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Supply-chain woes are roiling holiday shipments. Expect to pay a lot more for gifts this year. (© Dave Cutler)

On Oct. 8, as retailers braced for an onslaught of holiday-season supply chain issues, 185 shipping containers, each filled with thousands of Care Bears, weren't where they needed to be. Some were in China, some stuck outside the Port of Los Angeles and others sitting on railcars in Chicago.

"They're moving. But they're moving like a turtle," said Jay Foreman, CEO of Basic Fun, which makes Care Bears and other '80s classic toys. "The question is: When are they going to get where they're supposed to be?"

Blowout holiday demand this year will clash with a supply chain battered by a cascade of online shopping and Covid disruptions — rewarding big retailers like Amazon (AMZN) and Walmart (WMT) with the global heft and sophistication to adapt. Container liners and logistics companies such as ZIM Integrated Shipping (ZIM) and XPO Logistics (XPO) are benefiting from soaring shipping rates.

The world's supply chain issues may mean 20% higher prices for online shoppers this holiday season. Longer term, analysts expect elevated supply-chain costs to shift consumer behavior and spur businesses to recalibrate operations.

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For now, holiday shoppers, many flush with pandemic-era savings, can stomach whatever costs retailers pass on, analysts say. They also say bigger companies, with more technology and less exposure to handling transportation vessels and escalating labor issues, are better equipped to manage the supply chain issues. 

But shipping-industry consolidation will likely keep prices high beyond the holidays. Digital shopping habits solidified during the pandemic will complicate improvements.

"Unless something dramatic happens, it's hard to imagine the U.S. deviating from the current addiction to imports," said Tinglong Dai, a professor and supply-chain expert at Johns Hopkins. 

The National Retail Federation forecast record holiday sales this year. The group expects holiday sales, for November and December, to climb between 8.5% and 10.5% to between $843.4 billion and $859 billion.

The NRF, during a conference call, called some accounts of the current supply chain issues "hyperbolic." And it said via email that retailers' inventory should be "more than adequate to match demand." But it said some shortages are inevitable.

Despite that risk, analysts say some retailers, particularly in fashion and accessories, could try to keep inventories tight heading into the holidays.

"Retailers have learned through the pandemic that they can do more with less, and that inventory control has measurable benefits on both sales and gross margin," Mari Shor, analyst at Columbia Threadneedle Investments, said over email.

Others have highlighted the chip shortage, which could squeeze prices of gaming consoles and other electronics higher. Some bestselling books could be harder to get, Vox noted, due to China's environmental efforts to limit paper production and understaffed printers in the U.S.

Nikki Baird, vice president of retail innovation at retail tech firm Aptos, said there would be fewer choices for shoppers. Retailers, she said, were likely to fall back on safe bets, rather than newer items. Generic toys could get a sales bump.

"Anything in the nonessential retail space, clothing and footwear in particular, is a candidate for reduced choices," she said over email.

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A pandemic-induced shutdown of travel and entertainment last year left many U.S. customers stuck at home. In the absence of those options, many of them bought lots of stuff online. Manufacturers, bracing for cratering demand, had to pivot.

But that steady stream of orders has scraped up against Covid-induced restrictions at ports and factories in Asia. Hiccups in production and seasonal shopping patterns have left warehouses packed to the ceilings.

"Some of the spring and summer goods came in so late, it didn't sell at retail," said B.J. Patterson, CEO of Pacific Mountain Logistics, a warehouse operator based in San Bernardino, Calif. "So it's sitting in warehouses ... and they're trying to figure out how to deal with that."

Backups in warehouses and at port shipyards have created an ocean-freight traffic jam in U.S. coastal waters and made securing shipping containers more difficult. Meanwhile, exhausting, low-paying work has made warehouse and trucking jobs, along with other pandemic front-line work needed to clear the influx of goods, less popular. Some employers are raising pay to attract workers. But gaps remain in what employees want and what employers think they want.

Against that backdrop, costs to ship things have swelled, most acutely on the water.  For lengthier routes — from Asia to the East Coast — the cost to send a shipping container across the ocean has run as high as $30,000.

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As those costs converge on the holidays, Salesforce expects customers online to pay 20% more for purchases in November and December. That price increase, it said, would ultimately push global digital holiday sales higher this year — to $1.2 trillion globally and $259 billion in the U.S. — even as it forecasts a dip in orders following a flood of demand last year.

Retailers in the U.S. could face an extra $223 billion in cost of goods sold over that time due to logistical snags and thin staffing, Salesforce says. So-called "buy now, pay later" options could become more common, as customers try to manage the higher prices.

Despite the supply chain issues, however, Salesforce sees few actual delays, as last-mile shippers add capacity, retailers bulk up their in-store pickup options, and customers pack more items into fewer orders.

The holiday season's heavy lifters aren't taking any chances. Amazon said it planned to hire 150,000 seasonal workers, 50% more than last year, after opening more than 250 fulfillment and other logistics centers this year. Walmart and Target are chartering their own ships, hoping to find detours around backed-up ports.

"Bigger retailers should be advantaged, given that they have vendor scale and vendor relationships," Cowen analyst Oliver Chen said.

Last year's home-renovation boom should still hold this year, he says. Same for wellness and fitness. He's also upbeat on apparel, as more people return to the office and school after a year of staying at home.

"The consumer is restocking the closet," he said. "For the first time in many years — five years or more — we're in an attractive and robust apparel cycle."

Chen says he likes the odds of Target and Walmart during the holidays, given their vast e-commerce infrastructure and broad store offerings. He's also bullish on The RealReal (REAL), an online luxury apparel reseller, and online fashion marketplace Poshmark (POSH), citing their appeal to younger consumers and a less wasteful approach to clothes shopping.

Still, analysts say the biggest gainers from the supply chain issues could be ocean-liner, trucking and logistics companies. Those firms have sat squarely at the crossroads of lean capacity and rabid demand.

"All these liner companies are going to make record profitability in the third quarter, after making record profitability in the second quarter, and they're going to follow that up with record profitability in the fourth quarter," Jefferies analyst Randy Giveans said.

He singled out Israel-based container liner ZIM Integrated Shipping. ZIM's per-share profit is seen ballooning roughly sixfold to $31.48 this year. On Nov. 17, ZIM reported third-quarter earnings per share skyrocketed 794% with revenue tripling.

The company, Giveans said, owns a majority of the shipping containers businesses are clamoring for. But it charters most of the ships it uses rather than owning them outright. The company has launched new premium high-speed services to meet e-commerce demand.

"We expect retailers to target the sales inventory to sales ratio they had prior to the pandemic, which will continue to support the restocking trend especially as we enter into the traditional peak season for Christmas," CFO Xavier Destriau said on ZIM's earnings call in August.

"This, in turn, is expected to sustain strong demand for container shipping for the remainder of the year through the Chinese New Year," he continued.

Other ocean shipping stocks, like Danaos (DAC), are also set for big profit jumps this year. Both ZIM stock and Danaos have IBD Composite Ratings in the 90s.

ZIM stock is up around 350% since its debut in January. Danaos is up some 230% year to date.

Once those holiday goods land in a truck, companies like J.B. Hunt (JBHT) and XPO Logistics (XPO) stand to benefit from rising freight rates. In the process, Wall Street expects profits for those companies to soar in 2021.

Those gains come as the trucking industry deals with its own supply chain issues. The same tight supply of chips that has hit car production has also strained truck output. The trucking industry has struggled to attract and retain drivers, as they opt for better-paying, less-itinerant work. Health risks due to the pandemic have also kept potential drivers away.

"If you don't have drivers, you can't move the freight, and you can't take advantage of a very good pricing environment," KeyBanc analyst Todd Fowler said.

Some companies, he says, have a bit more distance from the industry's labor issues than others.

Drivers in the so-called less-than-truckload market — trucking companies that pack shipments for multiple customers into one trailer — might be able to get home more frequently. XPO, Old Dominion Freight Line (ODFL) and ArcBest (ARCB) operate in that space, which has benefited from the e-commerce boom. Elsewhere, he says, companies like J.B. Hunt and Schneider (SNDR) use rail lines for long-haul container shipping and trucks for the last mile.

ArcBest stock has gained more than 160% year-to-date. J.B. Hunt is up nearly 50%. Old Dominion is up around 85%.

Meanwhile, rail stocks, like Kansas City Southern (KSU) and CSX (CSX), have made double-digit gains this year, even though limited space — in trailers and warehouse floors — has spilled over into the rail industry.

When shipping delays might start to harm shipping demand is unclear. But some analysts note that delays aren't always bad — at least for companies charging for the work.

"Theoretically, all these delays will create more pressure for higher-service goods," said Bruce Chan, a Stifel analyst who covers trucking stocks. "They should create pricing momentum and demand for services. So ultimately, they should be a good thing for these companies."

Still, other large companies have struggled to get a grip on the supply chain issues.

Package-delivery giant FedEx (FDX) — among the busiest businesses over the holidays — in September cut its full-year profit outlook, after wrangling with the disjointed supply chain and limited labor availability. A pandemic-related manufacturing shutdown in Vietnam hit Nike (NKE) sales in the latest quarter. Luxury furniture chain RH (RH) in September said it would delay launching a furniture line following the shutdown in Vietnam and difficulties sourcing raw materials.

Vietnam and other Southeast Asian countries are reopening factories, but generally too late for the holiday season.

Basic Fun, the toy company, also makes handheld games. Some of its Care Bears sing "Happy Birthday." Both require chips. Foreman, the CEO, says it used to take 60 to 90 days for chips the company ordered to arrive for production. Now, it takes 200 days.

Basic Fun's K'NEX building-set toys require a chemical to strengthen their plastic, he says. But other businesses need that material as well, making it harder to get. Motors that go into those toys come from China. Scarce container space to ship those items raises the risk of delays.

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For smaller businesses, materials once taken for granted can emerge as bottlenecks.

Executives at Made In, a kitchenware maker in Austin, Texas, said they've had to live with making less money on some stainless-steel frying pans, as they weigh pricing and margin targets against a commodities surge. The company works with manufacturers in Western Europe and the U.S. Executives say they've had to pay as much as $14,000 to ship a container from France to the East Coast.

Made In has expanded its staff to prepare for the holidays, after overhauling how it fulfills orders over the past year. Materials like corrugate that goes into boxes, or even the resin that glues a piece of foam into a knife box, have become constraints.

"As those things have become constraints, we have just had to extend the timelines through which we plan," said Chad Brinton, Made In's VP of operations. "You can't just buy a thing that used to take two weeks in two weeks anymore. It has to be a conversation that you have six weeks in advance."

Christian Champion, CEO of Ocean Crawler, a watchmaker based in Charlotte, N.C., has dealt with shipping delays out of Switzerland, where the company gets premade sets of self-winding gears that help make the watches run.

"There could still be delays, because one part could just delay everything," he said of the company's holiday preparations. "But we try to have everything in stock way ahead of time."

Even a T-shirt can hopscotch across multiple production hubs before it reaches the customer's doorstep. That journey includes mills in India and China. It includes facilities for dying, cutting and decorating, and retail distribution centers and warehouses for e-commerce orders.

Gooten, an on-demand manufacturing platform, uses a network of worldwide locations to produce clothes and home decor. The company says the model helps its customers — small and large retailers handling e-commerce orders — make and finish goods closer to the source of the order with fewer transportation hops.

Still, the world's banged-up supply chain has forced companies to examine what they can realistically do to meet demand.

"If we're out of one particular shirt in a particular size because the supply chain's broken, and can't facilitate getting new ones, what can we do?" said Mark Kapczynski, Gooten's chief marketing officer. "What are the swap-outs? And literally, that's going three, four, five, six levels deep."

Analysts who follow the supply chain issues point to a number of pre-pandemic factors that gave us the system we have now. In the wake of the Great Recession, some businesses shifted toward tighter inventories. Logistics technology advanced. E-commerce boomed. A lack of visibility into working conditions at factories and other points along the trek to customer homes made it easier for shoppers to guiltlessly click through to checkout.

The ports of Los Angeles and Long Beach — the U.S.' major Asia import hubs — are trying to expand their operations. But experts say untangling one link in the global supply chain requires untangling other links as well.

Analysts expect shipping costs to fall after 2021. But they'll likely stay elevated over the next few years. And they likely won't return to levels seen even five years ago, said Giveans, of Jefferies.

That trend might sustain the momentum for shipping stocks. But it could force recalibrations for the businesses that have to live with the higher costs.

A big reason for the higher prices, Giveans says, is consolidation within the ocean-liner industry into a handful of alliances after the industry lost money for years. The risk of regulation, at least in the U.S., is minimal, he says.

"These are large multinational, international companies charging supply-demand rates," Giveans said.

Others suggest simply rethinking what matters during the holidays would help ease the current supply chain issues.

"A lot of plastic Christmas trees ... will probably not be able to arrive in Chicago or Baltimore anytime soon," said Dai, the Johns Hopkins professor. "But to be honest, I don't really think that's going to be the end of the world if people don't get them."

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