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24 Sep 2021
First Take: JD Sports Fashion - NIKE misses on Q1
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First Take: JD Sports Fashion - NIKE misses on Q1
JD Sports Fashion Plc (JD:LON) | 117 -4.2 (-3.0%) | Mkt Cap: 6,062m
- Published:
24 Sep 2021 -
Author:
Ben Hunt, CFA | Kate Calvert -
Pages:
4
Short term supply issues to impact Nike in Q2 and Q3
NIKE (N/R) reported Q1 revenues +16% to $12.2bn (+12% constant FX) versus FactSet consensus of $12.47bn, falling short in US and EMEA specifically. NIKE digital grew 25% with owned stores +24% and wholesale +5%. The reason for the shortfall was production issues in Vietnam and Indonesia. NIKE lost 10 week of production in Vietnam, with the lockdown recently extended to 1 October. Indonesia has reopened. In addition, product from Asia is taking 80 days to deliver, twice as long as normal, resulting in lost sales. NIKE sources over half of its footwear and a third of its apparel from Vietnam.
Supply chain issues and longer delivery lead times in North America and EMEA are expected to impact its Q2, with NIKE Group guidance now for flat revenue growth YoY. The impact of lost production is expected to be greatest in North America in Q3. China, with shorter lead times, is likely to feel the impact in Q2. For the rest of FY22, NIKE’s management expects strong marketplace demand to exceed available supply and that availability should improve heading into FY23.
For JD Sports, supply constraints are a short term headache & should not impact its exciting longer term growth story
JD Sports reported 1H results just last week. JD management would have been aware of the current supply situation and clearly stated the current challenges in the market are ‘manageable.’ Supporting this, in our view, NIKE management commented ‘we continue to see strong growth in our differentiated (wholesale) partners’. When asked about how product would be allocated between D2C and wholesale, NIKE management said they were ‘going to continue to focus on prioritizing our product availability for those locations where the consumer is shopping, and that will continue to be within NIKE's own channels and our most strategic wholesale partners.’ Indeed, NIKE management also stated ‘supply-related reductions will likely trigger an even greater acceleration in the transformation of the marketplace towards NIKE and our most important wholesale partners.’ We believe this is supportive for our positive investment thesis on JD Sports.
Another positive for JD is that the industry pricing environment is expected to remains favourable. The shortage of product does mean H1’s benign promotional environment is expected to continue into H2, resulting in strong full price sales which should support a strong gross margin. In addition, NIKE has put through a low-single digit price rises in 2H.