Supply chain problems have wreaked havoc on companies around the world over the past year. The pandemic-fueled global supply chain issues have thrown a wrench into the operations of companies across sectors.
Worse, global supply chain problems are not going to subside anytime soon, according to high-profile economist Mohamed El-Erian. He predicts that supply chain constraints will stick around for another one to two years, or longer. This is a setback for companies like Nike that are right in the middle of the supply chain disruption.
Wall Street firm BTIG is not optimistic and has downgraded Nike’s stock from buy to neutral as a result. Shares of Nike tumbled more than 2% in response to the downgrade.
Nike’s stock is hovering below its all-time high of $174 and currently trades for just below $160. Investors who believe that Nike will weather the storm and use its pricing muscle to mitigate the damage might see the downturn as a buying opportunity, though it’s unclear where the bottom might be.
Factory Fears
BTIG’s bombshell downgrade was in response to factories in Vietnam that were forced to be shut down due to the spread of the virus, which has had a ripple effect on the supply chain. BTIG analyst Camilo Lyon wrote in a report,
“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.”
The factories in question comprise more than half of Nike’s footwear production and nearly one-third of apparel items. The timing couldn’t be worse, with the holiday season right around the corner and vaccinations becoming more prevalent so that retail sales could benefit.
Vietnam is suffering from another wave of the pandemic, particularly in Ho Chi Minh City, which has triggered restrictions in the economy and crippled the manufacturing sector. A mere 5% of Vietnam’s population has been vaccinated from COVID-19.
Nike Not Alone
While Nike’s issues might begin in Vietnam, the supply chain disruption is a global problem. As a result, other brands are feeling it too. Athletic apparel company Lululemon, for example, experienced a 61% jump in Q2 revenue, but the supply chain is still a worry. They similarly source a good chunk of their apparel from Vietnam and are having to scramble as a result. Nonetheless, Lululemon has a strong sales outlook for 2021.