Nike falls amid supply chain hurdle warning

Yahoo Finance's Reggie Wade breaks down Nike's slump despite an earnings beat.

Video transcript

ZACK GUZMAN: I want to shift over though to another stock we are watching in today's session. And that's one that we tried to warn you about, at least one of our guests did, 10 days ago. Talking about a slowdown in supply chain operations for Nike due to COVID issues in Vietnam. And we're seeing the shares there slump after the company reported earnings. It still topped estimates, but we are seeing shares off by about 7%. It was revenue that came in slightly below forecast. $12.2 billion for the quarter. That was up 12% but shy of what the Street was expecting at $12.5 billion. Earnings stronger than expected.

But want to bring in Yahoo Finance's Reggie Wade because Reggie, you were there with me in the interview with BTIG and we were talking about the supply chain issue. So it is interesting to see the company come out and say that yeah, we got a problem here.

REGGIE WADE: Yeah, and there's really no hiding that. A rare miss from Nike. They don't miss much, but this was a miss, even though it was slight. They did however beat on adjusted earnings per share. But despite the lingering supply chain issues, Nike CEO John Donahoe remained confident on the Q1 conference call. He said, "Over the past 18 months, we've demonstrated our ability to manage through turbulence to emerge even stronger and better position and that's what we'll continue to do as we navigate through these current supply chain issues. We'll focus on what we can control, while leveraging the many levers at our disposal."

The supply chain constraints were put into further context by Nike CEO Matt Friend. During the conference call, he disclosed that the brand lost about 10 weeks of production since mid-July. And he also said that it normally takes about 40 days to move product from Asia to North America. Now that takes about 80 days. So this forced the company to lower its short-term outlook. Nike now expects that in fiscal year 2022 revenue will grow mid-single digits versus the prior expectations. And they will also have a guidance of lower double digit growth. In Q2 Nike also expects revenue growth to be flat, down low single digits versus the prior year.

But despite the rare miss, the swoosh brand's brass did point to their industry leading digital prowess and that was a bright spot. Nike direct sales were up $4.7 billion in the quarter, up 25% on a currency neutral basis. And Donahoe says that the brand's digital success is evident of their product innovation, brand strength, and their relationship with consumers. And one interesting note. On the call, Donahoe disclosed that the company does take into account when their customers miss out on certain sneaker drops. And today I hit on a pair of Nike Air Jordan Pollen One so I'm a very happy camper in that respect.

But on a serious note, Nike does have supply chain issues but the good news for them is that demand is through the roof. People don't want to stop buying sneakers. I don't want to stop buying sneakers. It's just about getting the sneakers on the shelves. So we'll see how they wade in these waters.

ZACK GUZMAN: Yeah, and that seems like the big concern here and why we're seeing shares down is because they laid out that they expect-- they don't expect to open facilities until October. So I mean, there are question marks I guess, around how bad it will get. And obviously, nobody knows how to answer that because it's COVID and we've seen that time and time again, forecasters out there try as they might, very difficult to really predict how these things are going to go.

And we talked about that too in that interview with BTIG, what 10 days ago, Reg, when we were talking about fair value here. He had $152 a share. Interesting to see that kind of playing out here in the session. You could say maybe the sell offs overdone. But we talked about their ability to kind of look outside Vietnam, maybe to some of these other factories. But under tight time constraints, pretty hard to pull that off.

REGGIE WADE: It is, especially for the upcoming holiday season. So that will be impacted. But it was discussed that Indonesia factories are now fully operational. And this is just something that Nike is just going to have to power through. But a lot of analysts out there, even though there have been some downgrades, think that the company can do this and we'll see. So a lot of this really comes down to what happens to the vaccination rates in Vietnam, that has lagged behind its neighbors. So only time will tell.