The COVID-19 pandemic continues to impact businesses globally in some form, the latest being supply chain issues that have been affecting the functioning of companies across all sectors worldwide. The new Delta variant of the virus has led to restrictions in affected parts of the world, consequently putting pressure on the smooth transition of goods through the ports. This has disrupted the supply of everything from oil and iron ore to food and electronics.
Cumulatively, the impacts of the disruptions have been felt everywhere. There have been huge displacements in the container market, shipping routes, ports, air cargo, roadways, railways and warehouses. This has resulted in shortages in key manufacturing components, order backlogs, delays in deliveries, and escalating freight costs and consumer prices. Consumer Discretionary Players Feel the Pinch
The Consumer Discretionary companies, particularly focused on manufacturing and sourcing lifestyle, sports and clothing related products, are not shielded from the ongoing turmoil either. These companies are caught in the middle of the supply chain disruptions as the majority of their products are either manufactured or sourced from outside the United States.
The COVID-led supply chain menace has been causing delays in deliveries of raw materials or finished goods due to port congestion in some parts of the world, creating acute supply shortages globally. Freight inefficiencies leading to higher freight costs, inventory disbalances due to longer-than-expected delivery times and other logistics related issues are additional headwinds stemming from the scenario. The companies in the apparel and footwear sector are likely to face increased uncertainty from manufacturing disruptions in Vietnam. It is worth mentioning that Vietnam is the hub of manufacturing units for footwear and clothing bigwigs like NIKE ( NKE Quick Quote NKE - Free Report) , lululemon ( LULU Quick Quote LULU - Free Report) and more. Southeast Asia is grappling with one of the world’s worst Covid-19 outbreaks at the moment. Vietnam along with other emerging nations are struggling to gain access to vaccinations, which has aggravated the situation amid the new wave of COVID variants. This has led to closure of manufacturing units and tourism in these countries. Recent reports suggested that NIKE, which has about 51% of footwear and 30% of apparel units (43% of total units) in Vietnam, is likely to witness acute product shortages as the holiday season approaches due to almost zero production from its Vietnamese factories in the past two months. The company expects the shortages to be evident at the start of the holiday season and continue until spring time. lululemon in its latest earnings report pointed out that its supply chain has been affected by the pandemic-led factory closures in Vietnam, congestion at ports and reduced air freight capacity. Some of the factories in Vietnam, which are used to source lululemon’s products, have closed due to another wave of COVID-19 outbreak in the region. This has delayed deliveries of products in recent months. The company expects these challenges to impact its business in the second half of fiscal 2021. Apart from the rise of Delta variant infections across several parts, natural disasters in China and Germany, and cyber-attacks in key South African ports have significantly disturbed the supply flow across the world. These issues have not only affected product availability at stores but also led to increased costs, consequently impacting the margins of companies. Analysts believe that the continued impacts from higher costs may lead to spike in prices as the cost of manufacturing or sourcing escalates. As the holiday season approaches, companies are worried about the supply chain disruption, which is expected to persist in the near term. Industry experts expect supply-chain and logistics challenges, and the increase in freight rates to prevail ahead of the holiday season, resulting in inventory shortages in time for holiday offers. According to analysts, consumers are likely to witness lesser discounts, longer shipping time and limited inventory at stores, on account of the supply-chain headwinds and labor shortages during the 2021 holiday season. This is likely to impact the holiday season math for most consumer companies. However, companies are working toward alternative sourcing strategies to make things good in time for the holiday bash. This includes identifying and signing new sourcing agreements from different places with potentially lesser impact of virus transmission, and evaluating what it means for its operations. Quickly adapting to the situation and bringing in alternate supply sources are likely to offer respite in the current situation. In fact, companies with a diversified supply base stand to gain in the current situation. In a recent report, lululemon’s management stated that it expects some of the factories in Vietnam to be operational by mid-September. The anticipated partial reopening of the Vietnamese factories is likely to reduce production shortages for many companies. 4 Stocks to Buy
That said, we have highlighted four stocks in the Zacks
Consumer Discretionary sector that have strong fundamentals and are likely to steer clear of the supply bottlenecks. These companies have reported strong results in the last quarterly release and provided encouraging view for the year, despite the anticipated effects of the supply chain challenges. The stocks have a favorable combination of a VGM Score of A or B and a Zacks Rank #1 (Strong Buy) or 2 (Buy). Each of the stocks have outperformed the S&P 500 composite’s growth of 20.6% on a year-to-date basis. lululemon athletica inc.: The yoga-inspired athletic apparel company has been benefiting from robust business fundamentals, strong brand positioning in the athletic apparel space, continued growth in e-commerce and rebound in brick-and-mortar sales. Its financial position keeps it on track to exceed targets under its Power of Three growth strategy in fiscal 2021, two years ahead of the planned 2023 deadline. Despite the COVID-19 induced headwinds, including supply-chain disruptions, the company raised guidance for fiscal 2021. The company’s sales guidance for fiscal 2021 implies a 2-year CAGR of 25%, which is higher than the 3-year CAGR of 19%, leading up to 2020 and is significantly ahead of the low-teens CAGR targeted in the Power of Three growth plan. The view assumes phased reopening of the factories used for sourcing products in Vietnam in mid-September. lululemon has a trailing four-quarter earnings surprise of 25.2%, on average. The Zacks Consensus Estimate for its fiscal 2021 sales and earnings suggests growth of 42.3% and 62.1%, respectively, from the year-ago period’s reported figures. The consensus mark for fiscal 2021 earnings has increased 4.4% in the past seven days. The Zacks Rank #2 stock has rallied 22.5% year to date. You can see . the complete list of today’s Zacks #1 Rank stocks here Image Source: Zacks Investment Research Crocs Inc. ( CROX Quick Quote CROX - Free Report) : The leading footwear brand with its focus on comfort and style gains from healthy demand in its key products, including Clogs, Sandals and Jibbitz. Crocs is poised to benefit from significant progress in expanding digital and omnichannel capabilities. Its recent Investor Day presentation highlighted its long-term strategy and key initiatives to deliver sustainable growth. The company provided an upbeat revenue forecast, additional share repurchase commitments and accelerated efforts to reduce carbon footprint. It expects to generate revenues of more than $5 billion by 2026, which means witnessing a CAGR of more than 17% in the next five years. The Zacks Consensus Estimate for Crocs’ 2021 sales and earnings suggests growth of 63.6% and 114%, respectively, from the year-ago period’s reported figures. The consensus mark for its 2021 earnings has moved up 1.6% in the past seven days. The Zacks Rank #1 company has a trailing four-quarter earnings surprise of 43.6%, on average. Shares of Crocs have gained 151.8% year to date. Deckers Outdoor Corporation ( DECK Quick Quote DECK - Free Report) : Acceleration of omni-channel capabilities, international expansion, new product categories, and customer-centric product and marketing strategies have been contributing to its performance. Strength in the HOKA ONE ONE, UGG and Teva brands as well as solid gains across direct-to-consumer channels bode well. It is focused on expanding brand assortments, bringing innovative lines of products, targeting consumers digitally via marketing and sturdy e-commerce, and optimizing omni-channel distribution. The Zacks Rank #1 company has a significant four-quarter earnings surprise of 1,135%, on average. The Zacks Consensus Estimate for Deckers’ fiscal 2022 sales and earnings suggests growth of 21.4% and 16.2%, respectively, from the year-ago period’s reported figures. The consensus mark for its fiscal 2022 earnings has been unchanged in the past 30 days. Shares of the company have risen 53.4% year to date. Skechers U.S.A., Inc. ( SKX Quick Quote SKX - Free Report) : Skechers has been witnessing strong demand for comfort products as consumers began returning to a normal lifestyle amid easing pandemic restrictions. Investments in long-term growth strategies including brands and infrastructural capabilities have also been yielding results. Growth across domestic and international channels, driven by strong wholesale and direct-to-consumer sales, have been key drivers. Management is optimistic regarding strength of its brands and relevance of their products in the forthcoming periods. The Zacks Consensus Estimate for the company’s 2021 sales and earnings suggests growth of 37.1% and 318.8%, respectively, from the year-ago period. The consensus mark for its 2021 earnings has been unchanged in the past 30 days. Shares of the Zacks Rank #1 company have appreciated 25.2% year to date.