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The Freight Cost Tailwind Fade

It’s likely we’ll be observing a change in tone this earnings season, as management teams discuss the puts and takes on gross margin guidance.  While the majority of gross margin improvement has been the result of prudent inventory management and historically low clearance levels, freight costs have also been on the decline over this past year.  For a glimpse into the early freight headwind, we take a look at Celadon Group, a large domestic truckload carrier that services a wide range of companies including Wal-Mart, Procter & Gamble, and Phillip Morris.

Celadon Group’s reported results suggest freight costs are on the rise.  Representing a wide range of industries,  Celadon transports tobacco, consumer goods, automotive parts, home products and fixtures, lawn tractors and assorted equipment, light bulbs, and various engine parts with in the US, Canada, and Mexico.  The steady rise in fuel costs as a percent of revenue since Celadon’s Q3 ‘09 (calendar qtr Q1 ‘09) and the sequential increase in fuel costs since October ‘09 suggests that the freight tailwind is drawing to a close.  Retailers and wholesalers are likely to use rising freight costs as one reason to temper gross margin expectations in the coming year.  In the absence of accelerating top line growth, this could be a topic that continues to build and adds pressure to robust earnings growth expectations.  With so much focus on prices at the pump and the negative impact on the consumer wallet, it might be time to shift focus to the cost of goods.

The Freight Cost Tailwind Fade - 1

The Freight Cost Tailwind Fade - 2