- Ports could become congested this summer as companies bring forward shipments from China in anticipation of higher tariffs.
- Lululemon plans to dodge the problem by flying in more products instead of shipping them by sea.
- The athletic-apparel retailer expects tariffs and air-freight costs to weigh on its gross margin this quarter and its full-year earnings.
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Ports could become clogged this summer as US businesses bring forward shipments from China in anticipation of higher import duties. Lululemon, which posted a robust set of first-quarter results this week, plans to dodge the problem by flying in more products instead of shipping them by sea.
“We are committing to higher air-freight usage as the hedge against disruption in ocean shipping lanes as we approach the key dates related to tariff increases,” Lululemon CFO Patrick Guido said on the company’s earnings call.
“We’re anticipating port congestion right around that mid-to-late July time frame, and we think it’s prudent and important to deliver new product for our guests and protect the sales associated with those goods,” he added.
Lululemon may be right to worry about port congestion. The number of shipping containers at two of America’s largest US ports, Los Angeles and Long Beach, California, surged after the first round of tariffs on Chinese goods were introduced last year, the Los Angeles Times reported. And a trade expert told the newspaper that because additional tariffs could take effect as early as July, another such surge could tie up California ports again as firms rush to get in front of them.
Lululemon imports only 6% of its total finished goods from China, limiting its direct exposure to tariffs. However, the combined costs of import duties and air cargo are likely to mean its gross margin will be “flat to modestly up” this quarter, compared with 54.8% a year ago, Guido said.
The athletic-apparel retailer also expects higher costs to reduce its diluted earnings per share by $0.04 to $0.05 this fiscal year.
The company may be taking extra precautions to avoid a repeat of 2014, when about 1 million of its products were held up because of port congestion in Los Angeles and Seattle, delaying delivery to stores for up to 10 days and forcing it to lower sales forecasts, according to Reuters.
The US-China trade war is taking a bigger toll on sea trade. The world’s biggest shipping company, Maersk, pegged growth in global container trade at 1.7% in the first quarter of this year, a sharp slowdown from the average growth of 3.6% in 2018. It also warned recent escalation – Trump hiked tariffs on $200 billion worth of Chinese goods, and China retaliated with tariffs on $60 billion of US goods – could reduce annual growth to the lower end of its 1 to 3% forecast.