- Margin pressure and operational disruptions could likely weigh on earnings in the near term
- Companies continue to diversify supply chains away from China to Southeast Asia
- Excess inventory levels, due to companies front-loading shipments to avoid tariffs, could impact their ability to sell products at full price, as seen with Puma
- Despite pricing pressures, consumers continue to spend on iconic names, indicating brand sustainability
Supply chain restructuring to accelerate benefiting Southeast Asia. The global sportswear sector is experiencing temporary volatility due to tariff-induced market disruptions. While the sector faces near-term margin compression, companies with diversified supply chains and premium brands are demonstrating strong pricing power. The current environment favours selective exposure to market leaders with operational flexibility, rather than broad sector allocation. Nike, for example, sources c.60% of its apparel and 95% of its footwear from Vietnam, China, and Cambodia, and intends to further diversify away from China. Supply chain restructuring is expected to accelerate, benefiting manufacturing hubs across Southeast Asia.
Crafting strategic price hikes and expected financial impact. Sportswear players such as Nike, Adidas, Puma, On Running, and Lululemon anticipate US price increases due to tariffs, although the full cost burden is unlikely to be passed on to consumers. Nike, which could face a cost impact of up to USD1bn, is leveraging its diversified supply chain and has already implemented targeted price increases – USD5 on footwear between USD100 and USD150 and up to USD10 on footwear above USD150, and USD2-10 on other goods. Adidas has paused profit guidance upgrades in 1Q25 due to ongoing tariff uncertainty. Puma faces a more challenging situation, with a projected EUR80mn gross profit impact in FY26E, alongside elevated inventory levels from expedited shipments ahead of tariff implementation, which contributed to weaker full-price sales in 2Q25. On Running remains relatively insulated due to its Southeast Asia-focused supply chain and has modestly raised its topline guidance to 28% y/y (currency neutral) in 1Q25, though it has moderated margin expectations. Lululemon maintains its revenue growth guidance of 5-7%, despite expecting greater margin pressure in FYJan26, demonstrating its brand strength in premium athleisure.
Temporary operational challenges are met with consumer resilience. The current market disruption presents entry opportunities for quality names with operational advantages, particularly those less exposed to Chinese production or with a proven ability to maintain pricing power. Near-term volatility stemming from margin compression and inventory adjustments present tactical investment opportunities. The ongoing structural shift toward supply chain diversification favours companies with established alternative manufacturing relationships. Market leaders that have maintained brand premium positioning and demonstrated operational agility are well positioned for relative outperformance during this sector restructuring cycle.
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