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Higher oil prices, shipping disruptions create a double-edged sword for retailers

Retailers may soon be hit from multiple sides as costs rise while consumer spending lowers.

Rising oil prices due to global tension and supply constraints are a factor in everything from shipping costs to inflation. And with gas prices creeping up again after falling from their 2022 highs, shoppers may soon start to feel the pinch.

"It's pretty clear that higher gas prices will crowd out spending on other things like apparel and accessories, home goods, makeup and jewelry, … sporting goods, things that are probably less necessities," Morningstar senior analyst David Swartz told Yahoo Finance.

For young people and low-income consumers, the pullback in spending can be more pronounced, as gas costs make up a larger percentage of their income. Other headwinds for this demographic include rent, insurance, and college tuition or loans.

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"It's clear that Anthropology and Free People, which tend to have older and higher-income consumers, are doing much better than Urban Outfitters, which tends to have younger consumers typically in the 18 to 25 age range," Swartz said.

Read more: Best credit cards for gas for April 2024

Companies on the other end of the spectrum can also benefit, as people need cheaper essentials.

"That Dollar General consumer is being affected by gas prices, but they're still going to Dollar General because they need to buy stuff like toilet paper," Swartz added.

Other retailers that could feel the hit include Kohl's (KSS), Target (TGT), and even Walmart (WMT), per Neil Saunders, GlobalData’s managing director of retail.

"Kohl's is somewhat more exposed to the lower income consumer," Saunders explained, while Target has a wide range of shoppers, many of whom could be pulling back.

Walmart has done well with its grocery business, pulling in higher-income consumers who are looking to save on food, but its lower-income shoppers could be cutting discretionary items from their budget.

As of Q4, 60% of Walmart’s US sales came from grocery, Deutsche Bank analyst Krisztina Katai told Yahoo Finance.

Rough seas for retailers

Freight rates are also having an impact, as conflict in the Middle East drives up oil prices and disruption from the Red Sea crisis continues.

Typically, the two most significant factors behind freight costs are fuel prices and seasonality (such as gearing up for holidays), said Judah Levine, head of research at Freightos.

But the big swings are often caused by “black swan-type events” — think COVID, the Suez Canal blockage, or the Russia-Ukraine war.

In January, the Red Sea crisis interrupted shipping at a time when demand and freight rates often rise. Using alternative routes delayed shipping times, in turn forcing companies to use more vessels to ship the same amount of items.

The collision of factors created a spike in freight rates, which had been declining since hitting stratospheric highs due to the pandemic.

For the week ending April 5, 2024, freight rates from China and East Asia to North America's West Coast cost $3,294 per 40-foot container compared to $998 during the same week in 2023.

For the same week, freight going from China and East Asia to North America's East Coast cost $4,308 this year, compared to $2,085 last year.

When rates dramatically change, companies may end up paying more, even if they have locked in contracts at lower rates.

“It's possible that within those contracts, they also have a clause that allows for higher rates as long as the Red Sea goes on," said Levine.

Retailers with bulkier items — think cars or furniture — would likely feel the effect of higher freight costs more.

Additionally, a client note from Bank of America at the end of February pointed to Sonos (SONO), Mattel (MAT), Hasbro (HAS), Genuine Parts (GPC), Tempur Sealy (TPX), and Whirlpool (WHR) as among the companies that are "most at risk of direct impact from the Red Sea disruption given their exposure to Europe."

Companies that tend to be service-focused will have "no to very minimal impact," including Mister Car Wash (MCW), Driven Brands (DRVN), PROG (PRG), Upbound (UPBD), and Rollins (ROL).

TOPSHOT - This picture taken on March 23, 2024 shows an aerial view of the new extension to the Suez Canal which was inaugurated in 2015 at al-Ferdan, north of Ismailia in northeastern Egypt. (Photo by Khaled DESOUKI / AFP) (Photo by KHALED DESOUKI/AFP via Getty Images)
This picture taken on March 23, 2024, shows an aerial view of the new extension to the Suez Canal which was inaugurated in 2015 at al-Ferdan, north of Ismailia in northeastern Egypt. (Photo by KHALED DESOUKI/AFP via Getty Images) (KHALED DESOUKI via Getty Images)

"Spot rates are actually exploding again. ... If you don't have a long-term contract or you ship more than your contract, there is an increased cost because of that," Adidas CEO Bjørn Gulden said in the company's February earnings call.

The company locked in shipping contracts through the summer, “but if we need to ship more than the contract says or we need to accelerate something, that has now a pretty high premium,” said Gulden. He told the analyst that Adidas is not estimating a huge impact on margin.

Nike (NKE) and Adidas (ADDYY) also ship from more than 40 countries, complicating their supply chains and routes, per Swartz.

"In terms of shipping rates, we have long-term contracts, so at this moment, we're not seeing any pressure in terms of where oil is," Levi (LEVI) CFO Harmit Singh told Yahoo Finance. "Should it rise further, we'll be able to manage through it because we have other areas of opportunity to try and manage that issue."

H&M CEO Daniel Ervér told Reuters that the team is “concerned about the situation” but added that higher transportation costs are not yet having any impact on profitability.

As far as how long this could last, Levine said it’s “very, very hard to tell,” as it’s “dependent on when the Israel-Hamas war ends.”

At the end of March, TD Cowen analyst Jason Seidl said US-bound ocean container rates "moderated substantially through March" in a note to clients, but only after triple-digit increases earlier in this year.

He added, "We continue to see the prolonged conflict impacting ocean rates (bid season is currently underway) despite newbuild capacity, though we welcome the rate relief we've seen through March."

Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.

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