BTIG has lowered Nike’s (NKE) recommendation from Buy to Neutral due to increased supply chain disruption in Vietnam.
“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.
When it comes to relocating production within Asia, logistics aren’t the only roadblock for Nike. If the troubles in Vietnam continue, China may be considered as a positive. However, Lyon points out that the tariffs placed by the Trump administration on Chinese goods 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.
Source: Yahoo News