Red Sea attacks add 'element of uncertainty' for food retailers, says BMO

By James Rogers

There have been dozens of attacks on cargo ships from Houthi-controlled Yemen since November

The disruption caused by the Houthi attacks on cargo ships in the Red Sea could result in incremental costs for food retailers, according to BMO Capital Markets.

"This adds an element of uncertainty for retailers (DLTR, TGT, WMT, COST, DG) as it relates to guidance/visibility in 2024, and if temporary, could add some incremental costs that companies may be reluctant to pass on given the rapid changes and uncertainty," wrote BMO Capital Markets analyst Kelly Bania, in a note released Monday.

However, BMO said it believes that Costco Wholesale Corp. (COST) is not currently experiencing disruption to date. "They generally are reliant on contracted freight and typically only really use spot rates during high important volume periods such as summer/pre-Holiday."

Related: Oil prices pare gains after drone attack kills U.S. troops, escalating Mideast crisis

But BMO notes that the Red Sea disruption "clearly adds risk" for Dollar Tree Inc. (DLTR) and expectations for the company's additional $1 in freight-related benefits in 2024. "We estimate 10-15% exposure to spot markets for DLTR as the company has shifted more towards longer-term contracts," wrote Bania.

Chef's Warehouse Inc. (CHEF) imports European specialty foods, and may experience product delays and cost pressures, according to BMO, which adds that the company managed these issues well through the pandemic.

Last week Wells Fargo warned that Dollar Tree is at risk from Red Sea disruption. "Exposure varies across our coverage, but names with high unit velocity (dollar stores) and high discretionary mix (ocean imports) are most at risk," wrote Wells Fargo analyst Edward Kelly. "This places DLTR in the cross-hairs of another key industry issue."

Related: These retail stocks could be exposed to Red Sea disruption, say analysts

Dollar Tree shares are up 20.8% in the last three months, while Target Corp. (TGT) stock is up 31.2%. Walmart Inc.'s (WMT) stock is up 0.8% over that period, while Costco is up 23.8% and Dollar General Corp. (DG) is up 11.3%. Shares of Chef's Warehouse are up 74.6% in the last three months.

Since November, there have been dozens of attacks on cargo ships in the region from Houthi-controlled Yemen. On Friday the Bermuda-owned merchant vessel Marlin Luanda was struck with an anti-ship ballistic missile in the Gulf of Aden, causing a major fire in one of the ship's cargo holds, according to the U.S. military's Central Command. The Gulf of Aden connects to the Red Sea through the Bab-el-Mandeb strait.

The Houthi attacks have prompted a U.S.-led coalition to launch air strikes against the group.

Related: These seven tanker stocks are set for upside amid Red Sea disruption, says Evercore

The Red Sea is a vital conduit for the Suez Canal, which is the main route for shipping from Asia to Europe and the East Coast of North America. The Suez Canal has historically accounted for about 60% of this traffic, according to Raymond James.

However, the recent Houthi attacks have prompted many shippers to divert their cargo around Southern Africa and the Cape of Good Hope, extending journey times. "The impact has been two-fold, as the trip around the Cape of Good Hope is 1-2 weeks longer than going through the Suez Canal (causing delays and 'soaking up' global container capacity), along with soaring shipping rates," Raymond James analyst Rick B. Patel wrote in a note released last week.

-James Rogers

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01-29-24 0818ET

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