Under Armour, Adidas suffer after China’s COVID lockdowns expose vulnerability in supply chain
Inflationary pressures and China’s COVID lockdowns combined to cast dark clouds over the outlook for athletic wear companies on Friday.
Under Armour missed its own quarterly revenue target, posted a slight loss weighed down by restructuring charges, and predicted profitability would not improve through the end of the current calendar year. Meanwhile Adidas, which typically enjoys strong years when the World Cup is held, no longer expects margins to expand in 2022 despite December’s soccer competition, hosted this time in Qatar.
Investors gave both stocks a drubbing, shaving 4% off of Adidas and vaporizing a quarter of the market cap of Under Armour, while punishing competitor Nike with a 3% decline for good measure.
Under Armour experienced a hit to its top line this past quarter in Asia Pacific owing to “inbound shipping delays driven by COVID-19 disruptions,” the company’s finance chief David Bergman said, referring to China’s worst outbreak since the pandemic began.
If one were to exclude this unexpected effect, the company would have met its target for a sales rate gain in the mid–single digits rather than the 3% it recorded, he noted during an earnings call on Friday.
“In addition we encountered restricted store hours and store closures in China due to COVID 19, which caused significant reductions in retail traffic,” he told investors.
In order to compete on cost, much of the athletic industry’s athletic footwear and apparel is produced in China, with some factories even serving numerous competitors. That means the whole sector can be affected when key port cities like Shanghai are placed under draconian lockdowns as a result of the central government’s zero-COVID policy.
Rather than risk a pileup of inventory that then needs to be cleared through warehouse liquidation sales, which can erode a brand’s image, Under Armour is choosing to cancel orders for footwear and apparel that would arrive too late to stores as a result of “disjointed” supply chains.
“It’s hard to get right stuff to right place at right time,” CEO Patrik Frisk conceded.
CFO Bergman said investors would have to wait until the following year before they could expect a material improvement, as temporary factors such as soaring ocean freight costs slowly worked their way through the income sheet.
‘Strong decline in traffic’
Shares in Under Armour plummeted 25% on Friday amid the glum outlook. The company warned gross margins would compress by 150 to 200 basis points over the 49.6% baseline for the new fiscal year that started in April.
The situation would only start to improve by the fourth quarter, which starts in January 2023, when a number of these temporary effects start to wash out of annual comparisons, the company said. Come next April, it expects the cloudy skies to dissipate.
“We’re definitely excited about launching into [fiscal] 2024,” Bergman said.
Shares in Adidas likewise came under pressure, falling nearly 4% in trading after it cut its full-year guidance to a gross margin target of 50.7%, in line with its 2021 level, versus the range of 51.5% to 52% previously seen.
Logistics constraints sliced off €400 million in quarterly revenue for the company, while margins narrowed owing to a “significant increase” in sourcing and freight costs.
“Due to the most recent widespread COVID-19–related lockdowns in China, which have led to a large number of store closures as well as strong traffic declines even in parts of the country not directly impacted, revenues in Greater China are now expected to decline significantly in 2022,“ Adidas said in a statement on Friday.
In March, Nike’s management largely dismissed concerns about the lockdowns when it reported its fiscal third-quarter results. Investors didn’t care, however, driving the stock down in sympathy.