Nike's Revenue In The First Quarter Was Less Than Expected Due To The Impact Of The Supply Chain,Where Is The Road To Future Transformation?

Summary

• Nike's Q1 revenue growth but not as expected.
• Nike's supply chain has encountered certain challenges and has risks.
• Nike's transformation and outlook of future business.

Revenue growth but not as expected

On September 24, Nike (NKE.US) announced its fiscal year 2022 Q1 financial results, Strong demand was hampered by supply chain delays in production and delivery. FY22Q1 revenue increased by 15.6% year-on-year to 12.248 billion U.S. dollars，the evenue was the same as FY21Q4 revenue, which was lower than market expectation of $12.464bn ; thanks to the increase in the proportion of directly-operated full-price products and the increase in profitability, gross profit can still increase by 20.1% year-on-year to $5.696bn in the case of soaring shipping costs; net profit increased by 24.2% year-on-year to $1.874bn, exceeding market expectations of 1.812 billion U.S. dollars; diluted earnings per share increased by 22.1% year-on-year to $1.16, better than expected $1.12.

From a different geographical perspective, total revenue in North America increased by 15.5% year-on-year to $4.879bn, which was less than the expected $5.05bn, which was a decrease of 9.4% from the $5.384bn in FY21Q4; Europe, the Middle East, Africa (EMEA) region Total revenue increased by 13.6% year-on-year to $3.307bn; total revenue in Mainland China increased by 11.3% year-on-year to $1.982 bn, the smallest increase among all regions.

Nike's advantages in direct sales and digitalization have contributed to the company's strong revenue growth and provided the company with long-term and sustainable profit growth. As the number of vaccinated people continues to increase, offline physical retail is steadily moving towards normalization and surpassing the level before the epidemic, NIKE Direct increased by 25% year-on-year benefit from this. At the same time, due to the growth of members and the increase in repurchase rates, coupled with the boom in the North American school season, the Nike brand's digital business maintained a strong growth of 25% year-on-year, of which the North American region increased by 43%. The Management has stated that by 2025 previously:Nike’s direct sales revenue will increase from the current 40% to 60%, and self-operated and cooperative digital sales revenue will increase by 50%, accounting for 40% of total revenue. Nike will continue to strengthen its investment in innovation and consolidate its digital leadership position to lay the foundation for its long-term development in the future.

The current supply chain has encountered certain challenges and has risks

North America and EMEA (Europe, Middle East and Africa) have increased shipping costs and time mainly due to port and rail congestion, shortages of containers and labor; shipping time is expected to double before the epidemic, and the time for shipping products from Asia to North America has changed from the original the average of 40 days has soared to the current average of 80 days. Nike is expected to have 160 million pairs of shoes that cannot be delivered on time this year. The inventory this quarter was $6.7bn , the same as the same period last year, but lower than market expectations of $7.65bn. Although the market demand is still strong, due to the continuous interruption of the supply chain, the lead time has been extended, and the inventory in transit has increased.

On the other hand, due to the surge in new crown cases, Vietnam imposed a lockdown (the latest news is at least until October 1st), resulting in the shutdown of factories and production, and Nike also lost 10 weeks of production time. More than half of Nike's footwear and approximately one-third of its apparel production is in Vietnam (approximately 51% of Asia's total production capacity). It is reported that in fiscal 2020, the Nike branded shoes produced by contract factories in Vietnam accounted for about 50% of its total sales, and nearly half (49%) of the US seaborne imports in the second quarter of this year came from Vietnam. In addition, clothing sellers usually start stocking clothing for the year-end holidays in the summer, and as orders accumulate, international freight is blocked, and supply chain issues may become more complicated.

The company stated in its financial report that it currently expects annual sales growth to reach about 5%, it had expected annual sales growth to be double-digit previously,. Due to factory closures, Nike expects revenue growth in the second quarter to be flat or slightly lower than the same period last year.

Transformation and outlook of future business

In a recent interview with the media, Michael Martin, vice president of Nike Mainland China, said that he hope to develop a more suitable digital business model in the Chinese market , because China’s consumer market is huge, digital consumption is very developed, the popularity of mobile shopping, the speed of supply chain operations, and logistics have all been at the forefront of the global market. Nike has realized the digital transformation of internal operations through the DTC strategy. Starting in 2016, Nike’s acquisition target has shifted from the sportswear brand to the digital field. It has successively acquired digital design company Virgin Mega, consumer data analysis companies Zodiac and Invertex, and forecasts Analysis company Celect. In recent years, Nike has successively launched SNKRS APP, Nike WeChat Mini Program, Nike shoe display platform Nike Adapt, Nike App, NRC (Nike Running Club) and NTC (Nike Trainning Club), etc., and to build Nike's digital product matrix. In addition, Nike has also entered Alibaba's Tmall and cooperated with Tmall directly. A series of actions show that Nike has gradually shifted from the original traditional business model to a new digital business model.

From 2016 to 2020, Nike’s digital channel business has been on a straight upward trend, and its share of Nike’s overall revenue is also getting higher and higher. Data shows that Nike’s digital channel business has grown by 82% in Q2 2020, accounting for 30% of total sales. It should be said that Nike's digital transformation in the Chinese market has achieved remarkable results, which will also become the focus of future business transformation and development.

Company profile

Nike (NKE.US) was founded in 1967 and is known for its iconic slogan "Just Do It". Nike is the world's leading sports goods manufacturer, committed to providing sports shoes, clothing, equipment and other products and related design and development services to consumers and distributors around the world. The company mainly sells products to retail customers through Nike's retail stores and Internet sites, as well as independent dealers and authorized dealers around the world. Nike has a series of brands, including Air Jordan, Nike Golf and Nike Pro, as well as Converse and Hurley International.