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This week's retail container traffic begs some questions as to how our call for a 4.5 point margin squeeze will play out in 2H.

Yesterday we commented on how retail container traffic begged a few questions – from us included. Here are some further thoughts.

Specifically, Retail Container Traffic rolled over after trending up for 18 months. The NRF came out with the following bland comment "After nearly a year and a half of volume increases, it's not surprising to see some leveling off," NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said. "Retailers are being cautious with how much merchandise they import due to economic pressures such as higher commodity prices, but overall consumer demand remains strong." U.S. ports followed by Global Port Tracker handled 1.08 million Twenty-foot Equivalent Units in March, a gain of only 0.3 percent over the same month a year ago.

The NRF might not have been surprised, but we were.  After 2-years of pulling inventories down to borderline-unhealthy levels, shipments should be on the upswing.

There's no two ways about it...the relationship between retail sales and container traffic is very very real. Though keep in mind that this is very much the tail wagging the dog. Traffic does not pick up because demand is strong this month. Unit sales in the coming months will be impacted by the level of product coming into the country today. In other words, the units will sell -- it's just a question of what margin the retailers will get for the goods.

There are a few other possible explanations…

1)      Our bearish thesis about a supply/demand imbalance is wrong, and the entire retail industry is acting uniformly to take down units.

2)      In the first quarter, it was clear that retailers/brands pulled product forward ahead of COGS increases – so perhaps volume took a breather.

3)      Another consideration is that volume is tracked in TEUs, or twenty-foot-equivalent units. This says nothing about how full the containers are. As oil prices rise, we tend to see logistics teams maximize space inside the container to mitigate the need for additional TEUs. Remember that in filling a container, you either a) leave free space, b) fill it perfectly, c) ‘cube out’ (run out of space), or d) ‘weight out’ (don’t fill the visible space, but hit weight limit). Apparel and shoes don’t ever ‘weight out’, so this is all about cube optimization. We know we’re seeing some of that today.  Hard times make people work harder and/or smarter.

The dotted white line in the chart below represents the ASP yy change on input costs. Again, this is the cost that is pushed into the US -- and one that needs to be eaten by the brand, retailer, consumer -- or any combination therin.

Although we’re already starting to see a crack in the industry’s attempt to pass through pricing (ie Gap – 4.5% of US apparel sales), we’ve got to stay vigilant on both side of this (especially given the severity of our ‘4.5 below’ margin call for 2H.). If we see a consistent downtick in unit volume, it will test our negative assertion that unit shipments will not be down meaningfully for the year despite higher costs.

Retail: Contain Yourself - ContainerTraffic 5 11