Nike just delivered itself a huge black eye with Flextronics -- its partner in rethinking and reworking the entire supply chain process around shoe customization and localized production. FLEX missed revenue, guided down, fired its CEO, and announced a $30mm cost associated with writing off its Nike Mexico operation because “In recent weeks, it became clear that the company would be unable to reach a commercially viable solution” on the initiative. Remember when Eric Sprunk from Nike presented at the FLEX meeting in May, at which time the FLEX CEO delivered his assurance on 2H success? This is an outright failure on the part of a highly touted Nike/FLEX relationship.
It represents a small piece of Nike’s current production, but a big portion of its future. We’re talking about 4mm pairs of shoes this year so just shy of 1% of volume. But in buying Nike today you need to believe that it can expand its DTC operations by 2-3x over 3-5 years. It needs a revamped large-scale, small-batch manufacturing process in order to make that happen. Can’t get there without FLEX success. This is a big black eye for that initiative. Parker (NKE CEO) is going to accelerate the process to achieve success without relying on a third party. That’s gonna cost $. A lot of it. It also delays the TAIL call (DTC revs and margin) realization, and while I wasn’t banking on this kind of failure by any means (I’m shocked by it, actually) it shows how little margin of error Nike has in its current model. It put too many eggs in one basket.
I remain short Nike. As tempted as I’ve been to cover it on its recent shellacking, the reality is that it faces risk in China and Europe that I don’t think are represented in current estimates – not to mention robust expectations for US growth that are hardly a slam-dunk while organizational issues remain. I’m going to keep a tight leash on this one, but the cards are stacked against you right now if you’re long this name. Good luck.
