Global supply chains are under significant pressure from COVID and other disruptions. In this blog, we look at inventory levels across leading US retailers, shipping company dynamics, as well as transcript color from recent conference calls.
TIP: If you plan on doing holiday shopping this year, do it now.
We have been monitoring inventory levels across retail for over a year now. Last September, we collaborated with the Financial Times on looking at the aggregate inventory levels for over 30 retailers after the initial COVID disruptions.
In one of our favorite data visualizations, we add up the quarter-ending inventory levels at eight leading US retailers: Walmart (also parent of Sam’s Club), Target, Home Depot, Lowe’s, TJX (parent of TJ Maxx, HomeGoods, and others), Best Buy, Dollar General, and The Gap Inc. (parent of Gap, Banana Republic, Old Navy, Athleta).
In addition, we added the quarterly revenues for these eight leading retailers. Then we simply divided the inventory by the revenues for the most recent quarter.
We can see that industry inventory levels, in relation to the industry revenues, are extremely low. The usual seasonality (inventory peaking at the end of Q3, and dropping at the end of Q4) has been severely disrupted since COVID.
We are seeing the problems in conference calls as well. For example, transcripts that mention container/containers have skyrocketed in recent months.
The picture is similar for related terms, such as “freight” and “bottlenecks.”
To be sure, there have been beneficiaries such as shipping giant Maersk. We have seen strong and persistent revisions upwards of the 2021-2022 revenue estimates, along with a strong share price performance. 2023 revenue estimates have also been moving upwards but in a less dramatic fashion.
The freight complexities are not limited just to trans-ocean shipping. Companies such as Fedex and UPS, are seeing increased costs for both labor and fuel, and have seen a contraction in their valuation multiples recently (using rolling NTM P/E for this example). Both multiples are now below their respective 5-year means.
We also looked for color from recent company transcripts, all from the month of September.
Nike (footwear and apparel): container shipping times are double the normal
Keep in mind that there are global complexities and differences in transit times and sourcing mix across our geographies, so I’m going to use North America as an example to just go a little deeper on what I’m talking about. Prior to the pandemic, it would have taken approximately 40 days to move product from Asia to North America. Transit times have been increasing due to container shortages, port congestion, rail congestion and labor shortages, impacting the entire industry. And during Q1, these lead times worsened further to now sit at 80 days, roughly 2x normal.
Costco (retail): container and shipping costs are up six times
Some inflationary soundbites, if you will. Price increases on items shipped across the oceans, some suppliers or us paying to 6x for containers and shipping. Price increases of pulp and paper goods, some items up 4% to 8%. Again, we’re trying to mitigate those where we can, and we think we’ve done a decent job of mitigating some of it.
General Mills (packaged foods): logistics labor and global container shortages will persist
I guess we foresee labor challenges persisting for quite a while, I mean, especially if you look at logistics. So there’s a shortage of truck drivers here in the U.S., and that’s not going to abate for a while. There is a shortage in shipping containers as we look at global transportation. You can see them on pictures in the L.A. port. So that’s not going to be — go away for a while. And while we have seen a little bit of loosening in the labor markets once the government spending has kind of decreased, that’s not going to solve the whole — that’s not going to help solve the whole dilemma. So I would suggest that the challenges we have with labor and labor inflation are going to persist for quite some time. We have not really seen them abate significantly at this point.
Terex (industrial): the shortages are “irrespective of cost”
The ability to have available containers and ships to get the machines to the European market is definitely an issue irrespective of cost.
Cracker Barrel (restaurant and retail): 200-300% increases in container costs
On the retail side, we have similar pressures there. Those are more in terms of some of the shipping costs and container costs. As many of you’ve probably seen in a lot of articles, you see ocean freight containers are up at times from 200% to 300% over kind of contracted rates.
ConAgra (packaged food): supply-demand disbalance ongoing since COVID
The first piece is supply-demand bottlenecks, everybody knows that since the start of COVID, the level of demand for food companies’ products has been elevated. It has remained elevated. And with Delta variant and other labor issues, that has strained the supply chain of many companies in the space. I tip my hat not only to our folks, but other companies for working this very effectively to the best of their abilities. And it’s a day-by-day challenge, but I’m proud of the work our team is doing to keep servicing our customers and getting products to our consumers on the shelves.
Eaton (industrial): bottlenecks are “materially worse” in Q3 2020
I mean, clearly, the big challenge for us is really supply chain availability. Again, it’s been well-documented, the issues around semiconductors, resins, various types of metals that we source. And so coming into Q3, we really expected that we’d start to see some improvement in some of the supply chain bottlenecks. And much to our surprise and to the surprise, really, I think, of everybody in the industry, we’ve seen that things actually got materially worse in Q3.
Hasbro (toys and games): doubled the number of ports used to address the delays
We’ve added domestic ports in the United States. In fact, we’ve almost doubled the number of ports here in the U.S, we’ve added a number of ports that we are now using in Asia and in China.
Freshpet (pet food): equipment delays even for local food manufacturers
But we’re supposed to be starting up our second line in our Kitchens South, and we have 2 pieces of equipment that are coming from, 1 from Japan and 1 from Europe that are stuck at a port. And getting through the ports is a problem. So we have about a 2-week delay in starting up that line because we can’t get stuff moved through the port. Those kinds of supply chain issues are things you never worried about in the past, and now you worry about them.
To learn how Sentieo can take your research to the next level, request a demo.