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Last Thursday, Nike reported earnings.
The sneaker and apparel company’s profit numbers appeared fine on the surface. Nike topped earnings per share (EPS) expectations with a $1.16 figure. This number beat Wall Street consensus by five cents.
But the company slipped on revenue, which came in at $12.25 billion. Wall Street wanted to see at least $12.46 billion.
Shares fell more than 6% on Friday.
What went wrong?
A serious challenge that I expect will hit many companies as earnings season begins in October: supply chain congestion.
Think back to the start of the pandemic.
Do you remember the rush on toilet paper? Did you buy as many canisters of pepper as you could fit in your hands? Were you wiping down UPS packages that contained boxes of gluten-free pasta (because that was the only pasta available)?
Do you still have an outrageous amount of soup cans in your pantry? (You might want to check them, because they likely expire soon.)
Everyone has their crazy pandemic purchase story. (If you want to share yours, I’d love to hear it — please, email me.)
There are great stories out there about people hoarding everything from Grape-Nuts cereal to 50-pound bags of flour.
Food supply chains faced some pain, with short-term shortages here and there, but they held up surprisingly well.
Here’s the thing. The challenges for supply chains in 2020 are now starting to have a dramatic impact on our ability to bring products to market today.
You see, last year, when companies faced depressed demand, they cut their expected orders for 2021. Suppliers of everything from semiconductors to rubber tires had to change their business plans as well. They reallocated their business elsewhere.
In the case of auto semiconductor suppliers, they turned their attention to rejiggering their manufacturing centers for chips in cell phones, personal computers, and televisions. After all, these industries didn’t face crunches in demand as people began working from home and watching more Netflix.
But the economy recovered a lot faster than most economists and companies had expected. As a result, a scramble ensued, and a bidding war started across the supply chains to access raw materials.
We started to see an incredible shortage of automobiles as too many manufacturers faced a scarcity of semiconductor chips, headrests, plastics, and other supplies.
But Nike’s earnings call was eye-opening. The company is facing long lead times, higher shipping costs, shortages of labor, and even production shutdowns in Vietnam due to the government’s efforts to control COVID-19.
Nike warned this week that it had lost 10 weeks of production, and it could take months to ramp back up. Then it must get products shipped to the U.S.
According to the company’s chief financial officer, Matthew Friend, it now takes the company an average of 80 days to move products from Asian manufacturing facilities to North America.
Friend says this figure is double pre-pandemic transit times.
And despite all the concerns about product delays, demand has remained steady for shoes and workout apparel, the company says.
Without a drop in demand, we will see greater competition among retailers for products and the possibility of inventory shortages at stores across America.
We are in Inning Four of this Supply Chain Crunch
It appears that we’re still at the onset of this crunch. But, heading into the fall, it won’t just be shoes that could face another supply shortage.
We’ve also seen shortages of chicken wings, beer, and snack products. I don’t know about you, but I’m already worried about my Super Bowl party — and planning to stock up early.
And Costco Wholesalers has warned this week that it is struggling to get toilet paper filled. According to Burt Flickinger of Strategic Resource Group, roughly 60% of paper product orders from American retailers have been shipped successfully this week.
Costco also recently announced that it saw similar shipping delays to what Nike has experienced. For example, the company says that furniture delays have doubled.
To address its supply problems, Costco is buying as many products as possible, particularly those it expects to be in high demand around the Christmas season. These include toys, computers, tablets, and video games.
The company has gone so far as to rent its own ships to deliver products to North America. Not every company can afford this, so a lot of smaller retailers could see the most pain and largest shortages as the months progress.
Seriously. Costco leased several thousand containers and chartered three ships to move products. Those ships will make at least 10 deliveries in 2022.
And that’s just getting products to the ports.
Keep in mind that we still face a shortage of commercial drivers across the country to deliver products. Even before the pandemic, the U.S. supply chain was short at least 60,000 drivers, according to the American Trucking Associations.
That figure could swell to 100,000 by the start of 2023, the same group says.
An acceleration in this trend will be something we are going to monitor all fall. But, more importantly, we will start to talk about stocks that could benefit — particularly in the sea shipping and air shipping space. I’ll talk tomorrow about one way to benefit from this trend.