Why Do Supply Chain Issues Cause Stocks to Lose Value?

Why Do Supply Chain Issues Cause Stocks to Lose Value?

Supply chain issues once again sent a stock tumbling last week — this time Under Armour — but why exactly is this happening?

Athletic apparel manufacturer Under Armour (NYSE: UAA) reported earnings on Friday and paid a heavy price for an underwhelming performance. Shares in the sports giant closed down over 24%, even hitting a new 52-week low at one point.

Under Armour posted adjusted earnings per share of $0.01 against an expected $0.06, on revenue of $1.3 billion versus an anticipated $1.32 billion. A net loss for the quarter of $59.6 million was in stark contrast to the $77.8 million profit seen in the year-ago quarter.

The company forecast earnings of between $0.63 and $0.68 per share for the year — well below the Wall Street expectation of $0.86. This is largely fueled by current massive supply chain constraints being experienced by the firm. Despite this, President and CEO Patrik Frisk remained upbeat, stating:

“As global supply challenges and emergent COVID-19 impacts in China eventually normalize, we are confident that the strength of the Under Armour brand coupled with our powerful growth strategy positions us well to deliver sustainable, profitable returns to shareholders over the long-term.”

But why are these supply constraints still happening? And how exactly do they affect a company’s stock price?

Why do supply chain issues affect stocks so much?

The answer lies very much in geography for many companies. In Under Armour’s case, close to 70% of its apparel is produced in China, Jordan, Vietnam, Cambodia, and Malaysia. Renewed COVID-19 lockdowns — particularly in China — caused a production stoppage for weeks which will have a huge knock-on effect on any company relying on those factories to manufacture its goods.

With this production backlog, companies will have fewer products to sell, meaning less money is being taken in. There’s also the very real possibility that orders will have to be canceled on short notice, which could impact future deals with vendors. 

Add to this the huge increase in shipping costs due to the lack of appropriate workers in key jobs — such as truck driving or dock work — and margins get slashed even more, while goods take even longer to arrive.

The Bottom Line

The global supply chain is an extremely complicated network that requires multiple moving parts to work in perfect synchrony. Companies across the world have been dealt numerous blows as supply issues continue to mount. Right now, it’s still very much a case of “it might get worse before it gets better.”

Rising costs and slowed production can have huge impacts on the profits of any consumer-facing manufacturing company. It’s likely that many of these companies will see their stock plummet as they report sub-par earnings reports. The important thing to look out for is which companies can pivot the quickest to mitigate these known issues. Recovery is unlikely to be swift, so look to companies with large amounts of cash on hand to deal with such a volatile market.

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