For months headlines have included reports of clogged ports, increasing shipping costs for container, rail and trucking, low inventory levels and increasing levels of inflation. Businesses have been tracking inventory levels, inventory to sales, and shipping costs. Looking at the various indices, the level of uncertainty for future performance forecasting continues.
Inventory Levels
This chart, prepared by the St Louis Fed, reports total business inventories. The $2.4 million total business inventory level reported in July 2022 is an increase from $2.1 million in July 2021, which is roughly an 18% increase. Business inventories are at their highest reported levels.
The next graph, also prepared by the St Louis Fed, reports that as of July 2022 retailers have 1.23 months of sales on hand in inventory. The level of inventory compared to sales dropped to a low of 1.09 in April, May, June, and October of 2021. The amount of inventory on hand compared to sales is now increasing.
These trends underscore issues we have been seeing with distributors and retailers having the wrong inventory, and supply chains being stuffed with product. Retailers reported these issues when they released their Q2 results in August.
Freight Costs
Freightos prepares a Global Container Index which peaked at $11,109 on September 10, 2021 and is at $4,653 as of September 16, 2022. While still higher than the March 17, 2020 level of $1,400, the current Freightos Global Container Index is clearly off the peak levels in September of 2021.
Looking at the Freightos Index from China / East Asia to the North American West Coast for 2022 compared to 2021, the cost per container to the West Coast is down from $18,425 in August of 2021 to $6,632 in August of 2022.
The Port of Los Angeles reported 404,000 inbound loaded containers in August, which is a 17% reduction month over month. This was the largest decline since May of 2020. The Port of Long Beach processed 5.6% few incoming containers compared to the same time last year. While both ports continue to be busy, these activity decreases can be foreshadowing reduced economic activity.
All this data shows the level of uncertainty, and the stress businesses are experiencing today is continuing to intensify.
Publicly Traded Companies Are Providing Clues
When reviewing the Q2 results for retailers such as Lowe’s, Home Depot, Walmart, and Target it became clear there was weakening consumer demand and changing consumer preferences, and the larger retailers were already reporting the impacts in their financial statements.
Now listening to FedEx’s release last week, it is clear FedEx is experiencing a global slowdown. Competitors such as UPS and DHI have not yet provided that same type of warning, but economists, businesspeople and bankers are waiting to hear from these companies. FedEx has indicated:
“While this performance is disappointing, we are aggressively accelerating cost reduction efforts and evaluating additional measures to enhance productivity, reduce variable costs, and implement structural cost-reduction initiatives.”
Cost reductions at large corporate leaders, such as FedEx and others, tell companies and their lenders that all companies need to evaluate their cost structures and consider ways to reduce variable and fixed costs.
Another indicator of a slowdown is the stock prices of shipping companies. Today’s stock price of Maersk is $10.10 per share, down from $19.01 on January 13, 2022.
What should we take away from this news?
There is continued financial performance stress across the economy. Inflation continues to impact profitability. It appears inventory purchases have slowed but stocks of inventory are growing.
Each business leader needs to do the following:
Evaluate variable and fixed costs and develop contingency plans to reduce costs.
Consider labor costs and availability by location. Certain states are performing much better from a labor perspective.
Consider contract renewals for office equipment, factory and warehouse equipment, and physical locations.
Consider office space needs in the hybrid work environment.
Evaluate inventory turnover by SKU and develop options to reduce reliance on investment in inventory.
Consider inventory turnover when evaluating customer profitability.
Consider selling excess inventory to reduce stress on ABL structures.
Reconsider inventory purchases for the remainder of 2022 and in to 2023.
Customer profitability, product line profitability should be part of the evaluation.
Evaluate customer order trends and changes. Talk to customers about their outlook for demand.
These will be challenging times, and the successful businesses will be ones that are out ahead of the potential problems. In previous articles we have discussed “How Will Inventory Management and Credit Availability Intersect” and “How are Inventory Levels Impacting Cash Flow and Performance?” These articles address how inventory changes are stressing cash flow and ABL structures and provide ideas on how to address the problems from a planning and analytical perspective. Tools for dealing with rising interest rates, cash flow needs, and covenant compliance were addressed in this article. And, a variety of articles addressing the impact of inflation have been published, (Ex. What Do August Inflation Numbers Tell Us About Tailgating and Business Financial Performance? or What Does a Hamburger Teach us about Inflation and World Economics?).
Each business will be impacted differently but every business will be impacted. Companies have a higher probability of navigating this period of stress and uncertainty if they employ the tools that FMG has been discussing in this article and the other articles linked above.
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