Nike’s slump was foretold by its key Taiwan shoe supplier

Fitness buffs have run out of puff. Signs of declining demand for sports gear drove Nike Inc.’s stock to a record losing streak, and the biggest indicator of weakness comes from a key supplier in Taiwan called Pou Chen Corp.

Shares of the Oregon-based sportswear giant fell for a 10th straight day Wednesday, the longest slide since it listed 43 years ago. While China’s economic malaise, including continued weakness in domestic consumption, is an easy scapegoat it really doesn’t explain the situation. Greater China accounts for just 14% of Nike’s sales, and revenue there had already been dropping since a peak in the fiscal year to May 2021.

Nike gets 42% of its business from North America, and two-thirds of global sales comes from shoes. Revenue in the footwear division for the fourth quarter, ended May 31, climbed 7%. That’s slower than the double-digit figures it posted in the two prior periods, but it’s still growth. It’s fortunes haven’t always fared so well in tough economic times. Revenue fell 4.8% in fiscal 2020 when Covid-19 kept people away from gyms and running tracks, while it suffered a mild contraction in 2010 amid the global financial crisis.

The US may not be in a recession now, but households have almost depleted excess savings built up during the pandemic and may be feeling a mix of fear and boredom. When the US Department of Commerce last week announced July retail sales had climbed 2.5% from a year earlier, the category that  includes sporting goods dropped 0.5%, its second consecutive monthly decline. It’s likely that revenge spending on flash new athletic gear has run its course, and Nike is feeling the pinch.

Savvy investors have been watching Pou Chen. Based in the central Taiwanese city of Taichung, the company is the world’s largest contract maker of branded sports shoes, counting Nike and Adidas AG among its clients. Last year it shipped 273 million pairs at an average $20.73 apiece. Neither Pou Chen or its clients reveal the extent of their relationship, but filings from the Taiwan company show its biggest client accounted for 25% of its sales, or $2.1 billion, last year.  

Pou Chen is low-key and often overlooked by foreign investors: only four sell-side analysts cover the stock. But it’s listed in Taiwan, which requires companies to report sales on a monthly basis. Its latest report was on Aug. 10, and the data is bleak. 

Revenue fell 17% in July, and it’s now on course for a 7.7% decline for the year. What’s worse, the footwear unit posted a 20% drop, taking that division’s  year-to-date slide to 13%. A sudden and large cut in business at a major supplier is a signal that clients like Nike and Adidas are slashing orders with little optimism for an uptick anytime soon.

Adidas AG already gave us hints of trouble when it announced earnings on Aug. 3 that included a 16% decline in revenue from North America. The region only accounts for 28% of the German company’s sales, so any direct impact from the US is limited. Bad news from Dick’s Sporting Goods Inc. added to the noise but could be misleading: the major weakness was from a surge in thefts at its US stores. Foot Locker Inc. also came out with poor second-quarter results and a cut to its full-year guidance, a sign that things really are looking bad. 

It’s set to continue. By the end of June this year, Pou Chen had cut its global workforce to 280,888; that’s 56,000 fewer than a year ago and the lowest in at least a decade. Most of those workers are in Southeast Asia; 46% of its output comes from Indonesia and 38% from Vietnam.

A continued reduction in orders spurred one division in Ho Chi Minh City that employs 50,000 people — Pouyuen Vietnam — to cut another 1,200 staff this month, Nguoi Lao Dong, a publication aligned with Ho Chi Minh City’s party committee reported this week. Over 5,000 job losses in June and July was the biggest round of layoffs at the unit since it began operations in 1996, Vn Express reported in May.

If the the situation improves and consumers are suddenly inspired to get active again, then it’ll be news out of Taichung that will give us an early heads up.