Supply Chain Disruption Raises Concerns On Q2 Analyst Calls

Most vendors in the active lifestyle space reported better-than-expected second-quarter results and raised their 2021 guidance as demand remained resilient. However, supply chain concerns, marked by continued port congestion and recent factory shutdowns in Vietnam that could limit second-half growth, were widely discussed on recent quarterly calls with analysts from VF Corp., Columbia Sportswear, Deckers Brands, Inc., Under Armour, Vista Outdoor, Yeti, Skechers USA, and Wolverine Worldwide. 

»VF Corp. Sees $35 Million In Incremental Air Freight Costs In 2021
VF Corp. officials, on its July 30 first-quarter call, indicated the supply chain continued to be impacted by port delays, equipment availability and other logistic challenges.

“Essentially, every link in the supply chain has been impacted to varying degrees over the last 18 months,” Matt Puckett, CFO, told analysts. “And while we’re not immune to this, we believe we’ve managed these challenges relatively better than most. Our teams remain focused on delivering the products to satisfy increasing demand signals in the most cost-effective and efficient way.”

Some mitigation steps include using air freight, other means of expedited shipping and dual sourcing where appropriate. Puckett added, “While we remain confident in our ability to service our strong growth plan, there are financial implications to these actions. For example, we expect to spend more than $35 million in incremental expedited freight charges relative to fiscal 2020. We view our supply chain as a key competitive advantage of VF, and our teams are proving this now more than ever.”

VF Corp. raised the outlook for its fiscal year after reporting results in the first quarter ended June 30 came in well ahead of expectations, helped by signs of recovery at Vans and continued strength in digital.

Revenue is now expected to be at least $12.0 billion, reflecting at least 30 percent growth; this compares to the previous expectation of approximately $11.8 billion, reflecting growth of roughly 28 percent. 

Adjusted EPS is expected to be at least $3.20 compared to the previous expectation of approximately $3.05.

»Adidas Identifies Steps To Mitigate Vietnam Shutdowns
On its second-quarter conference call on August 5, Adidas chief executive Kasper Rorsted said that since July, Adidas’ sourcing network was by disrupted due to a surge in COVID-19 infections in southeast Asia. The most impacted country is Vietnam, where the government mandated large-scale factory lockdowns. AS result, the vast majority of supplier factory capacity in Vietnam has been unavailable since the middle of July, with current restrictions at the time expected to last until August 15.

Rorsted said Adidas has identified five key actions to mitigate the impact from the shutdowns in Vietnam, including re-allocating production to other regions, securing additional production capacity, and selectively utilizing air freight. At the time, Rorsted said Adidas was able to secure additional capacity for 30 million pieces, particularly for high-priced products, that it planned to delivery by airfreight.

The fourth key action is prioritizing key campaigns and product launches as essential to continue driving top line and brand momentum and finally, re-deploying existing market inventory.

“We remain optimistic the disruption will only be temporary, and our mitigation efforts will help us to reduce the overall impact,” said Rorsted. “We expect the current situation to start improving later this month, leading to a largely operational sourcing network at the end of the third quarter. And while the current interruptions will have a negative impact on our business in the second half, as we’ll not be able to fully cater to the strong demand for our product, the expected impact is already built in to our full-year guidance.”

The Vietnam shutdowns added to existing supply challenges, including significant capacity reduction in both vessels and containers that has led to a hike in freight rates. The capacity reduction is to an imbalance caused by the drop in demand in first half of 2020. Significant production reduction at the ports due to the health and safety measures have also led to congestion in key markets such as U.S. West Coast and UK and Europe, causing additional delays.

Rorsted said, “These challenges have been leading to significant delays and additional logistics costs, particularly as we’ve been making more use of airfreight.”

Overall, external factors – also including pandemic-related lockdowns in certain countries, as well as the impact from the geopolitical situation in China related to a number of Western companies’ stance on Xinjiang cotton – is believed to have reduced sales by more than €500 million in the first half current guidance accounts for a similar negative impact on sales in the second half.

Adidas still increased its outlook for the year as its business recovers nicely outside of Greater China due to strong demand. The company now expects currency-neutral sales to increase at a rate of up to 20 percent year-over-year in 2021, driven by strength in double-digit improvements in all markets. Previously, Adidas expected sales growth at a high-teens rate in 2021. Net income from continuing operations is now projected to increase to a level of between €1.4 billion and €1.5 billion, up from €1.25 billion to €1.45 billion previously.

»Columbia Sportswear Warns Of Higher Ocean Freight Costs
Columbia Sportswear said it now expects $40 million in incremental ocean freight costs not figured into its prior outlook as related rates have increased “dramatically over the past 60 days.”

Tim Boyle, chairman, president and CEO, said on its second-quarter call on August 3 that Columbia was prioritizing “supply chain continuity and market share gains over costs.”

Supply chain challenges are also leading to three to four-week delays in the timing of inventory receipts to support fall wholesale orders. Inventories exited the quarter down 16 percent year-over-year.

Nonetheless, Columbia raised its full-year outlook due to better than expected second-quarter results. Sales for 2021 are expected in the range of 25 percent to 26.5 percent, up from 21.5 percent to 23 percent previously. EPS is now expected in the range of $4.30 to $4.55 from previous guidance in the range of $4.05 to $4.30.

Columbia Sportswear’s sales in the second quarter were 8 percent above Q219 levels due to better than planned performance in its U.S. wholesale and direct-to-consumer brick-and-mortar businesses. Boyle said, “These record results were achieved despite ongoing pandemic-related disruptions. Industrywide supply chain disruptions are causing production and delivery delays as well as shipping cost pressures. Ongoing periodic lockdowns and temporary store closures also impact DTC, wholesale and brick and mortar store performance in several international markets. Thanks to the tremendous efforts of our dedicated global workforce, we were able to overcome these disruptions to achieve record sales results.” 

»Deckers Pulls Ugg Shipments Forward
Deckers Brands, Inc., in its fiscal first quarter ended June 30, shipped Ugg product earlier than the prior year to mitigate ongoing macro supply chain pressure, helping refill depleted domestic inventories from record product sell-throughs. The move helped drive Ugg’s global sales ahead 71 percent in the quarter.

Dave Powers, CEO, said on Deckers’ July 29 call, “The strength of global Ugg wholesale resulted from the brand’s marketplace management strategies that left Ugg with unusually lean inventories entering the year. This positioned Ugg to accelerate some would-be-fall shipments, helping avoid anticipated bottlenecks in the supply chain and providing the brand with an opportunity to meet in-store consumer demand.”

Deckers ended the quarter with inventory up 5 percent a year ago. Higher-than-expected logistics costs pressured margins for the rest of its fiscal year but were offset by expected delays in the pace of hiring due to the tight labor markets and marketing spend efficiencies.

Steven Fasching, CFO, said, “While disruption in the supply chain persists across the industry, we are working hard to mitigate impacts on our brands, including working with factories to prioritize certain products to ensure timely marketplace entry; planning greater D.C. bypass; collaborating with wholesale partners to get product onto shelves more quickly; utilizing air freight where necessary to maintain strategic product launches; and optimizing distribution center workflow to support peak season DTC shipments.” 

»Under Armour’s Inventories Decline 26 Percent 
Under Armour Inc. significantly raised its full-year guidance due to better-than-expected second-quarter results and despite inventory challenges. Under Armour’s inventory at the close of the second quarter was down 26 percent, partly due to internal steps to drive inventory efficiencies and tighten inventories in the marketplace to elevate demand. 

However, the lower inventory levels also reflected inbound shipping delays due to COVID-19-related supply chain pressures that could impact order deliveries. Dave Bergman, CFO, said on Under Armour’s August 4 call, “We see a few delays in some of our products, and that could lead to some cancellations here and there and other pressure points.”

About a third of its product comes from Vietnam, particularly impacted by factory shutdowns tied to rising COVID-19 rates. Under Armour has also faced port congestions and container availability issues.

Patrik Frisk, president and CEO, expects a balanced sourcing network, including a presence in Europe, the Middle East, South America, and Latin America, to help mitigate supply chain pressures primarily focused in the Far East. He said, “Agility here and a well-balanced sourcing platform probably puts us in a better position than most, but it’s going to be a developing situation.”

Updated guidance calls for revenue to be up at a low-20s percentage rate compared to the previous expectation of a high-teens percentage rate increase, reflecting a low-20s percentage growth rate in North America and a mid-30s percentage growth rate in its international business.

»Vista Outdoor Still Sees Demand Outstrip Supply
Vista Outdoor said on its July 29 first-quarter conference call that it anticipated elevated ocean freight costs in the second half as container prices rise. The increased use of airfreight is also planned where it makes sense to reduce lead times to consumers and alleviate pressure in the supply chain bottlenecks. The supply chain challenges have impacted its Shooting Sports and Outdoor segments.

Vista also faces higher commodity costs year-over-year in its U.S. manufacturing businesses and higher labor costs. 

The company still delivered a bullish outlook after reporting its fourth consecutive quarter of record performance. Sales growth of about 25 percent is expected for the current second quarter followed by growth in the range of 15 percent to 20 percent in the second half. Strong earnings were also expected for the current quarter and above-plan EBITDA for the back half.

On the call with analysts, Chris Metz, CEO, said Vista’s team is scrambling to offset widespread supply chain disruption to meet healthy demand. He added, “Consumer demand for our product has not slowed during the summer. It’s accelerated. Simply put, we cannot meet the current level of consumer demand. We’re fortunate to have a world-class supply chain, Center of Excellence, supporting our businesses. It has been a collaborative, all-hands-on-deck moment for our company, pooling resources and leveraging our scale to overcome many challenges. And despite the headwinds, we got more than our fair share and delivered a strong quarter, and our outlook is bright.”

»Yeti Faces Vietnam Factory Shutdown
On its August 5 second-quarter call, Matt Reintjes, Yeti’s president and CEO, said recent government-mandated shutdowns led to the temporary closure of one of its soft cooler suppliers in Vietnam due to the ongoing impacts from COVID-19; however, Yeti still raised earnings and sales guidance for the year due to strong second-quarter results and mitigation efforts.

Reintjes stated, “Our prior work to drive supplier redundancy in key product areas helps our ability to absorb this type of temporary disruption. The shutdown does underscore the inherent volatility that lingers globally. As evidenced by our results and updated outlook, we’re managing this overall backdrop well and will continue to tighten our grip on what we can directly control. We remain focused on servicing the tremendous momentum heading into the balance of this year to ensure we drive growth this year and beyond.”

Sales in the second quarter climbed 44.9 percent. Yeti also faced other logistics-driven cost and transportation pressures in the second quarter. 

Ongoing inventory constraints limited hard cooler growth, and overall inventories ended the quarter slightly below plan given the better-than-expected top-line results. Reintjes said, “Inventory levels are expected to build significantly year-over-year during the next two quarters as we continue to focus on replenishing our channels to meet demand and look to mitigate potential supply chain disruptions.” 

»Skechers Projects Minimal Impact From Vietnam Shutdowns
Skechers USA more than doubled second-quarter sales versus the year-ago comp quarter and posted sales growth of more than 30 percent versus 2019 results. The ramped-up production coming out of the pandemic limited more significant gains.

.John Vandemore, CFO, said on a July 22 call, “Truth be known, we certainly could have sold more had we gotten it here. It was a very difficult transition from slowing down through the pandemic and then having this explosive consumer purchasing program that’s going on. I think we managed it very well.”

Vandemore said Skechers was able to bring in more goods in the quarter than in 2019 despite the supply chain issues.

The CFO added that he did not expect Skechers to be impacted by the temporary factory closures in Vietnam as long as the closures were for a limited time. He also noted that the shutdowns largely impacted Southern Vietnam and would be a more significant issue for Skechers if production across the country was impacted. Said Vandemore, “Right now, we seem to be doing as well as anyone. We’re bringing in, and we’re meeting our shipping, but it certainly could be faster.”

For fiscal year 2021, Skechers said it expects to achieve sales between $6.15 billion and $6.25 billion and EPS between $2.55 and $2.65. Previously, Skechers had expected sales for the year between $5.8 billion and $5.9 billion and EPS between $1.80 and $2.00.

»Wolverine Worldwide Anticipates Elevated Air Freight Costs In Second Half
Led by Merrell and Saucony, Wolverine Worldwide reported second-quarter results came in well above Wall Street estimates and lifted its 2021 guidance as many of its categories are trending. The higher EPS guidance comes despite incremental air freight costs caused by the COVID-19-specific disruption in the supply chain.

Mike Stornant, SVP, CFO and treasurer, said on its July 30 call, “In the back half of the year, we had a well-known disruption in some of the Vietnamese factories that we’re in, but even with some of that downside exposure, which is reflected in our outlook, as we mentioned, we feel confident that we can continue to deliver growth in the back half of the year.”

He added that Wolverine expected continued improved inventory levels in the months ahead and through the end of the year, with inventory positions “up nicely” over the prior year and over 2019 levels. Said Stornant, “Again, the aggressive position we’re taking in terms of buying inventory and some of the tactics we’ve deployed have helped us navigate what’s been a choppy supply chain situation.”

Updated guidance calls for revenues in the range of $2.34 billion to $2.4 billion, or growth of 31 percent to 34 percent versus the prior year and representing growth of 5.6 percent over 2019 at the high end of the range. The target represents a $150 million increase from its original outlook in February. Adjusted EPS is now expected in the range of $2.20 to $2.30, up from its previous guidance of $1.95 to $2.10.

»Callaway Golf Sees $55M Revenue Hit From Vietnam Lockdowns
Callaway Golf said its third-quarter guidance assumes an estimated $55 million negative impact to sales due to the Southeast Asia COVID shutdowns. The updated guidance further assumes continued elevated freight and other cost pressures, which are expected to have an overall greater impact than originally anticipated for the balance of the year.

Chip Brewer, president and CEO, said on the company’s August 9^th call that the impacted factories are largely in Vietnam. He said the company has become accustomed to adapting to supply chain disruptions over the last 18 months and has been able to shift some portion of production to other less-impacted factories.

“Still, given how lean inventories are already, the fact that nearly all our factories are running at 100 percent capacity, and that we’ll need to shift production shortly toward next year’s launches to protect that supply, these shutdowns will have an estimated $55 million negative impact on second-half revenues, primarily in our golf equipment segment and primarily in Q3,” said Brewer. “Although disappointing, I view this disruption as a short-term issue, not one that will have a long-term impact on value for strategy.”

He added that one side benefit is field inventory levels will likely stay lower than expected through this year and that bodes well for 2022.

Said Brewer, “All in all, we are very pleased with the strength of this category and our position in it. We expect to deliver record performance for our golf equipment segment this year, and perhaps most importantly, we continue to believe the outlook for the golf equipment category is highly positive, with both a larger total market and a higher embedded growth rate.”

 Callaway issued strong guidance for the third quarter and full year due to strong demand being seen across its product lines. Net revenue for 2021 is expected in the range of $3,025 million to $3,055 million against $1,590 million in 2020 and $1,701 million in 2019. The guidance was ahead of analysts’ consensus estimate of $2.84 billion. Adjusted EBITDA for the full year is expected to range between $345 million and $360 million against $163 million in 2020 and $210 million in 2019.

»Clarus Ups Inventory Investments To Offset Logistics Hurdles
Clarus Corp., the parent of Black Diamond, Sierra Bullets and Barnes Bullets, ended the second quarter with inventory levels roughly 21 percent higher than at the start of the year. Aaron Kuehne, CFO, said, “We continue to work with our supply chain partners to dynamically manage our inventory levels to seek to meet demand.”

Clarus is also using its healthy balance sheet to take more control over its supply chain, which has reduced constraints on product availability, particularly in core categories. For instance, an additional $10 million of inventory at Black Diamond is being carried in an effort to offset the current elongated process of moving inventory from its supply chain partners to warehouses.

Kuehne added, “Although it has resulted in higher levels of working capital, we are confident that our strategy of increasing the size of our pipeline, will better position us to satisfy demand with higher levels of fulfillment, in a timelier manner. The results we reported today, are a testament to the execution of this strategy. Within Sierra and Barnes, we have purposely increased our baseline inventory levels by an additional $6 million, focusing on raw material and component availability. This has enabled us to protect our supply chains and corresponding production of core items, while opportunistically hedging the cost of rising commodities. Such benefits are partially reflected in our reported gross margins.”

»Rocky Brands Aided By Diverse Sourcing Strategy
Rocky Brands raised its sales outlook for the year despite the current disruptions in the global supply chain, particularly in Asia where the company sources roughly 65 percent of its annual inventory.

“While our own manufacturing facilities in Puerto Rico, Rock Island, Illinois, and Dominican Republic provide a clear, competitive advantage versus the rest of the industry,” said Tom Robertson, CFO, on its August 3^rd conference call. “If conditions become more challenging, there is some risk that a portion of our projected Q4 revenue would shift in to 2022.”

In terms of margin, Rocky Brands is now expecting consolidated gross margins for 2021 to be approximately 39 percent, down slightly from its previous estimate of 40 percent, reflecting the higher inbound freight costs and logistics costs that have recently emerged.

Robertson said freight and inbound container costs are two to three times higher than last year. Price increases on product will go into effect during the third quarter to offset these margin pressures.

Jason Brooks, CEO, added that Rocky Brands’ diverse sourcing helped its Durango western boot brand maintain a “much healthier stock positions” versus competitors to help secure shelf space gains and new customer acquisitions for the brand. Robertson also said the price increases planned for the third quarter weren’t as aggressive as some of its peers. He added, “We think that this will help us continue to drive growth for our brands and maintain or even grow more market share that we’ve already captured over the last year.”

Photo courtesy EPA