Looking to ‘22: Supply Chain Disruptions Impact Global Retail Trade

You may have heard: the global supply chain is broken.

Shipping delays and congested seaports have tripled container freight rates worldwide compared to levels observed in November of 2020. This cost inflation has translated into price increases, leaving many operators with the arduous tasks of buoying lagging sales and managing through heavy debt loads. Below, we compare seven high-risk with seven low-risk retail trade businesses during this rocky period.

CreditRiskMonitor is a B2B financial risk analysis platform designed for credit, supply chain, and other risk managers. Our service empowers clients with industry-leading, proprietary bankruptcy models including our 96%-accurate FRISK® score for public companies and 70%-accurate PAYCE® score for private companies, and the underlying data required for efficient, effective financial risk decision-making. Public company coverage comprises more than 57,000 businesses worldwide, totaling $69.3 trillion in corporate revenue compared to global GDP of $85.9 trillion. Additionally, private company coverage includes information on millions of businesses the world over. Thousands of corporations around the world – including more than 35% of the Fortune 1000 – rely on our expertise to help them stay ahead of financial risk quickly, accurately, and cost-effectively.

Distressed Operators

With the 96%-accurate FRISK® score, we have identified seven high-risk operators that have recently disclosed supply chain challenges. The FRISK® score red zone encompasses the bottom half of the scale, including anything equal to “5” or less, on the "1" (highest risk)-to-"10" (lowest risk) scale:

Company FRISK® Score Supply Side Commentary
Revlon, Inc. 1 “We have been focused on the global supply chain challenges that continue to impact both our business and the broader macro environment. Specifically, we are seeing pricing pressures and shortages on key ingredients and components…We expect the macro supply chain challenges to continue into 2022.”
Party City Holdco, Inc. 1 “To that end, as we sit here today, we anticipate supply chain headwinds to persist into 2022. Importantly, we are heavily invested in delivering an improved customer experience.”
Steinhoff International Holdings NV 2 “The material risks identified at operating companies include the following: the impact of the increased cost of labor and logistics on supplies; Supply chain failure.”
Express, Inc. 3 “We expect merchandise margin in the second half of the year to be slightly below 2019, driven by disruptions throughout the supply chain.”
Torrid Holdings 3 “The global supply chain has become more challenged and we expect continued shipping delays or congestion and manufacturing disruptions.”
McColl's Retail Group plc 3 “Supply chain disruption had impacted product availability in stores with a consequential effect on revenues…the ongoing nationwide shortage of delivery drivers, labor shortages at distribution centers and insufficient supply of key products continue to impact the supply chain nationwide and have intensified in Q4.”
J. Jill, Inc. 4 “Supply chain disruption is increasing, resulting in both elevated shipping costs and delays. We expect this disruption to continue at least through the back half of the year.”

Supply chain disruptions from the manufacturer to warehouses can lead to lost revenue and headaches. For example, CreditRiskMonitor has been closely watching apparel garment manufacturer Pan Brothers Tbk, a textile giant that defaulted on its debt obligations in March and continues to experience trouble financing its operations. This situation could lead to a supply disruption for many retailers, with customers ranging from Nike to Macy's. This past May, Fitch Ratings stated that Pan Brothers and another textile manufacturer, Sri Rejeki Isman Tbk PT, have severe liquidity pressures:

“We believe that the speed of debt restructuring execution is crucial for both companies’ operations to continue.”

Retail trade operators are facing higher costs in two ways. The bottlenecks in traditional shipping, coupled with strong consumer demand, are forcing operators to make use of more expensive modes of transportation such as air freight to stock shelves. B2B and B2C transportation costs from trucking have also increased. Higher expenses in excess of pricing pass-through will lead to weaker performance and pressure debt-servicing capacity for the leveraged retailers on the list above. 

Industry Leaders

CreditRiskMonitor has also identified retailers that have demonstrated solid inventory restocking, sales resilience, strong balance sheets, and guided on strategic initiatives for future growth. The retailers below indicated sourcing from new geographies, building out logistics networks, and/or increasing technological capabilities. With stable financial health, as indicated by their better FRISK® scores, these retailers can smoothly commit to these investments.

Company FRISK® Score Supply Side Commentary
H & M Hennes & Mauritz AB 6 “We have a great advantage here by having a global network in supply chain so we can adjust better than many smaller players.”
American Eagle Outfitters, Inc. 8 “I'm excited to share that in the quarter, we acquired AirTerra, an innovative logistics provider…we took an important next step in our supply chain transformation with the planned acquisition of Quiet Logistics to ensure ongoing efficiencies and procure a state-of-the-art logistics platform with meaningful growth potential.”
Steve Madden, Ltd. 9 “We feel good about the health and balance of our inventory…we benefited from the shift of production to Brazil and Mexico and our ability to chase is better there, particularly out of Mexico.”
Five Below, Inc. 9 “We are very excited to announce the opening of our Arizona Ship Center. We began shipping our stores from this facility at the beginning of the third quarter, which will help us better serve our Five Below stores out West. In addition, the Indiana Ship Center, which is planned to open in the summer of 2022, is under construction and will complete what we believe to be the optimal distribution center network to service over 2,000 stores.”
Ross Stores, Inc. 10 “Uncertainty remains on how industry-wide supply chain congestion may negatively affect our business in the fourth quarter. That said, we believe we are well-positioned as a value retailer.”
TJX Companies, Inc. 10 “We are well-positioned to take advantage of inventory opportunities, including packaway that we believe will arise from the disruption in the supply chain while also continuing to invest in the growth of our business.”
Walmart, Inc. 10 “Our price gaps are where we want them and we're innovating in the supply chain and adding capacity. And we're building businesses like Walmart GoLocal, Walmart Connect, Walmart Luminate, Walmart+, Spark Delivery, our Marketplace, and Walmart Fulfillment Services.”

American Eagle Outfitters, for example, has demonstrated top-quartile inventory turnover and excellent inventory financing patterns for several years compared to the broader apparel and accessory stores. To improve efficiency further, the company announced the acquisition of AirTerra, Inc. and the upcoming purchase of Quiet Logistics, Inc. to enhance its e-commerce and omnichannel fulfillment. According to its Q3 2021 announcement, company CEO Jay Schottenstein highlighted management's continued supply chain investments:

“We took an important next step in our supply chain transformation with the planned acquisition of Quiet Logistics to ensure ongoing efficiencies and procure a state-of-the-art logistics platform with meaningful growth potential.”

Effectively, companies that have the financial wherewithal to make strategic investments to deepen relationships with their vendors, build redundancy, and make investments will minimize disruptions and accelerate their growth trajectory. 

Bottom Line

Elevated transportation costs are likely to persist into 2022. Operators unable to absorb these costs combined with excessive debt obligations could find themselves flirting with bankruptcy. CreditRiskMonitor alerts credit and procurement professionals alike on upstream manufacturers, such as textile makers, with funding challenges that could easily end up rippling through the retail supply chain. Risk evaluators can start their due diligence process by separating high and low-risk operators with the FRISK® score. Contact CreditRiskMonitor today to see how we can help you uncover the risks and opportunities throughout the retail supply chain.