The global production model that Nike pioneered – and prospered from — has come back to bite the company.
Continued chaos in the shipping industry has become a significant drag on the company’s profit margins, Nike officials said Monday as part of the company’s fourth-quarter earnings report.
“We’re paying about five times the rate that we paid pre-pandemic to put product in a container on a boat and move it from Asia to the U.S.,” said Matthew Friend, Nike chief financial officer. “That has a significant impact on our operation.”
It is now taking more than 80 days for a container full of Nike shoes and apparel to cross the Pacific Ocean from factories in Asia. That’s about two weeks longer than normal, Friend said.
By the end of the quarter, 65% of Nike’s total inventory was bogged down in transit, Friend said.
Nike officials offered the logistical details as part of its fourth-quarter earnings report. Despite the issues, the company’s total revenue and profitability topped analysts’ expectations.
Nike officials did not elaborate on how much precisely it is paying for shipping. But any company relying on the shipping business these days has felt the pinch. By some estimates, the average price to ship a 40-foot container from China to U.S. West Coast ports increased from $1,500 at the start of 2020 to over $20,000 in September 2021.
Shipping costs began to decline around the end of 2021. But as recently as early this year, it wasn’t unusual to pay $15,000 for a single container.
Strong consumer demand, complications connected with the pandemic and badly congested ports have all contributed to the price increases.
“Right at the end of the quarter, we did start to see a little bit of improvement vis-à-vis the boat backlog at the West Coast ports,” Friend said. “But at this point in time, given all the variables that we see there, we’re not planning for a significant improvement in transit times in fiscal ‘23.”
The globalized marketplace has hurt Nike’s recent results in other ways as well. China’s economy has been clobbered by the pandemic. Once one of the company’s fastest growing markets, China sales reached just $1.56 billion in its just-completed fourth quarter, a 19% decline from the same period a year ago.
Chinese leaders have implemented tough new travel restrictions on much of the country in hopes of slowing the spread of the virus.
The disruption hit more than 100 cities and 60% of Nike’s business, company officials said. Among the Nike facilities caught up in the lockdown was the company’s central logistics center.
Employees used their contacts in China’s shipping and transport business to return the logistics center to full capacity in three weeks.
“I want to acknowledge the Greater China team, who have managed the business through a challenging period for them and their families,” said Nike CEO John Donahoe. “I’ve said it before, and I’ll say it again, this team is the greatest collection of talent in the world, and I sincerely thank them.”
Nike officials said the company has opted to take some “obsolescence reserves,” in China, an acknowledgement that some inventory has lost much of its value. In this case, the scale of the reserves, which can reduce earnings, is unknown.
The global bad news was evident in the quarterly numbers. Nike’s fourth quarter sales hit $12.2 billion, a 1% decrease from the same period a year ago. The company earned $1.4 billion in the quarter, 90 cents per diluted share, a 3% decline from the same period last year.
For the year (Nike’s fiscal year ends on May 31,) the company earned $6 billion on total revenue of $46.7 billion. That revenue figure was a 5% increase from the prior 12 months.
Both the total revenue and profitability topped Wall Street expectations. The average estimate of 11 analysts surveyed by Zacks Investment Research was for quarterly earnings of 81 cents per share.
Nike released its earnings after the market closed. The stock closed at $110.50 a share, down 2.13% from the prior close.
Given all the financial headwinds, it could have been far worse. “Nike’s results this fiscal year are a testament to the unmatched strength of our brands and our deep connection with consumers,” Donahoe said.