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Puma, VF and Nike Could Face Uphill Battle in China

China’s Covid policy and power problems could mean more trouble ahead for Western brands.

Puma, VF and Nike have already warned about turmoil in the Chinese market. Meanwhile, new restrictions could be ahead to curb a new wave of coronavirus infections in Northern China. In August, an outbreak disrupted Nanjing port operations for several weeks and also interrupted air freight and cargo pickup and delivery.

Covid aside, rolling power outages since September initially threatened Chinese textiles producers due to forced shutdowns that have since spread to other manufacturing sectors.

What does this all mean for apparel and footwear brands that source in China? Sales pressure and additional supply chain disruption, most likely.

Wells Fargo analyst Ike Boruchow on Friday noted the macro headwinds from regional lockdowns and electrical shortages. The consumer-led backlash against Nike, Adidas and H&M has driven Chinese shoppers to local brands. Other signs point to weakness in the active space.

Puma CEO Bjørn Gulden described a “very difficult market situation in China” amid a 16 percent third-quarter sales decline after a 5 percent dip in the second quarter. Puma, in addition to Nike, Adidas, H&M and other high-profile brands, was among the boycotts that rocked many Western companies in the spring.

VF CEO Steve Rendle noted “pandemic-related disruption and near term headwinds in China.” Vans in particular faced “challenging near term consumer environment in China.” Parts of VF’s business in “China have been been impacted by weaker digital traffic for non-domestic brands,” Rendle said. “This has been more impactful for active brands relative to [VF’s] Outdoor [group].”

Athletic footwear production for textile uppers—think fabric footwear, such as sneakers—has seen a shift from China to Vietnam as manufacturers such as Nike sought to broaden its base outside of China, only to face a ten-week delay due to supply chain constraints and an extended period of Vietnam factory closures because of a Covid outbreak. The company last month said first quarter year-over-year sales in China declined by 1 percent.

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Not all Western brands have had the same difficulties facing near term headwinds from China.

On Thursday, footwear firm Skechers said sales in China rose 10 percent year-over-year, on top of a 24 percent gain a year ago. The company apparently avoided facing the same labor backlash that dogged Puma and Nike. But Skechers also was able to show that one of its factories in Xinjiang had been audited several times, with each audit showing no signs of forced labor.

For other companies such as vertical retailer Abercrombie & Fitch, the manufacturing base in China is small component of overall operations and because its global sourcing network is so big, any supply chain impact so far has been manageable, company executives have said on earnings conference calls.

Moreover, Western luxury brands aren’t as impacted as many of their softlines counterparts in the active space, and many of their goods are locally produced. Wells Fargo’s Boruchow cited Moncler SpA as one example. Moncler, which on Thursday posted posted results for the first nine months of fiscal 2021, didn’t note any weakness in the region, and said third quarter Asia revenues accelerated, with China sales leading the charge. The Italian firm said overall revenues rose 54 percent to 1.18 billion euros ($1.36 billion) from 765.1 million euros ($884.5 million) for the same 2020 period.

The Wells Fargo analyst also believes that both Tapestry Inc. and Capri Holdings Ltd. could see investor sentiment grow more cautious because of their exposure to the Chinese market. Both Tapestry and Capri have yet to reports their latest quarterly earnings results, but are set to over the next few weeks.

Meanwhile, Boruchow has downwardly revised his third quarter estimate for Canada Goose Holdings Inc. He now expects third quarter revenue at $552 million, down from prior estimates of $576 million. And he lowered estimates for third quarter earnings per share (EPS) to $1.36 from his prior EPS estimate of $1.41. He kept his “overweight” rating on shares of Canada Goose, but cited the Chinese market as the reason for his near-term caution. Canada Goose has 40 percent of its 37-unit company owned store fleet in Asia, and its direct-to-consumer (DTC) growth story is “highly tied to that region,” the analyst said.

Canada Goose in August reported a wider first-quarter loss, but noted rising demand and projected stronger DTC revenue in the back half. The outerwear market has been focused on growing its business in Mainland China, with DTC revenue up 188 percent in the quarter.