|US inventory shortfall drives seemingly ‘never-ing’ peak season
On store shelves, in warehouses, in trailers and containers, US shippers are coming up short.
The sale of goods at many businesses is outstripping available inventory and that will keep pressure on supply chains, constraining capacity and pushing up transportation costs throughout 2021.
Shippers such as Yeti Holdings, Mohawk Industries, Columbia Sportswear, and Peloton Interactive have struggled to keep adequate inventory and determine what level of inventory is needed, and Peloton Interactive is sping millions of dollars to expedite delivery of its exercise equipment. Shippers large and small are still struggling today, as supply chain disruption collides with US consumers who are still sping more money on physical goods than services, drawing down inventories across many industries.
That demand is driving increases in imports currently clogging many US ports at a time of year when shippers typically catch their breath. US imports from Asia rose 14 percent year over year in January, according to data from PIERS, a sister product of JOC.com within IHS Markit.
That’s more than twice the annualized percentage increase in January 2019, and compares with a 2.9 percent year-over-year decrease in January 2020.
US retailers are projecting that imports in the first half of 2021 will increase 22.1 percent over the same period last year and, more importantly, that each month will set a new record for import volumes for those months.
Those containers swamping US ports are slowing an increase in production at US manufacturers that rely on components sourced overseas. Manufacturers also are trying to build up inventories, although their shortfall ts to be smaller than that of retailers.
However, replenishing inventory is coming at a high price for manufacturers and, as a result, some manufacturers such as flooring manufacturer Mohawk Industries are passing their transportation costs on to customers. “We have announced price increases across most of our collections to pass through higher transportation costs,” Chris Wellborn, chief operating officer, told investors during a Feb. 11 first-quarter earnings call transcribed by Seeking Alpha.
Some retailers and manufacturers are changing strategies more radically, either keeping more inventory on hand to prevent shortages as they build new distribution centers, or putting a cap on inventories to avoid overstocking amid uncertainty over what consumers will buy.
“This year is going to be the peak season that never s in many ways,” said Brian Bourke, chief growth officer for freight forwarder and third-party logistics provider (3PL) SEKO Logistics. “We see it getting worse before it gets better, and we don’t see it getting better for a long time.”
A $40 billion shortfall
Data from the US Bureau of Economic Analysis (BEA) show the gap between inventories and sales remained wide across most industries through November, said Jason Miller, associate professor of logistics at the Eli Broad College of Business at Michigan State University.
“We’re down roughly $22 billion of inventory in wholesale durable goods since February,” Miller said in an interview. “In all retail we’re down $40 billion in inventory in real terms. This isn’t something where we’re going to be turning away from inventory restocking in a month or two.”
Inventory-to-sales ratios, a measure of how many months of inventory businesses have on hand, are only slowly climbing, indicating inventories remain low. The combined ratio for all retail sectors, for example, rose from 1.34 in February to 1.53 in April, but was 1.17 in November.
In manufacturing, inventories built up during the spring and then declined from June through October before rising again in November, the BEA data show. Inventory-to-sales ratios remained flat, however, at about 1.68, indicating a need for even faster replenishment.
The COVID-19 pandemic d a hopefully once-in-a-lifetime drain on inventories in many sectors of the economy, from retail to manufacturing and wholesale distribution. It also generated a wave of consumer demand supported by government stimulus.
Business sectors involved in e-commerce, have grown inventories beyond pre-pandemic levels, but their sales are so much higher they are continually scrambling to rebuild stockpiles, Miller said. “Given where sales are at right now, inventory is still low on a historical level.”
That’s forcing shippers to make difficult decisions about how much inventory they need, how to bring that inventory into the United States, and how to move it within the country. Some shippers believe they will need more inventory to support e-commerce sales, while others want less.
“One of the challenges is whether the Walmarts of the world want to get inventory-to-sales ratios back to where they were, or settle 2 or 3 percent below where they were?” said Miller. “There will be multiple additional months of restocking, if the goal is to bring it back to where it was.”
Cooler and drinkware manufacturer Yeti Holdings is among those shippers that plans to build up its inventory to pre-pandemic levels. “We see inventory ing the year approximately $200 million. And that actually takes us back to slightly above 2018 level,” Paul Carbone, CFO, told analysts Feb. 11 on a first quarter earnings call transcribed by Seeking Alpha.
However, performance apparel manufacturer Under Armour is one of those looking to do more with less.
“We will look to manage our inventory tightly, and in some instances, constrain demand to return to more premium revenue growth,” David Bergman, chief financial officer, said in a Feb. 10 earnings call. Apparel maker Levi Strauss attributed an increase in fourth-quarter earnings to lower inventories, which helped the apparel maker avoid discounts on its clothing.
Falling into the gap
In 2020, overall retail inventories steadily increased each month after June, when they hit their lowest point. Still, overall US retail inventories were down 12 percent year over year as of November, while sales were up 8 percent year over year, Miller pointed out.
The picture painted by BEA data varies across the economy, but in many sub-sectors the tr lines are very similar, with large gaps ing up between actual inventories and inventory-to-sales ratios, an indication that replenishment is falling behind demand.
In the building materials and garden supply sector, inventory levels were 3 percent higher year over year in November, but sales were up 12 percent. In the third quarter last year, Home Depot reported that inventory turned over 5.9 times, up from 5 times a year earlier.
In the furniture, furnishings, electronics, and appliances retail sub-sector, inventories were still down 7 percent year over year in November, although they had been down 15 percent in July. Sales, which had rebounded from July through October, were down 2 percent.
Meanwhile, automotive dealers’ inventories were down 15 percent in November year over year while sales were up 3 percent. While vehicle sales recovered faster than expected, materials shortages, whether of steel or semiconductors, hampered rising manufacturing production.
The US manufacturing recovery took hold in late 2020, and continued into January, when output rose at the fastest pace since August 2014, according to IHS Markit, the parent company of JOC.com. But delays in transportation, especially from overseas, are limiting expansion.
“Excluding Decembers record low, vor performance deteriorated to the greatest extent since data collection began in May 2007,” IHS Markit said in its January Purchasing Managers Index (PMI) report. Disruption reportedly stemmed from raw material and transportation shortages, “notably trucking.”
Noting exted lead times for raw materials, manufacturers increased their purchasing activity in January, resulting in the fastest rise in pre-production inventories since December 2019, according to IHS Markit. But that also means more containers of inputs headed to US ports.
Delayed deliveries, expedited freight
Manufacturers’ longer lead times will add to a frustrating situation in which shippers have to not only fore inventory needs to meet current demand but also future demand during the pandemic. Retailers voiced frustrations with analysts during recent quarterly earnings calls transcribed by Seeking Alpha and Motley Fool.
“Supply chain and logistics issues, coupled with ongoing global constraints on ocean transportation, including vessel and container shortages, are resulting in later Spring 2021 receipts and deliveries to wholesale customers, as well as availability of Spring 2021 inventory for our direct-to-consumer businesses,” Jim Swanson, chief financial officer of retailer Columbia Sportswear, told Wall Street analysts in a call Feb. 4, transcribed by Seeking Alpha.
“We continue to expedite transportation and that comes at a higher cost as were trying to fulfill retail orders as quickly as we can,” Kevin Jacobsen, CFO of cleaning and disinfectant product maker Clorox, said during an earnings call Feb. 4, transcribed by Seeking Alpha.
“I dont see things getting better in the next six months,” Steve Fasching, chief financial officer of Deckers, said Feb. 4. “For the foreseeable future, were going to continue to have disruptions in the supply chain. I think theres pressure on factories to get products out, theres pressure on shipping companies to get ships across the ocean.”
There are problems on both sides of the Pacific. “Right now that [Asian] factories are working extra shifts during the Chinese New Year,” SEKO’s Bourke said. “But there are no truckers to pick up the goods and no containers to put them in. So the backup will take months to work through,” he said.
Another stimulus check could soon be heading to US consumers, which could bump up demand for goods even higher. “We’re preparing additional labor and ships for the upcoming stimulus,” Bourke said. He expects the stimulus will increase sping on goods such as exercise bikes.
“Last year with the stimulus we had a peak in demand. There’s a certain percentage that will use that money on a new TV or Peloton bike and that will translate to demand.”
Peloton Interactive, the high-tech fitness equipment manufacturer, did see its sales more than double year over year in the fourth quarter, rising to $1.06 billion. But supply chain disruption continued to ext delivery times, forcing more sping on expedited transportation.
The company will invest $100 million to reduce the waiting time for its products, expediting ocean and air shipments, John Foley, co-founder and CEO of Peloton, said in a Feb. 4 earnings call. Part of the strategy will be diverting freight to less-congested ports, he said.
“We will continue making significant investments to get our products to the US with more certainty and greater speed,” Foley said. Container off-loading currently takes four times as long as a year ago at the port of Los Angeles, Peloton CFO Jill Woodworth said.
With demand and disruption continuing, “inventory-to-sales ratios may not catch up until 2022,” Bourke said. “But what happens if we get vaccines into 300 million Americans by the of the first half? Maybe we stop buying stuff, because we want to sp money on trips.”
“There’s going to be more peaks and troughs and there’s going to be more friction,” said Miller. “Fores typically are 70 percent scientific and data based and 30 percent emotional. But we’re all 70 percent gut check right now and in some industries it’s 90 percent.”.
AD/CV News: Carbon, End Blocks, Hot-Rolled Steel, Steel Wheels, Tires
Carbon – dumping margins of $0.38/kg to $1.83/kg in final results of administrative review of AD duty order on activated carbon from China for the period April 1, 2018, through March 31, 2019
End blocks – net subsidy rates of 16.8 to 337.07 percent for China, 5.86 to 14.81 percent for Germany, 5.2 percent for India, and 3.12 to 44.86 percent for Italy in corrected notice of CV duty orders on forged steel fluid blocks from these countries
Hot-rolled steel – net subsidy rate of 0.51 percent in preliminary results of administrative review of CV duty order on hot-rolled steel flat products from Korea for the period Jan. 1 through Dec. 31, 2018
Steel wheels – notice of covered merchandise referral from U.S. Customs and Border Protection in connection with an Enforce and Protect Act investigation concerning the possible evasion of the AD and CV duty orders on steel wheels 12 to 16.5 inches in diameter from China
Tires – continuation of AD and CV duty orders on passenger vehicle and light truck tires from China, effective Feb. 19