By Thomas J. Ryan and Eric Smith

<span style="color: #ababab;">Adidas and Puma on Wednesday became the latest companies in the active lifestyle space to report that the coronavirus outbreak was taking its toll on results in 2020 while warning of further struggles if the epidemic isn’t soon contained.

Adidas said its business in the greater China area had dropped by about 85 percent year-on-year in the period since Chinese New Year on January 25. China accounted for 20 percent of Adidas’ sales in 2018.

Adidas said it has closed a “significant” amount of stores and is facing “pronounced traffic reduction” at locations remaining open. Lower shopper traffic, mainly in Japan and South Korea, is also being seen although Adidas, has not yet registered any “major business impact” beyond greater China.

“As the situation keeps evolving on a daily basis, the magnitude of the overall impact on our business for the full-year 2020 cannot be quantified reliably at this point in time,” Adidas said. More details will be provided when 2019 results are published on March 11.

Puma said that its first-quarter forecast earnings would be lower than analysts’ estimates as a result of disruption related to the spread of the virus, with roughly half of its mainland China stores temporarily closed.

“The business in China is currently heavily impacted due to the restrictions and safety measures implemented by the authorities,” said Bjørn Gulden, Puma’s CEO, in a company’s fourth-quarter results statement. “Business in other markets, especially in Asia, is suffering from lower numbers of Chinese tourists. Given the current uncertainty around the virus, it is, of course, impossible to forecast its impact on the business.”

From a revenue standpoint, the major impact so far has been in mainland China, where the outbreak, also called COVID-19, first started appearing in December. As of Wednesday morning, the total death toll from the outbreak was 2,102, of which only six deaths occurred outside of mainland China. Of the 75,282 confirmed cases, 74,188 have been confirmed in mainland China.

New cases in mainland China appear to be slowing, and Chinese health officials say data indicates the outbreak may have peaked more than two weeks ago. But with cases now having been detected in at least 27 countries, concerns of coronavirus becoming a broader global crisis remain.

Outside of China, the drop-off in Chinese tourism has led to profit warnings from a number of luxury companies, including Burberry; Kering, the owner of Gucci, Saint Laurent and Alexander McQueen; and Capri, the owner of Michael Kors, Versace and Jimmy Choo; as well as high-end outerwear labels, Canada Goose and Moncler. The investment bank Jefferies estimates that Chinese buyers accounted for 40 percent of the $305 billion spent on luxury goods globally last year and drove 80 percent of the past year’s sales growth in the sector.

The outbreak has also caused massive disruption across the supply chain as thousands of factories — already closed over the Chinese New Year  — have yet to reopen, bringing manufacturing to a near standstill. Restrictions on movement imposed by the government have impeded operations of manufacturers in provinces that are a key part of Chinese output: Jiangsu, Zhejiang, Guangdong and Shaoxing.

China is also the world’s largest textile producer and factories outside China may be forced to run idle due to raw material supply interruptions.

In a note on Monday, Baird analyst Jon Komp presented a slightly rosier update on the supply chain disruptions following more warnings in the preceding weeks.

“While details remain fluid, our contacts suggest footwear factories are starting to come back online (more expected in the next 1-to-2 weeks), matching some signs of slightly higher traffic congestion in certain cities (though still at low levels),” Komp wrote. “Still, many challenges related to staffing, component sourcing (we understand many of the upstream suppliers remain closed), and eventually transportation are preventing factories from committing to new order delivery dates at this time. Similarly, we note Chinese brands Anta and Xtep issued related warnings, with Xtep noting its internal production and all non-Hubei province stores should resume normal operations by the end of February.”

At last month’s Outdoor + Snow Show in Denver, CO, the coronavirus was in its infancy in terms of the direct impact on U.S. brands, but it had created plenty of buzz. The disruption to companies’ supply chains, in fact, ranked as the No. 1 takeaway in SGB Executive’s OR show recap.

Show attendees noted the virus’s biggest hindrance—canceling trips to China to meet with manufacturing partners, check on production, visit retailers or prospect for new business opportunities.

In fact, not only did brand executives say their upcoming trips to China were scrapped, but events had been canceled, including Snowsports Industries America’s third trade mission to the Mainland, scheduled for early March. Many airlines have stopped flying there, of course, but even when they resume, U.S. travelers likely will be cautious in their travel plans.

The impact could have been worse had it not been for the trade war, brand executives said. Many companies over the past year or so diversified their supply chains by moving some or all production out of China to avoid a tariff hit. Although it was a pain point, and large financial investment, when the moves happened, those companies now have at a slight advantage.

However, nearly everyone will feel the effects of the coronavirus because it’s hitting all links along the supply chain—sourcing, manufacturing, distribution, even retail sales.

“It’s brutal, to put it lightly,” Jon Frederick, country manager for Rab, told SGB Executive at the show. “We have canceled trips to check in on our factories. I’ll be in Europe for two weeks in March to meet with other country managers and look at first-round samples for Winter 2021 and second-round samples for Summer 2021, but we don’t think we’re going to have anything because a lot of stuff is being shut down. It’s going to have a massive impact.”

Many companies in the active lifestyle space have also issued statements or discussed the potential impact of the outbreak on conference calls. The following is a summation of the discussion.

»In a statement issued on February 7, VF Corp. said that at this time, about 60 percent of VF’s owned and partner stores in China have been temporarily closed due to coronavirus mitigation efforts. Stores currently open have experienced significant declines in retail traffic.

“The safety and well-being of our associates and partners in China is our highest priority. Our thoughts are with those people affected by the coronavirus,” said Steve Rendle, VF’s chairman, president and CEO. “While the coronavirus will impact our financial results in the Asia Pacific region in the near term, VF’s growth opportunity in China and across the Asia Pacific region is significant and the fundamentals of our business are strong. VF is well-positioned to navigate the impact of the coronavirus situation given the diversity of our business and operating model in other key geographies.”

VF said that in fiscal 2019, the Asia Pacific region and mainland China represented 12 percent and 6 percent, respectively, of total VF revenue. And while VF said it is not possible to gauge the impact to its supply chain at this point, approximately 16 percent of VF’s total cost of goods sold is sourced directly from mainland China, of which 7 percent is bound for the U.S. market.

VF will provide an update as to the operational and financial impacts of the coronavirus during VF’s fourth-quarter fiscal 2020 conference call in May 2020.

»Nike Inc. on February 4 said it expects the coronavirus outbreak to have a “material impact” on its operations in Greater China in the near term. At the time, half of Nike-owned stores had been temporarily closed, with “corresponding dynamics across its partner stores.” Stores remaining open were seeing reduced hours and experiencing lower-than-planned retail traffic.

On the positive side, Nike said it believes its “brand and business momentum with the Chinese consumer remains strong,” as reflected in the continued strength of its Nike digital commerce business.

John Donahoe, Nike’s president and CEO, said, “Despite this difficult situation, Nike’s long-term opportunity to continue to serve consumers in Greater China with inspiration and innovation remains exceedingly strong. At the same time, we continue to have an extraordinary brand and business momentum in all other geographies.”

Nike will provide an update on the operational and financial impacts on its Q3 earnings call that’s expected to occur on March 20.

»Tim Boyle, CEO, Columbia Sportswear Co., said on the company’s fourth-quarter earnings call on February 6 that the coronavirus is “having an immediate impact on our business in China, including the effects of store closures and lower store traffic at stores that remain open.”

“We’re also seeing an impact in regions and stores outside of China, due to lower tourism related to the outbreak,” he continued. “This has resulted in a challenging start to the year which will likely persist until normality returns to the region. At this point, it’s too early to forecast the regional and global financial impact on our business, including sourcing, production, and supply chain implications. Given the real-time nature of these developments, the potential financial impact related to this outbreak has not been factored into [our] 2020 financial outlook.”

»On its fourth-quarter conference call on February 11, Patrik Frisk, Under Armour’s president and CEO, said almost 600 branded Under Armour doors were currently closed in China due to the coronavirus outbreak. As a result, revenues in the APAC region are expected to be impacted by $50 to $60 million in the first quarter.

He added that with the situation featuring “several unknowns,” the company’s outlook doesn’t include further disruptions should the outbreak not be contained soon. Factory closures, attaining materials, shipment delays and the continuing impact on consumption were all cited as risks.

Said Frisk, “From a supply chain point of view, there could be challenges that develop from the material, factory, and logistics perspective. In materials, we are assessing possible impacts related to fabric, trim and package sourcing and potential delays and capacity challenges that could prove to be difficult in the second half of the year.

With respect to factories, we’re continuing to see closures, changing timelines of when they might reopen and trying to assess what it means for production fulfillment, capacity and the prioritization of which products to make. In logistics, we think it’s reasonable to expect industrywide delays in terms of delivery around the world, including potentially missed shipment and service windows and the need for increased air freight and additional measures at ports that could create unforeseen congestion.”

“Looking at the greater marketplace and how consumption, consumer behavior, and overall economic shifts could potentially play out is where it gets even more unclear with respect to duration and the possible levels of elevated inventories and promotional activities later in the year. In aggregate, we are evaluating each of these items individually and collectively to assess potential impacts and options to try to mitigate risks to the best extent possible.”

»Vista Outdoor Inc. CEO Chris Metz, on the company’s fiscal third-quarter earnings call on February 6, said the company is “tracking the virus and taking precautions to protect our employees and their families.” He also acknowledged the numerous travel advisories and travel restrictions in the region, but what comes of it from a supply chain issue remains unclear.

“We’re working with regional partners to understand working conditions and impacts on production and overall commerce,” Metz said. “China is a hub for many products in our Outdoor Products segment, and we are diligently tracking the situation to assess the impact on our operations. At this point, it is too early to fully understand the ongoing impacts on our businesses.”

»Canada Goose Holdings Inc. expects its fiscal fourth-quarter earnings to suffer, CEO Dani Reiss said on the company’s February 7 conference call with analysts.

“As it is to everyone in the luxury industry, this is obviously a major near term headwind,” Reiss said. “Understandably, people are staying at home and avoiding shopping for their own health and safety in China and abroad. So we’re seeing the impact in our stores, on TMall in China and also in stores located in major international shopping destinations in Europe and North America, due to extensive flight cancellations and travel restrictions.”

That near-term headwind will wreak havoc on Canada Goose’s fiscal fourth quarter, which ends March 29, and, of course, on its fiscal year. The company last week updated its guidance for the quarter and year. Click here to read more about the company’s downward revision.

»On its fourth-quarter conference call on February 10, Roberto Eggs, Moncler’s chief marketing and operating officer, said the company had a “very good start of the year” until January 24, when the Chinese government stepped up its response to the outbreak by closing some malls. Moncler has seen “immediately a very strong impact in Hong Kong, Macau, Singapore and China” and one-third of its store base in China, or 14 stores, were closed. The ones remaining open have seen traffic declines around 80 percent.  In Korea, five duty-free shops were closed due to a decision by the department store operator. A “strong decrease” in Chinese tourist traffic has been seen in Korea, Japan, Australia and Singapore.

Luciano Sintel, Moncler’s chief corporate and supply officer, added that the “situation is critical” and the company is looking for ways to “reduce and/or postpone some expenses and some investments, in order to protect our margins,” including seeking out rent reductions in affected regions and re-exploring cap-ex plans. Said Santel, “We are giving priority to some projects that we believe are essential for the brand first and for the business.”

»On its quarterly conference call on February 7, John Vandemore, Skechers USA’s CFO, said the company’s full-year guidance incorporates an initial estimate of the impact to the Coronavirus outbreak in China, including a significant number of temporary store closures. Those that have remained open were “seeing significantly below average traffic and comparable-store sales patterns.” If the severity of the situation in China worsens and impacts the businesses outside of China or the company’s global supply chain, the guidance would change.

“We are planning China down for this quarter,” said Vandemore. “We’ve taken a fairly severe look at February and parts of March. How that unfolds really is to be determined. But it’s really the strength of all of our other business segments that aren’t being directly impacted by the situation right now which is powering our guidance.”

He said the outbreak won’t impact Skechers’ long-term view of strong growth potential in China. Vandemore said, “We view this as a temporary situation, and that is informed by both the success that we saw coming out of Q4. Q4 in China was a very solid growth quarter. The business did well on Single’s Day and did well on 12.12. So, we’re still seeing the brand resonate and grow with consumers. Part of our strategy over the next few years will certainly be incorporating more Tier three, four and five cities into the mix. The reception we’ve seen so far has been extremely strong. I think this is probably, at worse, the temporary setback and we’ll continue to grow the brand that way.”

»On his company’s conference call on February 14, Matt Reintjes, Yeti’s president and CEO, said he doesn’t expect the coronavirus outbreak to impact Yeti’s first-half outlook but the company is watching the situation closely. Said Reintjes, ”We are actioning multiple levers to help mitigate future risk of supply disruptions in the event there is a prolonged delay due to factory and logistics start-up. Similar to our approach last year with tariffs, we’re working a plan.”

He noted that the company has a team on the ground in China that’s working closely with factory partners as they work to come back online. Yeti plans to leverage existing work-in-progress inventory in production scheduling to optimize available assortment. Said Reintjes, “One of the advantages in addition to having some inventory is that we also have work in progress in those factories so factories aren’t fully starting cold.”

Expedited shipping options will also be explored for specific product should production delays continue. Reintjes said, “There are expedited opportunities on the water, and there are expedited opportunities in the air. And as we build our plan, we contemplate some of those contingencies.”

»Anta Sports Products, China’s largest sportswear brand by sales, said in a regulatory filing on February 16 that its results “will inevitably be affected by the epidemic in the first half of 2020” and it “expects the recovery will come in the second half of 2020 at the soonest.”

Roughly 40 percent of the company’s stores in mainland China have re-opened, according to the filing. The company’s in house factories suspended their operation for two weeks in accordance with government regulations after the Lunar New Year holidays, and will gradually resume operation next week. However, due to limited transportation, some employees in the affected provinces and cities, especially those in the Hubei region, are still unable to return to work. Anta said in a press release, “As a result, the productivity of the Group’s in house factories could not achieve a normal level and it is expected to take certain time to resume operation. However, it is estimated that the impact of the government’s measures on the epidemic could be temporary, and the Group primarily relies on outsource production.”

Anta noted that according to its the Interim Report 2019, self-produced footwear and apparel products of the Anta brand accounted for 34.4 percent and 11.9 percent of total quantities, respectively.

»Callaway Golf Co.’s supply chain has been significantly disrupted by the coronavirus, company executives said on the company’s February 10 fourth-quarter earnings call. Callaway lowered its outlook for 2020 because the coronavirus is “estimated to have a negative impact of $25 million on sales [into China] and $13 million on EBITDA” for the year, according to CFO Brian Lynch.

“But that represents the best-case scenario for Callaway, said CEO Chip Brewer. That’s because the company shifted some of its manufacturing out of China due to the trade war. Had the pandemic struck, say, a few months earlier, the disruption would’ve been exacerbated.

“It would have been worse for Callaway Golf and perhaps for China, quite frankly, if it [the coronavirus] happened earlier,” Brewer said. “So we’re in a relatively good position from that perspective. And we’re just working out how the factories get up and running after the markets start to open up, which it sounds like they’re starting to go through that process.”

Photo uploaded to social media on January 25, 2020, by the Central Hospital of Wuhan showing medical staff holding Chinese Lunar New Year signs in Wuhan, China. The Central Hospital of Wuhan via Weibo via Reuters