Items that are trapped in the supply-chain bottleneck plaguing consumer companies right now will eventually make it to store shelves, but when they do they’ll likely have to be discounted, say BMO Capital Markets analysts.
Parts of the supply chain have come to a standstill at different points over the course of the COVID-19 pandemic, with factories shut down and stores temporarily closed for business.
But BMO analysts led by Simeon Siegel point out that the supply chain is now experiencing delays, a problem with transportation rather than manufacturing goods. “Meaning, the issue is actually less one of lack of supply and more one of an inability to get the supply to stores,” BMO said.
“And that means that product is slowly inching its way across the globe. Unfortunately, that will likely lead to mistimed floor sets as product [is] missing its intended season, likely triggering promotions and clearance as compelling product sells out immediately, but slower-moving product necessitates clearance, beginning [with] the emergence of outperformers and laggards into next year.”
For now, the supply-chain problems are driving gross margins and giving share prices in the sector a boost. The analysts say Michael Kors parent Capri Holdings Ltd.
and Under Armour Inc.
have seen the greatest margin expansion in the retail category. They were also the only two companies in the analyst group’s coverage that saw inventory declines on a year-over-year basis in the most recent quarter.
“Going forward, managements continue to point to freight and labor-cost headwinds persisting, which should continue to keep inventory levels lean, though if we are right about the aforementioned distinction between a supply-chain slowdown versus shutdown, it is simply a matter of time before late product hits the floors and begins to drive up promotions,” BMO said.
Wells Fargo analysts say promotions started to edge up some in October. Usually, there are plenty of promotions during the holiday season to entice consumers.
“With holiday messaging ticking up across our group, we expect that current move towards more of a promotional normal is in part an effort to appeal to early holiday shoppers looking to get ahead of inventory shortages and supply-chain constraints into [the fourth quarter],” analysts said.
The impact of supply constraints should begin to increase as the year winds down and into the first half of 2022, Wells Fargo wrote.
“We are beginning to see an earlier ramp of consumer shopping and holiday messaging (which has started during the last two weeks of October) while goods are still on shelves, with the question being the degree of [fourth quarter] sales left on the table given the availability of supply.”
In the meantime, the National Retail Federation says companies are racing to get items onto shelves, with imports sitting at container ports at near-record levels. More than 70 ships were waiting at the ports in Los Angeles and Long Beach last week, according to the group, with an average wait of two weeks in Los Angeles over the past month.
“Dockworkers are unloading ships as fast as they can, but the challenge is to move the containers out of the ports to make room for the next ship,” said Jonathan Gold, NRF’s vice president for supply-chain and customs policy, in a statement.
“We need better empty return procedures and more chassis, truck drivers, rail capacity and warehouse workers to keep the system moving. Retailers have enough inventory on hand to make sure shoppers won’t go home empty-handed this holiday season. But there are still items sitting on the docks or waiting on ships that need to make it to store shelves and online sellers’ warehouses.”
Many estimate that supply-chain hurdles will persist into next year, but that includes hopes that another COVID-19 spike won’t throw the system into a fresh round of disarray.
Still, the NRF is forecasting a record holiday season with sales poised to top $843.4 billion in November and December.