US Retailers Navigate Freight Costs, Scarce Inventory, Uncertain Future

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Michael Mullican, chief financial officer of Academy Sports & Outdoors.

Retailers are grappling with ongoing supply chain disruptions that are keeping inventory low and often causing delays, forcing companies to pay premiums to accelerate shipments. Deliveries from Vietnam and other Southeast Asian countries have slowed as local governments limit factories’ production capacity due to the Delta variant, potentially resulting in delays and shortages of certain products.

Companies say they are experiencing a level of uncertainty not seen since the onset of the pandemic, putting their financial plans in doubt.

Despite these obstacles, US finance chiefs have maintained a positive outlook on future profits and demand for their products, due in part to strong consumer spending. Sales at US retailers climbed 0.7% in August, a rebound from a drop in July, the Commerce Department said.

About 30% of the 108 retailers in the S&P 1500 index revised their annual guidance through August 31, nearly all upward except for discount retailer Dollar Tree Inc., according to data provider FactSet Research Systems Inc. That’s up 25 percentage points from the prior-year period, when 5% of the retailers updated their guidance. About 8% haven’t changed their annual guidance so far this year, while the remaining 62% didn’t provide such a forecast, with some —including Burlington Stores Inc. and Victoria’s Secret & Co.— citing uncertainty as a reason.

Chief financial officers are working to offset some of the hurdles, including ordering inventory earlier than usual, revising long-term contracts with ocean carriers, spending more on airfreight, increasing prices and moving their operations.

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Chesapeake, Va.-based Dollar Tree, for example, signed a three-year contract for a dedicated charter vessel to make international shipments and pulled its orders for seasonal inventory forward by 30 days, executives said. The chain, which operated 15,865 stores in the US and Canada as of July 31, said it expects to ship more goods than planned by purchasing transport capacity on the spot market, as the ocean carriers it has contracts with can only move 60% to 65% of the agreed volume for the year, down from the 85% Dollar Tree forecast in May.

For Macy’s, supply constraints will be a challenge
Macy’s Inc., which also operates the Bloomingdale’s and Bluemercury brands, forecasts supply constraints will be its biggest challenge in the fall and winter months, said CFO Adrian Mitchell. However, the increase in Delta cases doesn’t pose a significant threat to the companies’ business because consumers are more experienced in dealing with Covid restrictions now and would likely be able to navigate new ones, he said.

The New York-based retailer has been ordering inventory four to six weeks in advance in an effort to secure products earlier, he said. Macy’s works with its vendors to confirm availability and the expected timing of deliveries when it submits orders as well as throughout the process, Mitchell said.

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“Let’s get ahead of the curve,” Mitchell said. “Otherwise we will be quite lean.” Macy’s reported $5.65 billion in revenue during its latest quarter, up 58.7%. Its profit was $345 million, compared with a $431 million net loss a year before.

Academy Sports books bigger volumes
Sporting-goods retailer Academy Sports & Outdoors Inc. is making long-term plans to manage supply chain challenges on the assumption those problems will last till the end of the year or even longer, Finance Chief Michael Mullican said. The Katy, Texas-based chain has agreed to ship bigger volumes over the next two years with its existing ocean freight partners than it had planned, he said.

In recent weeks, the company has also booked freight further in advance, Mullican said. “We’re in a position where we’re looking to obtain more inventory than we have,” he said. Academy’s inventory totaled $1.12 billion for the quarter ended July 31, up 24% from the prior-year period and down 7% from the 2019 period, the company said.

“We’re about $100 million light of where we want to be,” Mullican said, adding that customers might have three or four treadmills to choose from in a store instead of six. The company had 259 stores across 16 US states as of July 31.

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Some retailers are reducing inventory to boost margins
While some retailers want as much inventory in their stores as they can get, other businesses, typically apparel sellers, are looking to reduce inventory to boost profit margins. Companies including Abercrombie & Fitch Co. , Guess Inc. and Gap Inc. in recent weeks said they are closely monitoring stock levels as they look to market apparel at full price.

Companies clamoring for inventory might run into trouble if products that are seasonal or part of a collection arrive late, potentially resulting in big markdowns, said Janine Stichter, a senior vice president at investment firm Jefferies Financial Group Inc.

“Lead times to get products are so long that if we do see a slowdown in demand, the wheels will already be in motion on securing inventory and retailers won’t be able to hit the brakes fast enough,”  Stichter said.

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