Drop in Shipping Could Mean Weak Holiday Season for Retail (DRYS, GNK, EXM, SSW, DAC, TGT, M, WMT)

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One indicator of a profitable holiday season for US retailers is the flow of goods into US ports. The shipping season for holiday goods generally starts in July and August and runs through October. So far this year indications are not rosy. Container ship traffic into the Port of Long Beach was down in July and is expected to be lower still for August.

Container shipping companies, unlike the dry bulk shippers DryShips Inc. (NASDAQ: DRYS), Genco Shipping & Trading Ltd. (NYSE: GNK), Excel Maritime Carriers, Ltd. (NYSE: EXM), and others, are mostly privately held or traded only lightly over-the-counter in the US. The world’s largest container shipper is Denmark’s AP Moeller-Maersk, which is expected to see profits fall by -25% this year as container rates have collapsed. Two publicly traded container shippers are Hong Kong-based Seaspan Corp. (NYSE: SSW) and Greece-based Danaos Corp. (NYSE: DAC).

For the shippers, part of the problem is an over-supply of ships. The container fleet has grown 17% since 2007 and new orders equal nearly 28% of existing supply. Dry bulk shippers have placed orders that would increase capacity by 36%, so the container shippers are a bit more cautious than the bulkers.

The main reason for the slowdown in container shipping is wariness on the part of retailers for the 2011 holiday season. Retail profits in the second quarter gained an average of 11%, the smallest increase in two years. That was due primarily to steeper discounts on goods as retailers cleared out inventories in the quarter to make room for the back-to-school season.

By and large back-to-school customers showed up as hoped. Target Corp. (NYSE: TGT) saw its total sales rise 5.4% in August compared to August 2010. Macy’s Inc. (NYSE: M) posted higher sales as well, and would have done better except for Hurricane Irene. Wal-Mart Stores Inc. (NYSE: WMT) has raised its full-year profit outlook, but most of that is due to increasing sales overseas.

But as news about the US economy and unemployment continue to dominate the front pages, there is some concern that skittish customers will hold back on holiday shopping until retailers put out their markdowns. And uncertainty about customers’ willingness to spend is dampening enthusiasm among retailers as well.

The National Retail Federation acknowledges the slowdown in shipping, but notes that last year holiday merchandise was shipped early as shippers feared a container shortage would hamper deliveries. The group expects September cargoes to jump by 10.4% over September 2010 and October shipping to rise 8%.

A hugely successful holiday season doesn’t appear to be in the cards for US retailers, but no one expects the kind of retail smackdown we saw in 2008. That’s should be some comfort to retailers.

Paul Ausick