Nike could lose production of 160 million pairs of shoes due to COVID in Vietnam

Nike Inc. stock slipped 2.7% in Monday trading after the athletic giant was downgraded to neutral from buy at BTIG based on supply chain challenges in Vietnam.

Nike announced in July that manufacturing in Vietnam had ground to a halt due to COVID-19, which was spreading through facilities and communities.

Since then, other companies, including Yeti Inc. YETI,  -0.69% , Adidas AG ADS,  -0.54%  and RH RH,  +0.93%  have cited the halts in Vietnam as part of the supply chain challenges they face moving into the holiday shopping season.

BTIG analysts led by Camilo Lyon say the impact to Nike could be felt as far into the future as spring 2022.

“We believe the risk of significant cancellations beginning this holiday and running
through at least next spring has risen materially for Nike as it is now facing at least two months of virtually no unit production at its Vietnamese factories which accounted for 51% of footwear and 30% of apparel units (43% of total units) last year,” analysts wrote in the note.

BTIG estimates that Nike has lost 40 million pairs of shoes a month to the production halt, or 80 million pairs total.

“We assume another ~4 months worth of 50% production capacity for a total of 160 million pairs potentially not made this year,” the note said. “This compares to an estimated 350 million that were made last year in Vietnam.”

Facilities are expected to come back online on Wednesday after nine weeks of shutdowns, according to BTIG. Initially, the halt was meant to last two weeks.

Even when facilities switch on again, analysts anticipate a slowdown due to social distancing and the time it takes to ramp production back up. Analysts forecast a five- to six-month period before factories are back to normal, including eight weeks to work through the backlog.

“By our math, we now assume footwear unit growth could be down -13% partially offset by +3% pricing. Given the complexity around footwear manufacturing (versus ease of apparel), we do not believe Nike can shift production elsewhere to recover the lost units,” the note said.

Though Nike has been focused on its direct-to-consumer business, retailers like Foot Locker Inc. FL,  -3.33%  and Dick’s Sporting Goods Inc. DKS,  -1.29%  are still significant partners. Shares of both slipped after the downgrade, down 2.7% and 1.7%, respectively.

Under Armour Inc. UA,  -2.91%  UAA,  -4.15%  and Hoka, a Deckers Outdoor Corp. brand DECK,  +0.70% , could also be affected. Shares of Under Armour slipped 4.4% in Monday trading and Deckers stock edged up 0.6%.

“Among our coverage, Steve Madden Inc.’s SHOO,  -1.31%  shift of 50% of its manufacturing to Mexico/Brazil earlier this year is looking particularly prescient as it appears to be averting many of these incremental supply chain issues that have gotten worse in the last three months,” a separate note said.

Steve Madden stock was down 1.3% on Monday.

“[O]ver its history, Nike’s stock has been most tightly correlated with sales growth, so with growing evidence that sales will likely stall, we believe Nike’s stock will
at best tread water until more clarity is had around its manufacturing issues, and at
worst suffer from reduced sales guidance and ensuing multiple compression,” BTIG wrote in its downgrade.

“While Nike typically is incredibly well-equipped to manage such disruptions, we fear this issue is just too large to control, even for the best-run athletic brand in the world.”

Nike stock has run up 12.5% for the year to date, in line with the benchmark Dow Jones Industrial Average DJIA,  +0.76% , which has gained 13.7% for the period.