Is Nike Ready for the Busy Holiday Season Given Its Supply Chain Issues?

What might have helped Nike (NKE 0.23%) in good times, such as exposure to fast-growing regions like China, is now hurting the company as it faces supply chain issues worldwide. In this video clip from "Beat & Raise," recorded on Sept. 24, Fool.com contributors Neil Patel, Brian Withers, and Demitri Kalogeropoulos review how Nike is handling its current inventory challenges amid competition from retailers like Lululemon (LULU 1.16%). 

Neil Patel: Something that's pretty eye-opening to look at for these companies that sell physical products is look at the revenue trend and look at the growth and inventory. If you look at inventory and revenue for Nike, revenue was up almost 16 percent year-over-year but their inventory balance is flat during that time. A big question mark I'm sure on investors minds is, how is Nike going to prepare for a busy holiday season? This is a warning sign for that where, they can't figure out their production issues, their shipping issues, they're not going to be ready for the holiday season.

Something that really stood out was Vietnam, which is having, you here read about all over the news which is where a lot of production is done, 50 percent of Nike is where it's produced in Vietnam, and 30 percent of their apparel is produced in that country. Nike mentioned 10 weeks of production delays which is going to continue. The company doesn't expect inventory levels to normalize until fiscal 2023, so next summer. Again, a big question mark is, how is the company going to handle holiday shopping season? I guess one positive about having shortage of inventory is they didn't have to resort to markdowns as much, so the gross margin was up 170 basis points to 46.5 percent in the most recent quarter. I just want to mention another company that reported recently is Lululemon. With Lululemon they raised their guidance and they also expected inventory issues, but it's kind of amazing to see Nike position in its global leader for so long it's having issues that smaller players and Lululemon also sources from the same part of the world. But I guess it's hitting Nike a lot more. The market didn't like the news and you see the stock down six percent.

Brian Withers: Yeah, I think the big challenge with Nike versus Lululemon is Lululemon only has like 525 stores and their digital outlets. Nike, [laughs] I don't even know how many places Nike, I want to say the last Investor Day that I looked at, that they sell in like 40,000 locations around the world. I mean, it's at least a 100 it's not quite a 100 times more than Lululemon but certainly significant more. The other thing that people might not know about Nike, and I've been watching this number and it's gone up quite a bit is the amount of sales outside of the United States. I don't know whether this is because growth is slowing in the US or not, but only 40 percent of their revenue comes from North America.

Patel: Yeah, that's, I think that part of that is they've been selling in this country and it just be a mature market, US and Canada, and you do think of Nike as a global brand, and that's exactly to your point, Brian, majority of their sales are outside of North America. That's in stark contrast to Lululemon who has the majority of their sales in North America. While that might help Nike in good times, they can get exposure to fast-growing regions like China, but then when there's supply chain issues like right now, it hurts them. I think if I remember correctly, management mentioned that the time to ship goods from Southeast Asia to the US has doubled. It's about, I think they said 80 days to ship product from Vietnam to the US because of all the issues right now. They not only have production delays they have to deal with, but once they do get product made, they get through shoes and clothing made, shipping it is a whole another issue. I mean, their supply chain is in a big problem right now.

Withers: Go ahead, Demitri.

Demitri Kalogeropoulos: I was surprised too like Neil because I had they covered in Lululemon report last couple of weeks ago. It's [inaudible 03:37:51] to see the difference there between obviously, a much smaller company. But reading through their conference call today, some bells went off about that Lululemon competition too. Nike was highlighting the fact that their yoga business is up almost 400 percent in the last two years, so that's clearly something they're targeting too. Then within the same breadth, they're talking about sports bras, which they're the number 1 leader in that, and Lululemon executives that we're talking about that, that was a big point of them. They're targeting sports bra leadership and they think they can earn some new market share there. It looks like there's definitely going to be some increase in competition between these two guys.