Retailers Cautious on U.S. Consumers Risk Holiday Shipping Rush

Retailers in U.S. Risk Holiday Shipping Rush
John Hurley sorts packages at a United Parcel Service Inc. (UPS) Chicago Area Consolidation Hub in Hodgkins, Illinois. Photographer: Daniel Acker/Bloomberg

Retailers may face a last-minute rush to restock their shelves if household spending improves as it did in the 2009 holiday season.

Declines in imported-container volumes and in shipments by trucking companies such as Werner Enterprises Inc. show that “cautious retailers are tightly controlling inventories right now,” said Benjamin Hartford, transportation analyst at Robert W. Baird & Co., a Milwaukee-based investment bank. Shippers will keep supplies low until “there is a clearer picture of consumer demand.”

A similar situation played out in 2009, when companies underestimated sales, then had to expedite merchandise to stores before Christmas amid improving demand. If history repeats, ground and air-transport firms may benefit from a surge in shipments, according to Justin Yagerman, a New York-based analyst at Deutsche Bank Securities Inc.

“Retailers may have to rush goods if spending accelerates in the next couple of months,” Yagerman said. “This could help trucking companies outperform.”

The U.S. consumer has shown little sign so far of wanting to hit the malls. Retail sales unexpectedly stagnated last month, according to the Commerce Department, following a 0.3 percent gain in July that was smaller than estimated by a Bloomberg News survey of economists.

Consumer confidence has fallen to its second-lowest level this year, with the Bloomberg Consumer Comfort Index dropping to minus 49.3 in the week ending Sept. 11. The number of households saying it was a bad time to spend was the highest in three years, as views of the state of the economy edged up to minus 86.6 from minus 88.7 in the prior week. The unemployment rate remained at 9.1 percent in August as job growth stalled.

Falling Volumes

Shipping data currently show retailers preparing for a “muted” holiday season, Hartford said. The combined inbound-container volume at the Los Angeles and Long Beach ports fell 9.4 percent in August from a year earlier, following declines of 2.3 percent and 4.6 percent in July and June, according to Bloomberg data. These ports, the two largest in the U.S., account for about 40 percent of total imports, Hartford said.

The correlation between the six-month average of trucking volumes and Los Angeles and Long Beach port activity is 0.86, according to Bloomberg News calculations. A correlation of 1 would show they move in lockstep, while a value of zero signals no relationship.

Trucking rose 0.8 percent in August from a year ago, down from a recent peak of 4.6 percent in February, according to the Ceridian-UCLA Pulse of Commerce Index, which measures the volume of diesel fuel purchased.

Summer Slowdown

This summer’s slowdown signals that retailers are “stocking to weaker sales expectations” and are willing to be under-supplied leading up to the holiday season, according to Edward Leamer, chief economist for the Pulse of Commerce Index for Ceridian Corp.

The ratio of retail inventories to sales was 1.34 in July, near the all-time low of 1.33 in January through April of this year, according to data from the U.S. Census Bureau.

In December 2009, the late rush for holiday goods led to a 3.5 percent annual jump in the Ceridian-UCLA index, which followed 22 consecutive months of declines, Leamer said.

From the investor perspective, “cautious” retailer expectations already are being discounted by trucking stocks, according to David Ross, a Baltimore-based transportation analyst at Stifel Nicolaus & Co.

‘Could Be Upside’

“The expectation is for a fairly low pace of consumer spending,” Ross said. “If things improve, there could be upside for these stocks.”

The Bloomberg U.S. Trucking Index -- which includes Landstar System Inc. and Werner -- has risen 5 percent since Sept. 6, while the Standard & Poor’s 500 Index grew 3 percent, Bloomberg data show. Between Oct. 15, 2009, and March 31, 2010, the index increased 17 percent, compared with the S&P 500’s gain of 7 percent.

Ross maintains “buy” recommendations on Arkansas Best Corp., Con-Way Inc., Old Dominion Freight Line Inc. and Roadrunner Transportation Systems Inc. All are in the index and may benefit from late-season demand, he said.

Shipping volumes for Werner, an Omaha, Nebraska-based truck operator, have declined as its customers keep inventories “lean,” Chief Financial Officer John Steele said at a Sept. 8 conference hosted by Credit Suisse Group AG. “But that may mean that we could see a spike or a quick step-up in volumes if there is some kind of a seasonality that occurs in September, October, November.”

Ship by Air

If consumer demand improves after mid-October -- a rough cut-off for retailers importing ocean freight from Asia in time for holiday delivery -- companies will ship by air, which may benefit FedEx Corp. and United Parcel Service Inc., Ross said.

“A slow start to what’s normally the peak shipping season suggests the airfreight businesses of FedEx and UPS may benefit if demand picks up closer to the holidays,” he said.

Chain-store sales during the traditional rush -- Thanksgiving to Christmas -- are forecast to rise 3.5 percent this year compared with 2010, according to the International Council of Shopping Centers. That’s “a tad weaker” than last year when annual sales rose 3.8 percent “but considerably slower” than the 5.1 percent average through the first eight months of the year, according to Michael Niemira, chief economist of the New York-based trade association.

“I would characterize this year’s holiday season as slow and steady, with downside risk higher than last year,” he said.

‘Pulled Back a Bit’

J.C. Penney Co., the third-largest U.S. department-store chain, has “pulled back a bit” on projections for this “most important” sales period, Chairman and Chief Executive Officer Myron Ullman said at a Sept. 7 conference hosted by Goldman Sachs Group Inc.

For Hong Kong-based Li & Fung Ltd., the world’s biggest supplier of clothes and toys to retailers such as Wal-Mart Stores Inc., this year “has been okay, although in the past few months things have slowed down a little bit,” Chairman Victor Fung said in an Aug. 30 interview with Bloomberg Television.

Still, demand for trucking has been “relatively stable” in the third quarter for Jacksonville, Florida-based Landstar, according to Chairman and Chief Executive Officer Henry Gerkens. “Although there was much talk of a major economic slowdown or double-dip recession, Landstar has not seen any evidence of a decline in freight-volume activity,” he said on a Sept. 2 conference call.

Website Crashed

And it’s possible consumer spending still may accelerate. Target Corp.’s website crashed last week as the second-largest U.S. discount retailer was overwhelmed by consumer interest in a new collection from the Italian designer Missoni. Demand exceeded that of a typical Black Friday -- the day after Thanksgiving and one of the busiest shopping days of the year -- according to Courtney Foster, a spokeswoman for the Minneapolis-based chain.

Another constraint has eased, with gasoline prices falling 10 percent since a peak in May, according to the American Automobile Association. A further drop at the pump “would be a positive for the consumer” and spur spending, said C. Britt Beemer, chairman of America’s Research Group in Charleston, S.C., a consulting company that studies consumer behavior.

U.S. shoppers also have pared their debts, giving them greater spending capacity when they find deals, Beemer said. If retailers can entice customers with an attractive offer, merchandise may sell quickly, particularly on Black Friday and pre-holiday weekends, he said.

“If consumers see an item that’s a good deal, they may go out and buy it,” Beemer said.

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