Retail stockscontinue on their slide as investors worry about the world's second largest consumer market.
I decided to ask Brian Sozzi, a StarMine top-ranked Equity Research Retail analyst, about his outlook on the sector.
LL:Japan is a supplier to the world. Now we are hearing that some products might have to be tested for radiation. What are your retail sources telling you?
Brian Sozzi: Thus far, the supply chain situation for retailers is not as dire as one would expect amidst all the heart-wrenching headlines and photographs. While the movement of goods and services throughout Japan has taken a hit, sparking sharply lower production from chip suppliers to car producers, the not so detrimental impact to retail reflects where the sector is structural speaking. By that I mean diversification. As the costs of production have climbed appreciably since the economic fallout concluded, retailers have made it a top priority to shift production from a high cost region in Japan, and a creeping inflationary country in China, to the likes of Egypt, Philippines, Vietnam, Nicaragua, and in some instances back to the United States.
Two great examples of the supply chain diversification I speak of are Gap and Abercrombie & Fitch. Gap has a vendor base of some 600 spread throughout 60 countries worldwide, with no vendor accounting for more than 3% of purchases. Abercrombie & Fitch has broadened its supply chain to Central and South America, and no vendor comprises greater than 5% of its purchases. Moreover, many retailers have taken advanced receipt of products that are set to arrive in stores in the next few months, so an immediate disruption in most product classifications is unlikely.
Make no mistake, Japan is a player in the global supply chain, and products produced there could very well be a cog in the supply chain of a plant in China, which in turn supplies a retailer with a finished product for sale. If we learned anything from the leverage bust, it’s that the world is interconnected.
Regarding my discussions with contacts, many have characterized things as being at a temporary standstill. Products are not flowing smoothly, and product out of stocks in food is being noted. Empty shelves are normally music to the ears of retailers as it signals strong demand, but the demand we are seeing in Japan is for basic necessities that may not be replenished quickly. Rolling blackouts, damaged roads and lines of communication are impediments to the supply chain currently.