Coming Soon to a Store Near You... An Empty Shelf

Here we go again... it's time to talk about the supply chain and product shortages... After spending much of 2020 scrambling for toilet paper... or meat... or a new bicycle... or baker's yeast... or any of the many other items that went out of stock last year, you would think we were done with all […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] Coming Soon to a Store Near You... An Empty Shelf By Berna Barshay Here we go again... it's time to talk about the supply chain and product shortages... After spending much of 2020 scrambling for toilet paper... or [meat](... or a [new bicycle](... or baker's yeast... or any of the many other items that went out of stock last year, you would think we were done with all that. COVID-19 restrictions to mobility have largely been lifted domestically, and things have generally reopened, yet I was told by a friend I need to start worrying about toilet paper again. I kind of brushed it off, but when I went to Costco (COST) on Saturday afternoon, I found the shelves stripped of toilet paper, and I was told I needed to come in the morning to the store or it would all be sold out. I would write this off as pre-winter hoarding – and there is no doubt that hoarding is a factor in must-have, relatively low-cost products like toilet paper. But there's more going on. A contact at a large company in the food and beverage space recently bemoaned the battle to stay in stock with products citing problems related to the availability of both truck drivers and factory workers. Even having raised wages to $15, it's hard to find people to work... and when they do manage to fill most positions, one COVID-19 case in the factory can send as many as 10 to 12 additional workers into quarantine for 10 days because the nature of the work creates a lot of "close contacts." Beyond the problems with transportation, freight, staffing, and occasional COVID-19 disruptions is the challenge of raw material availability, particularly when the supply chain is global. Shortages of space on container ships have led freight prices to soar... Space on a ship from China costs about five times (or more) what it did in May 2020. Check it out... Source: The Economist And once you pay a pretty penny to get your goods or raw materials here, the processing back-up at the ports significantly delay the amount of time it takes to get from the boat to a warehouse. On top of these numerous challenges, there is one other big one: countries that are currently experiencing or have recently experienced the types of shutdowns we saw in the U.S. in spring 2020. One of the places currently experiencing large-scale shutdowns is Vietnam, which accounts for about a third of U.S. footwear manufacturing and one-fifth of U.S. apparel manufacturing. Vietnam ended up the hub of so much U.S. footwear and apparel production because companies were trying to diversify their supply chains to reduce risk... Factories in Vietnam have been shut down for a couple of months, wreaking havoc in the footwear and apparel industry. As tariffs on Chinese imports grew during the Trump administration and other elements of general U.S.-China trade tension ratcheted up – companies invested significant time It's an ironic moment of "no good deed goes unpunished" that all this theoretically risk-reducing work has resulted in probably the biggest supply-side, industry-wide crisis that I have seen in my over 20 years of following the industry. The problem is so bad that a group of more than 80 footwear and apparel companies sent a letter to President Joe Biden with an appeal that the U.S. allocate more vaccine donations to Vietnam. In late August, the White House allocated an additional one million vaccines to the country, bringing the total donation to six million. But Vietnam has a population of around 100 million people. For companies that run on shorter lead times, the factory shutdowns – which started in July – are putting the arrival of products for the all-important holiday season at risk. For companies with longer lead times, the inventory shortages will likely hit later in the holiday season or perhaps right after the holidays in early 2022. Product shortages put companies at risk not only for missed sales but also for lower margins. Companies seem hopeful that Vietnamese factories should be up and running by early October... but they missed a lot of time and won't catch up on all the production they missed. And the product that does get made will be completed later, which will force the companies that can afford it to put goods on planes rather than boats – and air freight can cost as much as 10 times more than ocean freight in normal times. --------------------------------------------------------------- Recommended Links: [Buy the dip? Or time to sell?]( Panic and uncertainty are taking hold of U.S. investors. The mainstream financial media is plastered with mixed messages urging you to either "buy the dip" or sell every stock you own. Who should you listen to? And what should you do with your money right now to prepare? [Get your answers right here](. --------------------------------------------------------------- [The Tiny $4 Stock Capitalizing On Tesla's Big Problem]( Elon Musk and Tesla still have one BIG PROBLEM that could derail the whole electric vehicle market. No, it's not lithium. It's another resource that's even more critical for electric vehicles. And right now there's one tiny $4 stock that is uniquely set up to benefit from this booming demand. [Click here for details](. --------------------------------------------------------------- Last week athletic footwear and apparel giant Nike (NKE) got caught in the crosshairs of the Vietnam logjam... Nike made a huge push into Vietnam and out of China over the past five or so years. Nike now sources more than 50% of its shoes and about 30% of its apparel in Vietnam. Take a look... Source: Wall Street Journal Everyone knew that Nike was going to have trouble making up the lost time in Vietnam. As the largest footwear company globally, the volume of product that Nike needs to source swamps the competition. Adding insult to injury, Nike also sources a greater percentage of goods there than the competition does. But it was still a surprise when Nike reported earnings last Thursday night and lowered full-year guidance for revenue growth from low-double-digits to just mid-single-digits, all because of inventory shortages stemming from the Vietnam shutdowns. Because of the timing of when orders ship, Nike product shortages probably won't be widely witnessed on store shelves here in the U.S. until late in the holiday season or early 2022, coinciding with Nike's fiscal third quarter, which runs from December through February. However, product shortages will hit Asia sooner, and probably by the holiday shopping season, due to shorter lead times for shipping from Asian factories to Asian end markets. Nike's stock took a hit on Friday, down 6% on the news, and has drifted a bit lower today. Nike is now 15% off its early August high before the troubles in Vietnam became widely understood... Because of Nike's unusual reporting schedule – it finished its fiscal first quarter at the end of August – it was the first major footwear and apparel company to report earnings since the problems in Vietnam took hold. Nike dropped a bomb because of circumstances outside of its control... and it won't be the last company in the space to do so. But these supply-side problems are transitory. On the demand side, I can't remember when things have been better for Nike in its two largest selling regions, North America and Europe. The company was set to expand gross margins, thanks to a combination of increased full-price selling (because of that strong demand) and mix shift to its stores and website and away from third parties – Nike makes a better margin when it sells direct-to-consumer. Notably, Nike is keeping that guidance for gross margin expansion, despite higher freight costs and other expenses associated with the scramble for product. It's an affirmative signal of the strong positioning of the brand in the marketplace and the correspondingly reduced need for discounting. There is one region, however, where Nike has seen a slowdown in growth: Greater China. China had been leading Nike's geographies in growth in recent years until things slowed down earlier this calendar year after Chinese social media lit up over a corporate comment that was taken to be critical of the Chinese government, and a popular Chinese actor ended his endorsement contract with Nike. That social media firestorm seems to have mostly blown over, but China's local sales growth came in at 11% (or 1% on a constant currency basis). That is still good growth on an absolute basis but falls short of the 21% annual revenue growth put up in Greater China by Nike in fiscal 2018 and 2019, before the pandemic. While Nike's revision to guidance on Thursday was dramatic, the reason for the diminished near-term outlook is a temporary one. The more important thing is that demand is clearly strong in three of the company's four selling regions. China remains the wildcard – and the more important factor for the long-term potential of NKE shares. As I told The Wall Street Journal last Friday, "If you think about the long-term value of the company, success in China is much more important than what happens in any given quarter because of a supply chain issue." I'm positively inclined on Nike shares as I think the athleisure trend has legs, and it's the premier company in the athletic space with one of the best brands in the world. I've been on the sidelines, though, because of the record-high multiple in conjunction with a lack of visibility into how the Vietnam shutdowns would affect results and how quickly China would return to historical growth. One of those questions has since been answered. The stock is a lot lower, so I am warming up to it. At closer to $140, I would be ready to pull the trigger and buy NKE shares... and we may get there. So, keep an eye on that NKE chart. And if you need to buy sneakers for holiday gifting or yourself... buy early, or you may find yourself shut out. In the mailbag, more thoughts on the ongoing labor shortage and the difficulty of pet loss... Have you noticed an increase in out-of-stock products? What have you been having trouble finding? Are you going to stock up on anything in particular for winter? Share your thoughts in an e-mail to feedback@empirefinancialresearch.com. "I am one of those 'semi-retired' that decided not to go back to work. I retired from 30 years in the military, five years in the airline industry, and one year as an RN. I left the RN job to go work seasonal jobs in the National Parks. "Last year, we were not allowed to have half our summer workforce because we couldn't put two people in a dorm room. Consequently, we had to cut back on services – we did not open the bar or either of the restaurants, we didn't rent powerboats from the marina, we operated the gift and camp stores on minimum staffing and reduced hours, and we only rented the cabins that had kitchens, since it was the only way for people to make their own food as opposed to driving 30 miles into Jackson, WY, to crowded restaurants with long waits. "We worked harder last summer than any of the other five seasons I was there. I worked for 'extra' money – a cushion so I could travel more and enjoy life a little more. This year since it still wasn't going to be a year of full employment and also the cost of gas being more than a dollar higher than last year, I decided it wasn't worth it! I sold my motor home – the market was hot! Now I am looking for a permanent place to live close to family and grandchildren. "I won't have as much disposable income, but I won't have to put up with the aggravation! If you look at the numbers for National Park visits last year, they didn't go down even with closing the parks to the tourist buses, which was thousands of visitors who would normally come in by bus tour, and also the prohibition on foreign tourists due to Covid. "The pandemic and all its funky rules have changed the world we live in forever. There will now be more and more automation, especially in areas like hospitality – your Starbucks will end up coming from a vending machine in many locations. The Walmart I was in the other day has gone from over 30 registers with clerks to only six manned by a clerk—now there are over 30 self-checkouts! "I saw on a TV report yesterday that 245K women have left their previous jobs to become truck drivers – better pay and you can work on your own from the cab of your truck. A lot of those new truckers used to wait tables or were other similar occupations. "I have a grandchild and a niece graduating college this coming spring. I also have a granddaughter and a nephew graduating high school. The nephew doesn't want to go to college or to a trade school – he thinks he needs a year off to travel and 'find himself,' except his parents don't have the money to float that dream. He is not an anomaly—many friends I know have a grandchild or niece/nephew expressing the same. Many of them feel they are owed it. Some don't want to go to college unless it is free – they say they hear in the media it is going to be free soon... if the Republicans would just get 'onboard.' Quite frankly, the USA is going to hell in a handbasket if you ask me." – Don K. "Hi Berna, Great write-up re Chewy (CHWY)!... and I look forward to your subscriber recommendation in October. "My family shares your grief over losing your special pet Chihuahua. Our own little 'Moka' passed away peacefully in January at 15 1/2 years old. What we did not anticipate was also losing our sweet, Kora, six weeks later when she was diagnosed with inoperable cancer. We rescued her from a shelter as a puppy and she was only 9... I'm tearing up even sharing the heartbreak. We miss them so, and I cannot bring myself to even think about 'replacing them.' "Anyway, I loved your story and enjoy engaging with you on Twitter, and, of course, your Market Insider subscription." – Ed C. Berna comment: Ed, I am so sorry about the loss of your two beloved dogs. It is too much heartbreak to have to bear at once. "Berna, I send my sincere sympathies on the loss of Prince. I have had dogs most of my 70 years, so I have lost several over the years. I still miss each one." – Steve Q. Berna comment: Steve, me too. I think about all of them too, especially my Bailey, who passed in 2017. Not a day goes by that I don't think about him... they really worm their way deep into your heart, don't they? Regards, Berna Barshay September 27, 2021 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2021 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](