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Nike Feels Heat From Vietnam Closures, But Assures Reopening On Track

Nike reported minimal revenue gains for the second quarter on Monday as Covid-related factory closures in Vietnam hit the company’s Asia business.

According to chief financial officer Matt Friend, all impacted factories have reopened. Though analysts have expressed concern that workers who traveled home this summer would be slow to return, Friend said employee attendance rates have improved and Nike’s Vietnam reopening is “on plan.” Three months ago, Nike signaled the reopening would begin in October and then take “several months” to ramp up. As of today, weekly footwear and apparel production is at roughly 80 percent of pre-closure volumes, Friend said, with apparel skewing a little higher and footwear a little lower.

Thus far, the Vietnam factory closures have led Nike to cancel production of roughly 130 million units, Friend added.

“Relative to where we were 90 days ago, we’re increasingly confident that inventory supply will normalize and that we’ll be in a position to meet the incredible demand that we’re seeing across the marketplace,” Friend said in a call with investors Monday evening.

In a Nutshell: Given their vicinity to Vietnam, Greater China and Nike’s Asia Pacific & Latin America (APLA) region were the first to feel the impact from the Southeast Asia country’s pandemic-related factory closures.

In Greater China, a region already impacted by a boycott movement earlier in the year, revenue declined 24 percent on a currency-neutral basis, while earnings before interest and taxes (EBIT) fell 36 percent on a reported basis. Wholesale revenue fell further than the company’s Nike Direct business, 27 percent versus 21 percent. Though brick-and-mortar retail remained volatile due to Covid-related lockdowns—25 percent of partner retail stores were impacted in some way by local mandates, as well as 50 percent of Factory Stores—Friend said Nike saw traffic recover to pre-pandemic levels “at times throughout the quarter.”

Season-to-date, retail sales across the country have trended “more favorably,” Friend said. As supply normalizes, he added, the company expects to see sequential improvement in the quarters ahead.

In APLA, meanwhile, Nike revenue declined 6 percent on a currency-neutral basis and EBIT decreased 8 percent as declines in Asia-Pacific territories affected by Vietnamese factory closures offset revenue growth in South Korea. Season-to-date, holiday retail sales are up versus the prior year.

In North America and Europe, the Middle East & Africa (EMEA), Nike benefited from the high levels of in-transit inventory left over from the prior quarter. In North America, second-quarter revenue grew 12 percent and EBIT climbed 21 percent. Demand remained “incredibly strong,” Friend said, with season-to-date retail sales across the region up double digits, “energized by the continued momentum from the return to sport and the beginning of an outstanding holiday season.” Women’s retail saw “high double-digit” retail sales growth, more than twice the rate of men’s.

Nike Direct saw sales improve 30 percent versus the prior-year period, with digital sales up 40 percent as the company record “record” Black Friday week results. Nike-owned stores also saw “strong” double-digit growth, with traffic “trending toward pre-pandemic levels,” Friend said.

In EMEA, second-quarter revenue grew 6 percent on a currency-neutral basis and EBIT jumped 22 percent on a reported basis.

Though Insider reported last week that Nike was sticking by plans to require workers to return to the office under a hybrid model, chief executive John Donahoe appeared to confirm reports that emerged Monday that the company’s calculus has changed given the recent spike in Covid cases in the United States. “We’re ready to come back in a hybrid work environment when that’s safe,” the CEO said. “We’ll be ready, whether that’s first quarter or whenever it ends up being.”

Looking ahead, Nike expects revenue to grow mid-single digits in fiscal 2022 and low single digits in the third quarter.

Nike’s inventories totaled $6.5 billion as of Nov. 30, up 7 percent year over year, driven by elevated in-transit inventories due to ongoing supply chain disruptions and partially offset by strong consumer demand. Cash and equivalents and short-term investments were $15.1 billion, up $3.3 billion from last year.

Net Sales: Nike recorded revenue of $11.4 billion in its second quarter ended Nov. 30, a 1 percent increase versus the prior year, but flat on a currency-neutral basis. Sales from its Nike brand totaled $10.8 billion, flat compared to fiscal ’21. Converse saw constant-currency sales grow 16 percent to $557 million, led by strong performance in Europe and North America.

Nike Direct sales grew 8 percent on a currency-neutral basis to $4.7 billion. Digital sales climbed 11 percent in constant currency, led by growth in North America.

Net Income: The company’s gross margin increased 280 basis points to 45.9 percent, led by margin expansion in its Nike Direct business that was driven by lower markdowns, a higher mix of full-price sales and changes in exchange rates. Headwinds included increased freight and logistics costs.

Nike recorded a net income of $1.3 billion, a 7 percent increase from last year. Diluted earnings per share grew 6 percent to $0.83.

CEO’s Take: Donahoe touted the importance of Nike’s direct connection with its consumers moving forward. “We are in an era where that is the liquid gold for any brand,” he said.

“Our digital penetration is at an all-time high,” Donahoe continued. “Our Direct Digital and mono-brand penetration is at an all-time high, that gives us that direct connection. And, frankly, the partnerships like Dick’s allows us to have that direct connection, whether it’s direct, or with a wholesale partner, and that allows us to serve that consumer in a more personalized, engaging and sustainable way. And we believe that is going to be one of the key indicators of future success.”

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