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Nike Could Trip Over Soaring Numbers of COVID Cases in Vietnam

The market paid no heed to reports that Nike (NYSE: NKE) might run out of sneakers because of rising COVID-19 cases in Vietnam, sending the footwear maker's stock even higher. But with half its seaborne sneaker shipments at risk, the company could stumble just as the back-to-school season gets into full swing.

Yet Nike is not the only business that could feel the ill effects of the coronavirus outbreak. Everyone from Apple to Walmart relies heavily upon Vietnam for supplies, and with COVID-19 cases reaching record levels in the country, factories are shutting down to contain the spread.

Coupled with logjams at U.S. West Coast ports, there could be even greater dislocations in retail supply chains.

Basketball player about to dunk a ball.

Image source: Getty Images.

A looming threat

Data from Panjiva, the supply chain research unit of Standard & Poor's Global Market Intelligence, revealed two of Nike's Vietnamese sneaker suppliers shut down production due to the COVID-19 outbreak.

The Johns Hopkins University coronavirus case tracker shows COVID-19 cases in Vietnam spiking to a record high of 10,774 on July 27, the most since the pandemic began. Authorities responded by requiring companies to either close or shelter employees on-site. Nikkei Asia says suppliers for companies including Apple, Nestle, tire maker Kumho, and Swiss packaging giant Tetra Pak have all elected to erect bubbles at their plants to keep contamination at bay.

Employees are required to live in the factories for two weeks before switching out for another group of employees to come in. While this seen as a temporary solution, it's recognized that vaccinations may be the only effective way to resolve the problem. Only 4% of Vietnam's population has been vaccinated as of early July.

Locked in and locked down

With the rise of China's middle class, the cost of doing business there increased. American retailers and manufacturers turned to Vietnam and other Asian countries such as Cambodia, Malaysia, Thailand, and Bangladesh as a ready source of low-wage labor. Those countries, though, are now all seeing massive spikes in COVID-19 cases as coronavirus variants spread globally.

Since virtually all of Nike's footwear is produced outside the U.S., even if Vietnamese factories halt production for just a few weeks, it could severely affect sales and lead to price hikes. Port congestion can only cause further delays.

Container ships bringing cargo from overseas are also backed up off San Pedro Bay, where the Port of Los Angeles and Port of Long Beach are located. Together, they handle more containers per ship call than any other port complex in the world.

Research commissioned by the Pacific Maritime Association says supply disruptions are widespread and conditions are worsening due to "shortages of shipping containers, rail cars, trucks, and chassis to meet the enormous demand."

That may lead to Nike products being out of stock on store shelves or even on its website.

Kicked to the curb

As the world started to believe the pandemic was in the rearview mirror, U.S. seaborne imports surged. Panjiva said they rose over 25% in the first quarter compared to a year ago, then jumped another 54% in the second quarter.

Led primarily by footwear, Nike's imports aren't even the biggest driver. Wolverine Worldwide and Puma saw imports more than double in the second quarter, suggesting Nike won't be the only sneaker maker experiencing problems. Interestingly, Under Armour saw imports decline 4% during the period.

Even so, Nike's stock continues to ride high with shares running 25% higher over the past three months and up 69% over the past year. With the stock trading at 45 times trailing earnings and 32 times next year's estimates, investors might want to untie their relationship with Nike for when the supply chain disruption causes the footwear maker to stumble.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool recommends Nestle and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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