This is an excerpt from Monday’s Point of Sale retail supply chain newsletter.
We are entering a highly anticipated earnings season, especially for consumer and retail companies. Most analysts will be looking at the nation’s largest retailers to understand how the consumer behaved in the last few months of year. For me and my fellow supply chain nerds, we want to know how many blame freight and shipping costs for missing guidance.
Since there’s only been one major retailer to hold a call, surely no one yet has pointed to transportation costs for missing earnings… Wrong.
Bed, Bath & Beyond (BBBY) posted earnings per share (EPS) of 8 cents for the fiscal third quarter, which is less than half the consensus estimate of 20 cents. Of course, BBBY suffered from dismal store in-store traffic, as many other retailers did. According to Placer.ai, BBBY has experienced average store traffic down more than 20% since the summer. But BBBY was able to offset much of this traffic decline with robust growth in e-commerce and omnichannel offerings like BOPIS and same-day delivery.
What BBBY was unable to offset was tight shipping capacity and higher freight costs. Both the CEO and CFO both highlighted freight costs as their main drag on margins in their opening statements. In fact, during the call, management mentioned higher freight and shipping costs as a primary headwind more than 10 times.
Despite the drag from transportation costs, the company was able to expand gross margins through favorable markdowns, a product mix shift to higher margin categories and leveraging distribution and fulfillment costs. In other words, BBBY benefited from low inventories, was able to squeeze margins from fewer SKUs, and fulfilled 36% of online sales from its stores. CFO Gustavo Arnal stated gross margins were damaged by, “…around 80 basis points from higher shipping expenses associated with industry-wide outbound freight rate increases, particularly in the latter part of the quarter”.
What about 2021? BBBY is not expecting any loosening of capacity any time soon and is preparing for elevated freight costs throughout 2021. CEO Mark Tritton said, “We know that the freight pressure across retail is here to stay, and we’ve built that into our future plans”.
The company remains positive about the parts of the company it can control and expects year-on-year adjusted EBITDA margin improvement in fiscal Q4, despite lower store traffic, shipping constraints and higher freight costs.
Get accustomed to hearing this over the next few weeks, then again when Q1 earnings season rolls around. Why? Because Tritton is right – the freight pressure across retail is here to stay.
Although new equipment orders exploded in recent months, other constraints like the Drug & Alcohol Clearinghouse, the lack of CDL issuances, and the inability for driver training schools to operate at full capacity is creating a driver drought. The extent of shortfall is apparent in the industry-wide driver wage inflation. Quality carriers understand the implications of a depleted driver pipeline and are doing whatever it takes to avoid empty seats.
The facts are that demand shows no signs of slowing anytime soon. Not only are consumers continuing to spend money on goods, but there is a recovery blooming in the industrial sector. On a rejection-adjusted basis, the Outbound Tender Volume Index is up 19% yoy. With many viable options, carriers are being selective and rejecting nearly 1-in-4 tenders at contracted rates.
The first quarter is typically the weakest season of the year for freight, but stimulus-aided consumers are keeping the 2020 bull market charging into the new year. The slower-than-anticipated vaccine rollout and the potential for a third wave of stimulus are only adding fuel to the fire.
Final Thoughts. The variables that initiated the freight bull market still hold, despite actions taken to mitigate them. From the supply side, the striking new equipment orders will take several months to make any impact and may not be as significant as some are calling for if the bottlenecks at driver training school are not relieved.
From a demand perspective, the vaccine and fiscal stimulus are the biggest variables. There will undoubtedly be a release of generational pent up demand for services once the vaccines are widely available, but that may not be until well into the second half of the year. Until then, the possibility of further stimulus will keep consumers upbeat and freight flowing. Like I said, get used to retailers blaming transportation costs for earnings shortfalls. I’ll do my best to highlight these retailers, but I may not be able to keep up.
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