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Will Mid-October Milestone Ease Shipping Struggles? Week Ahead

With October halfway and the window closed to ferry goods in for the holiday selling season, retail should see better shipping availability, according to Jefferies analysts.

This suggests the disruption that has plagued the sector for more than a year may be reaching its peak, potentially clearing up the congestion that for months has hamstrung critical ports. Conditions should trend up early in the new calendar year with “significant improvement by the second half of 2022,” analysts said.

Analyst Janine Stichter believes apparel and footwear’s biggest challenges may already be in the rearview mirror, though she doesn’t see supply chain delays fully reverting until well into 2022. Accounting for one-third of U.S. footwear imports and 20 percent of apparel, Vietnam remains fashion’s biggest pressure point.

However, Asia’s covid restrictions and port challenges remain headwinds. “Currently, we are monitoring production in China where power usage regulation is leading to factory closures or shorter operating hours,” Stichter said.

Retailers will need to either cancel or liquidate goods that miss the holiday selling window. Nike, Foot Locker and Journeys parent Genesco face the greatest near-term inventory shortage risk, given their reliance on athletic footwear manufacturing. Deckers has significant exposure to Vietnam, but its factory concentration is in the Southeast Asian country’s less-affected northern territory.

Apparel faces less severe headwinds as it’s better equipped to migrate production than footwear. Lean retail inventories could empower off-price retailers to raise prices, Stichter said.

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Retailers in the department store sector have taken actions to secure inventory, such as pulling forward receipts, adding carriers and increasing store deliveries. Kohl’s, Macy’s, and Nordstrom have previously noted second-quarter challenges for women’s apparel and footwear coming from Asia. Analyst Stephanie Wissink said Nordstrom is working with vendors for goods, and Kohl’s is diversifying sourcing by moving production out of Vietnam and prioritizing time-sensitive women’s proprietary/private label items. Macy’s is placing stipulating earlier ship dates for both holiday and spring goods.

Wissink said department stores are already running on especially lean inventory exiting the second quarter. That could put them at a disadvantage heading into the holiday season if inventory fluidity becomes further constrained, she noted, adding that low promotional levels should drive higher full-price selling.

Wissink, who also covers the mass merchants, said Walmart is in a good position to weather the storm as it has managed disruption by changing supply sources, factoring in more lead time and chartering its own vessels. While Target has had to chase supply for its October holiday kick-off, the retailer could face medium-term risks because production impacts on its mostly private-label softline categories have been more severe.

Similar to Stichter, hardlines retail analyst Jonathan Matuszewski believes production is unlikely to normalize before late 2022, assuming elevated home goods demand continues.

Vietnam, a major upholstery producer, remains a challenge for the sector. For other home categories, Mexico’s seven-week average lead time compares favorably to Asia, where many factories require four to seven weeks of production lead before loading up cargo ships for the long maritime journey.

“In addition, China, Cambodia, Indonesia, Malaysia, Serbia, Thailand, Turkey and Vietnam have been levied with anti-dumping duties on mattresses, which complicates production there aside from everything else going on,” Matuszewski said.

Restoration Hardware has extended delivery times, but cancelation rates are not going up. Same for Bed Bath & Beyond, he said, adding that the retailer is just now starting to increase prices.

Mexico might also be strategic for value retailers—namely, the dollar stores. The analyst cited a recent call with Howard Jackson, president of HSA Consulting LLC, in which the warehouse club, discount and grocery consultant said retailers facing Asian supply constraints are strengthening Mexican vendor relationship to augment assortments.

Jefferies’ chief economist Aneta Markowska doesn’t see stagflation on the horizon. Current bottlenecks are a consequence of excess demand, with the supply side unable to adjust quickly. That also means the current inflationary pressures are largely demand-pull, rather than cost-push. While product shortages will intensify in the fourth quarter, mostly due to the seasonal surge in demand running into an inflexible supply scenario, bottlenecks could begin to ease in the first quarter as seasonal demand declines. This could allow retailers to rebuild inventories, Markowska said.