Nike can turn its snarled supply chain to its advantage

A lower sales forecast, slowing growth in China and a bottlenecked supply channel. The news coming out of Nike’s fiscal first-quarter earnings report wasn’t good.

Shares were down more than 6% Friday afternoon following the report. Ahead of the results, shares had already tumbled roughly 9% from an all-time high of $174.38, which it hit in August.

Amid the sell-off some analysts see an opportunity for Nike to positions its business — and its stock — for greater growth. Nike’s supply chain struggles are providing it with cover to accelerate its direct-to-consumer strategy, which has been a key driver of profitablity in recent quarters.

It now takes Nike roughly 80 days to get goods from Asia to North America, which is double pre-pandemic transit times. Manufacturing facilities across Vietnam are beginning to reopen, but Nike has lost about 10 weeks of production due to pandemic shutdowns. About 43% of its total footwear and apparel units are made in the country.

For the next few quarters, Nike predicts consumer demand will outweigh supply. This means Nike will need to be much more strategic about where it’s stocking running shoes and workout tops. It will likely opt for its own stores, over wholesale partners.

“As long as inventory is constrained, it’s fair to assume the pivot to direct will be accelerated,” BMO Capital Markets analyst Simeon Siegel said. “They’re prioritizing their own channels with product first.”

Before the Covid pandemic struck, Nike was on a path to grow its direct-to-consumer business. It has been cutting partnerships with some wholesale retailers, while building its online business and opening Nike stores around the world. Over the past three years, Nike has pulled out of about 50% of its undesirable wholesale accounts.

Nike calls the transition a “consumer direct offense,” a play on sports terminology. In fiscal 2021, Nike’s direct revenue represented roughly 39% of sales for the Nike brand, up from 35% in the prior year. Selling more goods at full price has also been aiding profits. Nike’s gross margin’s for fiscal 2021 grew to 44.8%, from 43.4% in 2020.

Industry-wide supply chain havoc could accelerate Nike’s DTC push at an even faster clip, and in turn drive profitability higher.