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: Supply-chain problems persist heading toward the back-to-school season, and the solutions give rise to a new set of risks

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Retailers and consumer-goods companies are taking steps to circumvent the supply-chain bottlenecks at West Coast ports and in other parts of the supply network, but Moody’s warns that some actions could have negative consequences.

Supply-chain challenges during the COVID pandemic are not new; companies took sometimes dramatic steps to save Christmas in 2021. Even as companies try to take precautions for any new or persistent problems, there could still be unintended results.

“Some sectors such as retail and apparel, footwear, consumer products and building products have a high volume of goods that come through the West Coast ports and are more seasonally dependent and time-sensitive to meet demand, which poses further risk to delays and disruption beyond the added costs,” Moody’s wrote in a sector report.

“Many retailer and apparel companies, for example, are buying well ahead of need and increasing lead times to assure supply after begin faced with stock outs and product being delivered late. But buying too soon can pose significant risk, if supply is late and demand pulls back before product arrival. Retailers could also find themselves lacking pricing power in the face of widespread inflation, which could hurt margins.”

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Gap Inc.
GPS,
-3.40%

described the setbacks at Old Navy after the company tried to clear supply-chain hurdles during the most recent quarter.

“Twelve-week pipelines for core categories have been critical to the success of Old Navy over the years,” said Gap Chief Executive Sonia Syngal on the first-quarter earnings call, according to FactSet.

“Reverting to a longer inventory push model not only diluted economic value but meant we were defining customer trends too early in the process and were unable to chase into the right fashion choices closer in. This resulted in excess inventory and less relevant styles that will pressure sales in the short term while we rebalance the assortment going forward.”

Executives hoping for supply-chain relief in 2022 are likely to be disappointed. The omicron variant of the coronavirus, and its subvariants; the war in Ukraine; and other volatility around the globe and across economies have created further disruption.

Hasbro Inc.
HAS,
+2.93%

once again talked about how it is taking steps early in the year to ensure items get where they ought to be for the second half. “To improve product in stocks this holiday season versus last, we’re advancing deliveries of key items in our owned inventory so that we can ensure it’s on hand,” said Deborah Thomas, Hasbro’s chief financial officer, on an April earnings call.

And in its first-quarter earnings release, Urban Outfitters Inc.
URBN,
-4.63%

said it was shifting its ordering schedule. “[D]ue to ongoing global supply-chain constraints, we are extending our lead times and holding more inventory,” the company said.

In a note after Urban Outfitters reported earnings in May, Wells Fargo analysts commented on the state of the company’s inventory.

“For the second straight quarter, Urban Outfitters missed Street margin expectations, and now they are battling a tougher inventory situation and higher costs as negative Street revisions accelerate,” the note said.

“Further, Urban Outfitters is now trending back at pre-COVID margin run-rates (something bears have continued to worry about across our entire universe) — wiping away 250 to 300 basis points of margin gains seen over the past 24 months.”

Also: ‘It’s a perfect storm for women’: Tampon shortage adds to women’s supply-chain woes

Wells Fargo rates Urban Outfitters stock equal weight with a $20 price target.

The National Retail Federation said earlier this month that U.S. ports were heading for a busy summer as back-to-school merchandise begins to arrive and holiday items come swiftly behind.

If that weren’t enough, there are ongoing negotiations between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA), with the current contract set to expire on July 1.

“Any labor disruption at the West Coast ports would have a cascading effect on rail service, container availability, ocean freight capacity, and other parts of the supply chain — affecting shippers around the U.S.,” Moody’s says.

A June Citi report, Global Supply Chains, takes a closer look at the repercussions and responses to the ongoing issues. Analysts there say companies will fine-tune their inventory-management practices to strengthen their networks.

“Most important, large firms are making it clear that they intend to look more deeply into the structure of their supply chains,” the report said.

“Previously, they had monitored their first-order linkages, namely, the firms that supply directly to them. But now, firms are increasingly focused on second- and even third-tier linkages — their suppliers’ suppliers, as well as the suppliers of those firms. This effort, while no doubt demanding, should make manufacturing supply chains more resilient.”

Still, Moody’s warns that U.S. ports are operating at near-capacity, including those on the East Coast and Gulf Coast where shipments have been redirected to relieve the West Coast.

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