Despite fears, retailers have so far avoided impact of Red Sea disruption

By James Rogers

The attacks by Iran-backed Houthi rebels on cargo ships in the Red Sea are ongoing

The Houthi attacks on cargo ships in the Red Sea, which started last year, sparked concern about the impact on retailers confronted with increased shipping rates and longer journey times as freight is rerouted from the troubled region.

The Red Sea has certainly been mentioned on a number of conference calls this earnings season, but retail giants and softline retailers say they are coping with the issue. Speaking during a conference call to discuss the company's fourth-quarter results last week, Costco Wholesale Corp. (COST) Chief Financial Officer Richard Galanti said the warehouse retailer has experienced some delays. "Generally just a couple or three weeks, but mostly now planned for," he said.

Galanti also pointed to Panama Canal drought conditions that, like the Houthi attacks, fueled fears of snarled supply chains.

"First, there was an issue a while back with the Panama Canal challenges, then, of course, the Red Sea challenges," he said. "A lot of that has to do with changing the way ships are being routed."

Related: This is what the Red Sea attacks mean for U.S. retailers, says Moody's

However, Costco has run into "no meaningful pricing issues," because of the contracts it has in place, according to the CFO.

The Red Sea is a critical conduit for the Suez Canal, a vital artery in shipping networks. In the first half of 2023, trade going through the Suez Canal represented about 12% of global trade, including 30% of container traffic, 10% to 15% of global seaborne cargo and 8% of global liquefied-natural-gas shipments, according to the IMF. But as of Jan. 21, the 10-day cumulative shipping volume through the Suez Canal had dropped close to 50% relative to the previous year, the IMF said in a regional economic outlook update for the Middle East and Central Asia.

Last week, Gap Inc. (GPS) also touched on the Red Sea fallout when it reported fourth-quarter results. The clothing retailer's Chief Financial Officer Katrina O'Connell said Gap was preparing for multiple situations that could bring "modest headwinds in the first half of the year related to late deliveries as a result of geopolitical issues in the Red Sea." But she added: "We currently expect that impact will moderate in the second half of 2024."

Related: Red Sea disruption forces retailers to rethink back-to-school and holiday shipments

When Abercrombie & Fitch Co. (ANF) reported its fourth-quarter results last week, Chief Financial Officer Scott Lipesky pointed to elevated shipping rates around the world in the wake of the Red Sea attacks. He added: "We are seeing some friction there on shipping costs. That'll be more of - kind of a Q2 into the back half thing, as those higher shipping costs start to flow through."

The CFO also said the disruption has been felt more in Europe than the U.S. "Obviously, the situation is evolving rapidly," he said. "When we think about impact, this is mostly an impact to the European market for us. A lot of shipping goes through that area."

Nordstrom Inc. (JWN) reported its fourth-quarter results earlier this month, and CEO Erik B. Nordstrom said that, at this point, the company is not seeing the impact of the Red Sea attacks on its merchandise margin. "We have some portion of our goods that's delayed a bit, but we don't see it being material effect to our results," he said.

Related: Here's where Gap still faces challenges, after shares rallied on earnings results

With earnings season almost over, the forthcoming reports from Dollar Tree Inc. (DLTR) and Dollar General Corp. (DG) will be closely monitored for any comments on Red Sea impact. In a note released earlier this year, Wells Fargo warned that Dollar Tree is at risk from disruptions caused by the Houthi attacks on Red Sea shipping. "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."

BMO has also said that the Red Sea attacks add "an element of uncertainty" for food retailers including Dollar Tree and Dollar General. Dollar Tree reports its quarterly results before market open on Wednesday, and Dollar General reports Thursday.

The attacks on cargo ships are continuing. The U.S. military's Central Command said that U.S. and coalition forces downed at least 28 Houthi drones in the Red Sea region on Saturday.

Related: Costco isn't raising its membership fee. Analysts are disappointed.

On Monday, Central Command said that Houthis fired two anti-ship ballistic missiles at Pinocchio, a Singaporean-owned, Liberian-flagged merchant vessel. The missiles did not impact the vessel and there were no injuries or damage reported, according to Central Command. Also on Monday, the U.S. conducted six strikes, destroying an unmanned underwater vessel and 18 anti-ship missiles in parts of Yemen controlled by Houthis.

Bill Peters contributed.

-James Rogers

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

03-12-24 1622ET

Copyright (c) 2024 Dow Jones & Company, Inc.