Cowen reduced its estimates and price targets for Nike, Adidas and Puma due to concerns over the fallout from the Russia/Ukraine war, including the impact on its EMEA businesses and heightened inflationary and supply chain pressures.
“Our contacts across the supply chain see stress in commodity inflation (oil-based polyester materials), cotton and freight (air and ocean),” wrote John Kernan on March 8. “Order cancelations in Europe are beginning.”
The analyst wrote that guidance calling for supply chain pressures to ease in the second half is now “likely unrealistic.”
Ocean freight rates are down from the record highs of mid-2021 but remain elevated and lapping much lower rates from a year ago. Current freight rates are in excess of $10,000 per container from Shanghai to Los Angeles and are running higher than the $1,000 to $1,500 cost before the pandemic.
“As it relates to the U.S., port congestion is still a concern, and many shipping operators continue to expect headwinds through all of 2022,” wrote Kernan. “Anecdotally though, dwell times at the ports have started to tick downward, and ships waiting to unload cargo remain below recent highs.”
From a materials perspective, cotton is seeing prices “reach ever-higher levels.” Cotton has been above $1 per pound for most of the prior six months and is currently hovering near $1.25 per pound, marking decade-long highs.
Oil prices are at decade highs and will pressure polyester-based unit costs. The analyst wrote that prices for both WTI and Brent crude futures are eclipsing levels not seen since September 2008. Kernan wrote, “Though it might be intuitive that prices do not sustain at these levels given historical supply/demand dynamics. That said, price levels for synthetic fibers will be under pressure, as will the discretionary spending of retail consumers.”
While air freight usage may decline as inventory flows normalize, the remaining headwinds do not have a perceivable catalyst for moderation.
Wrote Kernan, “Sector consensus gross margin estimates seem unrealistic into FY23.”
Cowen downwardly adjusted its models due to FX challenges, EMEA exposure to Russia/Ukraine, recent commentary from China, and potential for further geopolitical risk. EPS estimates for Nike, Adidas and Puma were lowered below consensus by roughly 12 percent, 11 percent, and 16 percent, respectively. Cowen reduced its price target on Adidas to €222.00 from €256.00; Nike to $144.00 from $192.00; and Puma to €86.00 from €96.00.
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