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

By James Rogers

Investor anxiety is "brewing" over ocean shipping rates amid the disruption caused by Houthi attacks in the Red Sea, says Wells Fargo

A number of retail stocks could be exposed to the fallout from the Houthi attacks on cargo ships in the Red Sea, say analysts.

Investor anxiety is "brewing" over ocean shipping rates, according to Wells Fargo. "Concerns around freight costs are rising as Red Sea instability bleeds into the broader shipping complex," wrote Wells Fargo analyst Edward Kelly, in a note released Friday. "While the situation is fluid, we currently expect a small impact for most, with freight still a tailwind in '24 overall."

However, Wells Fargo sees Dollar Tree Inc. (DLTR) as most 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 Kelly. "This places DLTR in the cross-hairs of another key industry issue."

Related: UPS 'a good value proposition' for shippers amid Red Sea attacks, says T.D. Cowen

But the potential impact on Dollar Tree is "still digestible", according to the analyst, who notes that many retailers expected a freight benefit in 2024, as favorable contracts in 2023 wrap into the first half of the year. "We estimate this issue could dampen this benefit, but estimate the EPS impact at 1% or less for all except DLTR."

Wells Fargo estimates that the events in the Red Sea could impact Dollar Tree's earnings in 2024 by 15 to 25 cents a share. "That being said, this probably just means a portion of the expected $1/sh+ benefit gets pushed into 2025, so it does not impact our positive stock view," Kelly added.

Wells Fargo has an overweight rating for Dollar Tree. Of 29 analysts surveyed by FactSet, 16 have an overweight or buy rating, 11 have a hold rating, and two have an underweight rating for Dollar Tree.

Related: Fallout from Red Sea attacks could boost this sector's margins, says T.D. Cowen

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," wrote Raymond James analyst Rick B. Patel, in a note released Friday.

Patel says that, for now, Red Sea supply chain problems appear mostly contained in terms of costs and delays in shipping times. But he adds that companies with high Europe revenue penetration are most exposed to the risks if the disruption persists, pointing to softline retailers Ralph Lauren Corp. (RL), Skechers USA Inc. (SKX), Capri Holdings Ltd. (CPRI), and Nike Inc. (NKE).

"The conflict is driving a tightening among the global shipping market with container costs continuing to move higher across many of the different global routes (admittedly off a very low base), including China/Asia to the U.S," Patel wrote.

The analyst also highlighted the recent drought conditions impacting transit through the Panama Canal, which typically handles 40% of the container flow to the U.S. "Given this ... we believe that Western ports are poised to take share from Eastern ports," he wrote, adding that this could mean volume benefits for J.B. Hunt Transport Services Inc. (JBHT) and Western rails Union Pacific Corp. (UNP) and BNSF Railway if issues persist.

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

But the problems in the Red Sea are garnering most of the world's attention at the moment, with Stifel noting that it accounts for about 15% of world's shipping traffic.

"That is highest for containers at 33% of all container trade, to a lesser extend oil at 12% and LNG [Liquefied Natural Gas] at 8% and an even smaller amount for dry bulk," wrote Stifel analyst Benjamin J. Nolan, in a note released Thursday. "Rerouting around Africa adds 7-10 days transit time, which is a supply shock to the markets, which has pushed box rates to Europe up from $1,500 to nearly $4,000 today."

As the fallout from the attacks continues, the Red Sea disruption is creating opportunities in the shipping industry, albeit temporary, according to Nolan. "Demand for crude tankers has been good, particularly for the mid-sized vessels, against very tight supply," he wrote. "Demand for product tankers has been tight this winter, driving rates up significantly against incremental supply which won't materialize until 2H-2025 at the earliest."

Dry bulk also has tight supply, although needs further Chinese demand to push rates higher, Nolan added. Additionally, the Red Sea disruption is helping box rates, although a "bloated orderbook" should drive container rates lower, the analyst said.

Related: Red Sea and Panama Canal disruptions may snarl supply chains, but these two toy makers appear well-positioned

Set against this backdrop, Stifel raised its price targets for Star Bulk Carriers Corp. (SBLK) to $27 from $25 and for Ardmore Shipping Corp. (ASC) to $20 from $19. The analyst firm also raised its target for Costamare Inc. (CMRE) to $11 from $10, and for DHT Holdings Inc. (DHT) to $12 from $11. Stifel increased its price target for International Seaways Inc. (INSW) to $63 from $58 and for Scorpio Tankers Inc. (STNG) to $76 from $73. The analyst firm also raised its Eagle Bulk Shipping Inc. (EGLE) price target to $55 from $54 but lowered its rating for the company to hold from buy.

-James Rogers

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01-27-24 0821ET

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