 cases in Vietnam have continued to rise, with its fully vaccinated rate only between 4% and 5%. In response, Vietnamese government officials have responded by closing down manufacturing facilities throughout the country.
When asked if changing manufacturing locations in the interim, Lyon did not mince words about the dire situation the Swoosh brand could face in the short term.
“Nike is the best company in the world, it’s also one of the largest. So when we talk about them shifting their production, we’re talking about a battleship turning, it’s a very long drawn out process,” he told Yahoo Finance Live.
“In particular, on footwear the complexities mount even more so relative to apparel ... If you think about how many hands, how many pairs of hands go into making a pair of shoes, it can be north of 30 people touching one pair of shoes,” he said.
“So the complexity is around labor, the complexities around the molds and the [cast] and the machinery that have been in place in Vietnam make that transition, while not impossible, pretty darn close to impossible, at least in the very near term," he said.
“Based on our supply chain checks with our manufacturing contacts in Vietnam and Singapore, we estimate F22 sales could be flat to +LSD vs. current guidance of +LDD growth, with the biggest impacts to FQ2-FQ4. We now are modeling F22/23 EPS of $3.29 / $4.33, effectively pushing our earnings estimates out one year,” Lyon's note stated.
Logistics are not the only hurdle in Nike’s way when it comes to shifting production within Asia. China could be seen as a good if problems continue to persist in Vietnam. However, Lyon points out that the Trump administration’s tariffs imposed on Chinese imports are still in effect.
“So then we’re talking about an incremental cost to that transition from Vietnam to say China of about 30%. So really there’s not a great amount of quick remedy that we see unfolding. They can’t shift production out. They can’t keep more units to themselves to sell through their own channels,” Lyon said.
“In fact, the math that we ran suggests that that would be a pretty cataclysmic shift against the wholesale partners in their favor. And it still wouldn’t make up enough of the loss production,” he added.
Former president and CEO of the American Apparel & Footwear Association Rick Helfenbein believes that cautionary downgrades like BTIG’s are reasonable given the situation. Like Lyon, he tells Yahoo Finance that moving manufacturing operations is not likely in the cards for Nike.
“Sales will likely stall or slow down a bit. It’s too late to change anything for holiday shipping and they probably figure that things will settle down by next spring,” he said.
Reggie Wade is a writer for Yahoo Finance. Follow him on Twitter at @ReggieWade.
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