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Nike CFO: ‘We’ve Already Lost 10 Weeks of Production’

Nike’s dominant first quarter was overshadowed by a grim outlook as the athleticwear and footwear giant battles a gridlocked global supply chain on top of extended pandemic-related Vietnam factory closures.

The company downgraded its financial guidance for 2022 solely due to the supply chain impacts, expecting revenues to grow in the mid-single digits, versus the prior guidance of low-double digits. Additionally, Nike expects second-quarter revenue growth to be flat to down low-single digits versus the prior year.

For its first quarter, the Swoosh firm reported revenues of $12.2 billion, up 12 percent on a currency-neutral basis, on a net income increase of 23 percent to nearly $1.9 billion.

In a Nutshell: As of Thursday, 80 percent of Nike’s footwear factories in Vietnam, and nearly half of its apparel factories in the country, are closed, Matt Friend, Nike’s executive vice president and chief financial officer, said in an earnings call.

“Through this week that means we’ve already lost 10 weeks of production, and that gap will continue until factories are able to reopen and produce product at normal capacity,” Friend said. “This has created a gap to the flow of inventory originally ordered for delivery beginning in mid-October.”

The Vietnamese factories are anticipated to reopen in phases beginning in October, and ramp up to full production “over several months.” A few of the factories just had their reopening plans approved this week. Factories in Indonesia, which previously had to shutter, have since reopened.

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One financial analyst, Camilo Lyon of investment firm BTIG, already estimated that Nike could lose out on 160 million pairs of shoes this year due to the closures.

Like they have for many apparel and footwear brands, the facility closures have added insult to injury for Nike. While it would traditionally take 40 days to move product from Asia to North America prior to the pandemic, the combined container shortages, port congestion, rail congestion and labor shortages have since doubled that lead time to roughly 80 days, Friend said.

“Unfortunately, the situation deteriorated even further in the first quarter,” Friend said, noting that EMEA saw increases in transit times as well.

Inventories for the global icon were $6.7 billion, flat compared to the prior year period, driven by strong consumer demand during the quarter, and offset by elevated in-transit inventories due to the extended lead times.

North America is coming into the second quarter with elevated in transit inventory, which means the region will have higher quantities of fall season product, that it can sell in the second quarter,” Friend said. “But holiday and spring production has been delayed, and if you combine that with longer lead times, the impact of the lost production is going to have a greater impact in North America in the third quarter.”

Gross margin increased 170 basis points to 46.5 percent, led by margin expansion in its direct business, a higher mix of full-price sales and favorable changes in foreign currency exchange rates, partially offset by higher product costs primarily due to increased freight costs.

Friend said that Nike expects second quarter gross margins to expand at a rate lower than the full year due to higher planned air freight investments for the holiday season.

Despite the unfavorable outlook, Friend was optimistic about due to the continued high consumer demand for Nike products, as the company achieved 65 percent full-price sell-through in the first quarter and proved its ability to sell seasonless product.

While the supply chain has been holding Nike back, the company’s various investments in it have helped the business improve service levels, reduce carbon impact and ultimately reduce cost to fulfill an order. A year after building a predictive analytics-driven “regional service center” in Los Angeles, Nike built two more in the first quarter—one on the U.S. East Coast and one in Spain.

Friend also highlighted the growth of the “Express Lane,” a digital staging system for raw materials that need to be deployed rapidly due to localized product selection. He said that the system is yielding higher profitability, creating locally relevant product and decreased lead times.

In the quarter, products made via Express Lane grew roughly 20 percent versus the prior year and increased its share of overall business.

CEO John Donahoe addressed the company’s recent product launches during the call, but he gave some insight into the growth of Nike’s sustainable sneaker initiative, Space Hippie.

He revealed that just one year after the material’s launch, there are more than 43 styles using Space Hippie innovations across four sports.

Cash and equivalents and short-term investments were $13.7 billion, up approximately $4.2 billion from last year, due to strong free cash flow generation, partially offset by cash dividends and share repurchases.

Net Sales: First-quarter reported revenues were $12.2 billion, up 16 percent compared to prior year and up 12 percent on a currency-neutral basis from the $10.6 billion brought in last year.

Revenues for the Nike brand were $11.6 billion, up 12 percent to prior year on a currency-neutral basis, while the Converse brand took in the other $629 million, which was up 7 percent on a currency-neutral basis

Footwear sales at the sneaker maker jumped 14 percent, or 10 percent on a currency-neutral basis to $7.7 billion, while apparel sales jumped 20 percent, or a currency-neutral 16 percent, to $3.5 billion.

Nike’s direct sales were $4.7 billion, up 28 percent on a reported basis and up 25 percent on a currency-neutral basis. Nike brand digital sales increased 29 percent, or 25 percent on a currency-neutral basis, led by 40 percent growth in North America.

The athleticwear giant said sales at its owned stores grew 24 percent, while wholesale grew just 5 percent in the quarter, negatively impacted by the lower available inventory supply.

Even with the broad reopening of physical retail, Nike’s digital sales now encompass 21 percent of total brand revenue, an increase of two points versus last year. Friend said that Nike is “well-positioned” to reach its vision of 40 percent owned digital business by fiscal 2025.

Regionally, revenue in North America rose 15 percent to $4.9 billion, short of the $5.05 billion that analysts polled by FactSet were looking for. EMEA jumped a currency-neutral 8 percent, while the Asia Pacific & Latin America (APLA) region grew 31 percent. China saw a small 1 percent gain to $2 billion.

Net Earnings: Net income for the Billie Eilish collaborator increased 23 percent to nearly $1.9 billion, from the $1.5 billion generated in last year’s first quarter. Diluted earnings per share for the quarter was $1.16, up 22 percent from the 95 cents in the year-ago period.

CEO’s Take: Donahoe highlighted Nike’s growth in memberships, which he called “one of the best gauges” for success in the brand’s digital business.

“Our digital growth is led by outsized member buying, which has seen a penetration increase of 14 points since last year,” Donahoe said in the call. “Our membership strategy is working as we increasingly use data and analytics to personalize member product offerings and experiences. And we’re seeing this come to life as repeat buying members for more than 70 percent in the quarter.”