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Nike (NYSE: NKE) shares plunged on Friday, falling 6.2% after the company reported its first quarter results.
The fall was predictable. Plant closures in Vietnam and Indonesia due to COVID protocols forced the company to lower its forecast for the year, and it also warned that shipping times to North America had doubled, passing 40 days to 80 days due to container shortages, port delays and labor shortages.
The company lowered its revenue forecast for the full year from low double-digit growth to mid single-digit growth, and said revenue for the current quarter would be flat or below single digits as she was facing the impact of the factory closures.
However, for long-term investors, the massive sell-off looks like a buying opportunity. There are two main reasons why.
Image source: Nike.
Supply chain problems are temporary
Analysts largely reacted to the earnings report by lowering their stock price targets. It makes sense. After all, their models are based on Nike’s future financial results, and the company itself has said that revenues, and therefore profits, will be lower than expected.
However, in the long run, headwinds in the supply chain will almost certainly be unimportant. They currently occupy a big place in the financial media, but they will likely be forgotten in the next year or so. The COVID-19 pandemic will slow down considerably. Shipping delays will ease, and labor and container shortages should also be addressed. Nike said it expects supply issues to improve towards the end of the fiscal year.
It should also be remembered that Nike is not the only one to suffer this setback. This affects much of the global apparel and footwear industry, including peers like Lululemon Athletica and Adidas, who made similar comments. In other words, supply chain disruptions don’t disadvantage Nike – they impact its peers just as much. In fact, Nike believes it has an advantage over its competitors and that its leadership position has strengthened during the pandemic as its digital and direct business grows. Management has also not adjusted any of its spending plans for the year and still anticipates a significant increase in marketing spending, while its other multi-year investment plans remain on track.
Demand is higher than ever
Inventory shortages may strike Nike at the worst time – just as the holiday season approaches – but the business is performing as well as ever on the demand side. Revenue grew 16% in the quarter or 12% at constant currencies, and demand was particularly strong in its direct and digital channels, where sales grew 28% and 29% respectively. Digital sales have jumped even as sales in physical stores recovered from the pandemic.
Management said more than 65% of sales were made at full price, exceeding the company’s target. As supply constraints remain, the company expects markdowns to be lower than normal for the remainder of the year, and the company even plans to raise prices to below single digits over the course of the year. of the second half to account for part of the increased costs in the supply chain. If there was one weak point in the report, it was that wholesale revenues had only increased by 5%, but that was partly on purpose. The company is shifting its resources from wholesale to its direct-to-customer channel, and has deleted accounts with a number of “undifferentiated” retailers. The direct-to-consumer sales channel tends to offer higher gross margins and gives the business more control over the sales process.
On several occasions during the call for results, management said that demand was “incredibly high” and that part of the demand had not been met due to inventory issues.
Take advantage of Wall Street’s short-termism
Temporary supply chain issues aside, Nike’s business is booming. The sportswear giant is implementing its long-term strategy of expanding its direct and digital channels, and is on track to meet its goal of generating 40% of its revenue from digital sales held by 2025. Its growing membership base also supports this. growth.
Friday’s sale erased $ 15 billion from Nike’s market cap, a lot for a temporary headwind. Long-term investors may want to take advantage of the haircut and grab shares of a blue chip company operating at peak performance.
This article represents the opinion of the author, who may disagree with the “official†recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
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