Raphael Stevens

A slew of factors including rising shipping cost and supply chain bottlenecks are persisting and should last through the upcoming holiday season.
One issue is that the cost to ship containers overseas has soared in recent months.
Many companies have indicated that consumers at least for now are willing to take on higher prices.
Rising inflation expectations could cause the Federal Reserve to change policy course.

A worker wearing a protective mask removes rotisserie chicken from skewers inside a Costco store in San Francisco, California, on Wednesday, March 3, 2021.
David Paul Morris | Bloomberg | Getty Images

Shipping bottlenecks that have led to rising freight costs are cooking up a holiday headache for U.S. retailers.
Costco this week joined the long list of retailers sounding the alarm about escalating shipping prices and the accompanying supply chain issues. The warehouse retailer, which had a similar cautionary tone in May, was joined by athletic wear giant Nike and economic bellwethers FedEx and General Mills in warning of similar concerns.

The cost to ship containers overseas has soared in recent months. Getting a 40-foot container from Shanghai to New York cost about $2,000 a year and a half ago, just before the Covid pandemic. Now, it runs some $16,000, according to Bank of America.
In a conference call Thursday with analysts, Costco Chief Financial Officer Richard Galanti called freight costs “permanent inflationary items” and said those increases are combining with things that are “somewhat permanent” to drive up pressure. They include not only freight but also higher labor costs, rising demand for transportation and products, plus shortages in computer chips, oils and chemicals and higher commodity prices.

“We can’t hold on to all those,” Galanti said. “Some of that has to be passed on, and it is being passed on. We’re pragmatic about it.”
Quantifying the situation, he said inflation is likely to run between 3.5% and 4.5% broadly for Costco. He noted that paper products have seen cost increases of 4% to 8% and he cited shortages of plastic and pet products that are driving up prices from 5% to 11%.
“We can hold the line on some of those things and do a little better job — hopefully do a better job than some of our competitors have and be even that more extreme than the value,” Galanti said. “So I think all those things so far, at least despite the challenges, have worked in our favor a little bit.”

Getting ready for the holidays

The timing, though, is not good.
Persistent inflationary pressures come at a time when retailers are preparing for the holiday shopping season – Halloween, Thanksgiving and Christmas, then into the new year. The pandemic has brought with it a relentless slew of factors that has made inflation an economic buzzword after a generation of mostly moderate price pressures.
Companies are pressed to deal with the situation ahead of a critical period.
“Getting closer to the holidays, we have been working with retailers and what we see is, No. 1, they’ve got to be flexible with their supply chain,” said Keith Jelinek, managing director of the global retail practice at consulting firm Berkeley Research Group. “We’ve seen cost-of-good increases especially in apparel, also costs of inbound shipping with the costs of containers, increases with transportation, trucking to get into distribution centers.”
“All these costs are going to hit the operating profits,” he added. “Retailers right now are really challenged with how much can I pass onto the consumer vs. can I get other efficiencies out of my operations in order to hit my total margin.”
Many companies have indicated that consumers at least for now are willing to take on higher prices. Trillions in government stimulus during the pandemic have helped swell personal wealth, with household net worth up 4.3% in the second quarter.
No one knows how long consumers will be willing to pay higher prices. Jelinek said he expects the current situation to persist into at least through the holiday season and into the early part of next year
“There’s only so much you can pass on to the consumer,” he said. “What most retailers are doing is looking across their [profit and loss statements] and they’re looking to improve performance and to optimize efficiency. That means really focusing on their supply chain.”
It also means raising prices.

Company warnings

FedEx this week announced that it will hike shipping rates 5.9% for domestic services and 7.9% for other offerings. The company said it is being hit by labor shortages and “costs associated with the challenging operating environment.”
The head of the company’s chief competitor acknowledged the hurdles the business faces.
“The labor market is tight, and in certain parts of the country we’ve had to make some market-rate adjustments to react to the demands of the market,” UPS CEO Carol Tome said Thursday on CNBC’s “Closing Bell.”
She added that the company also has been hit by supply chain issues.
“I’m afraid this is going to last for a while. These issues have been a long time coming and it’s going to take all of us working together to clear those blockages,” Tome said.
Federal Reserve officials this week conceded that inflation will be higher in 2021 than they had anticipated. However, they still see prices settling to a more normal range just above 2% in the coming years.
But Cleveland Fed President Loretta Mester said in a speech Friday that she sees “upside risks” to the central bank’s inflation forecasts.
“Many businesses report that cost pressures are intensifying and consumers seem to be willing to pay higher prices,” she said. “The combination of strong demand and supply chain challenges could last longer than I anticipate and could lead people and businesses to raise their expectations for future inflation more than we have seen so far.”
Fed officials said they are ready to start pulling back on the monetary stimulus they’ve provided during the pandemic but probably won’t be raising rates soon. However, Mester said that should prices and expectations hold higher, Fed policy “would need to be adjusted” to control inflation.

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Two hosts of “The View” tested positive for Covid-19 on Friday moments before a sit-down interview with Vice President Kamala Harris. 
Host Sunny Hostin and guest host Ana Navarro are fully vaccinated and contracted breakthrough cases of the virus, co-host Joy Behar announced on air.
Harris, who had flown to New York on Friday morning, did not make contact with the hosts before the show, a White House official told NBC News. She conducted her interview remotely in a different ABC studio. 

Ana Navarro and Sunny Hostin on the set of ABC’s The View.
Jeff Neira | Disney General Entertainment Content | Getty Images

Two hosts of ABC’s “The View” tested positive for Covid-19 on Friday moments before a sit-down interview with Vice President Kamala Harris. 
Host Sunny Hostin and guest host Ana Navarro are fully vaccinated and contracted breakthrough cases of the virus, co-host Joy Behar announced on air after they were ushered off the set and the program went to an impromptu commercial break. 

Harris, who had flown to New York on Friday morning, did not make contact with the hosts before the show, a White House official told NBC News. She conducted her interview remotely in a different ABC studio. 
Harris didn’t isolate after “The View” appearance and will follow her schedule as planned, spokeswoman Sabrina Singh said.
“No matter how hard we try, these things happen,” Behar said on air. “They’ll be OK, I’m sure, because they’re both vaccinated up the wazoo.”
Harris eventually appeared in a virtual interview with Behar at around 11:50 a.m. ET after being expected to appear at the top of the show.
“I hope you are in a safe spot right now. We did everything we could to make sure that you were safe because we value you so much,” Behar said, introducing the vice president.

Harris, in response, called the two hosts “strong women” and lauded Covid vaccines. 
“I know they’re fine, but it really also does speak to the fact that they’re vaccinated and vaccines really make all the difference because otherwise we would be concerned about hospitalization and worse,” Harris said in the delayed interview.

U.S. Vice President Kamala Harris descends from Air Force Two at Newport News/Williamsburg International Airport, in Newport News, Virginia, U.S., September 10, 2021.
Tom Brenner | Reuters

Both Harris and President Joe Biden, as well as their spouses, are fully vaccinated against Covid. 
The Biden administration has gone to great lengths to increase Covid vaccination rates in the nation, issuing a series of mandates in the past two months. 
Most recently, the administration issued sweeping vaccine mandates earlier this month that affect private businesses and federal employees. Government personnel and contractors are required to get vaccinated with no alternative for testing, and any company with more than 100 staff must implement vaccine mandates with some medical and religious exemptions. 
Biden also mandated on in early August that all service members to get vaccinated by mid-September.
On Friday, the president blamed the more than 70 million unvaccinated Americans for stalling the U.S. economic recovery, and condemned elected officials who have worked to undermine his administration’s Covid efforts with false information.

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House Democrats approved a bill to protect abortion rights, a symbolic response to the Supreme Court’s refusal to block a Texas law banning most abortions.
The House vote is seen as a show of solidarity, given that the bill, the Women’s Health Protection Act, will face steep opposition from Senate Republicans.
House Speaker Nancy Pelosi worked quickly to schedule action on the bill in response to the Texas law, which effectively prohibits abortions after six weeks.

House Speaker Nancy Pelosi (D-CA) speaks during a news conference about the House vote on H.R. 3755, the “Women’s Health Protection Act” legislation to “establish a federally protected right to abortion access” at the Capitol in Washington, U.S., September 24, 2021.
Kevin Lamarque | Reuters

House Democrats on Friday approved wide-ranging legislation to protect abortion rights, a swift but mostly symbolic response to the Supreme Court’s refusal to block a Texas law banning most abortions.
The bill, which passed 218-211, is principally a show of solidarity, given that the bill, the Women’s Health Protection Act, will face steep opposition from Senate Republicans and is not expected to advance through the chamber.

Democrats believe the bill would guarantee the right to abortion through federal law and cement the decision of Roe v. Wade, the landmark 1973 Supreme Court decision that established a constitutional right to the procedure.
House Speaker Nancy Pelosi, D-Calif., worked quickly to schedule action on the bill after the high court earlier this month refused to block a controversial Texas law that prohibits abortions after roughly six weeks, before most even realize they are pregnant.

Specifically, the Texas law says doctors may not perform abortions if a fetal heartbeat can be detected, activity that usually begins at around six weeks of gestation. That law went into effect on Sept. 1.
The Texas law does not make exceptions for pregnancies that result from rape or incest, and it is unprecedented in deputizing private citizens to sue anyone who performs the procedure or “aids and abets” it.
Pelosi offered comments prior to the bill’s passage Friday morning and offered a pointed rebuke to the Supreme Court’s 5-4 decision earlier this month. The justices who voted not to block the law focused on procedural questions and stressed that they have yet to judge the constitutionality of the law.

“This is about freedom. About freedom of women to have choice about the size and timing of their families, not the business of people on the [Supreme] Court or members of Congress,” the House speaker said.

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Rep. Pramila Jayapal, a Democrat from Washington and chairwoman of the Progressive Caucus, said from the House floor that she has had an abortion and urged fellow lawmakers not to criminalize the procedure.
“One in four women across America have had an abortion. I am one of them,” she said prior to the bill’s passage. “Terminating my pregnancy, Madam Speaker, was not an easy choice for me. But it was my choice. It is time to preserve that for all people.”
The act would establish a statutory right for health-care providers to provide, and patients to receive, abortion care without certain limitations or requirements.
Specifically, the bill would give patients the right to an abortion without medically unnecessary tests or procedures — generally understood to include ultrasounds, counseling or mandatory waiting periods. It also would bar states from imposing in-person clinic visits prior to obtaining an abortion, often referred to as “two-trip” requirements.
The bill would bar states from prohibiting any abortion prior to fetal viability. It also would bar the prohibition of an abortion after fetal viability if, in the health-care provider’s good-faith judgment, continuing the pregnancy would pose a risk to the pregnant patient’s life or health.
Despite its long odds in the Senate, the House-approved bill may provide Democrats with fuel in the 2022 midterms and a strong talking point for voters who view the Supreme Court’s recent decision as eroding rights many believed to be settled law.
Republicans, including Rep. Julia Letlow of Louisiana, protested the bill ahead of the House vote and argued that it goes beyond the Roe decision.
Specifically, members of the GOP say the bill strips states of their ability to regulate abortion. They also argue that the measure would prevent states from introducing measures to make abortions safer and lead to many more procedures in the late stages of pregnancy.
“As a woman, and most importantly, a mother of two children, I feel uniquely qualified to speak about this,” Letlow said from the House floor.
“The legislation before us is perhaps the most extreme abortion measure that Congress has ever considered,” she added. “It will overturn countless protections for the unborn that states have already put into place.”
The Senate, narrowly controlled by Democrats, may not take up the bill since it remains unclear whether a majority of the chamber supports it.
Two Democrats, Sen. Joe Manchin of West Virginia and Sen. Bob Casey of Pennsylvania, have not joined the rest of their colleagues in cosponsoring the Senate’s version of the bill and are expected to oppose it. Sen. Susan Collins, a Maine Republican who has supported abortion rights in the past, has reportedly said she will not support the bill in its current form.
Even if Democrats managed to scrape together a majority of the Senate, it is nearly certain that Republicans would filibuster the bill and prevent it from advancing with less than 60 votes.
A group of abortion providers and advocates asked the Supreme Court on Thursday to quickly review their challenge to the Texas law.

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Nike slashed its fiscal 2022 revenue outlook Thursday because of the temporary bottlenecks plaguing the logistics of its business.
The pressures have tightened Nike’s inventories ahead of the holidays.
This means it will be much more strategic about where it’s stocking merchandise. And the dynamics will likely accelerate the sneaker giant’s direct-to-consumer push.
“Strong brands get stronger in this environment,” CFO Matt Friend said.

A pedestrian walks past American multinational sport clothing brand, Nike store and its logo seen in Hong Kong.
Budrul Chukrut | SOPA Images | LightRocket | Getty Images

A lower sales forecast, slowing growth in China and a bottlenecked supply channel — the news coming out of Nike’s fiscal first-quarter earnings report wasn’t good.
Shares were down more than 6% on Friday afternoon following the report. Ahead of the results, shares had already tumbled roughly 9% from an all-time high of $174.38, which it hit in August.

Amid the sell-off some analysts see an opportunity for Nike to position its business — and its stock — for greater growth. Nike’s supply chain struggles are providing it with cover to accelerate its direct-to-consumer strategy, which has been a key driver of profitability in recent quarters.
It now takes Nike roughly 80 days to get goods from Asia to North America, which is double pre-pandemic transit times. Manufacturing facilities across Vietnam are beginning to reopen, but Nike has lost about 10 weeks of production due to pandemic shutdowns. About 43% of its total footwear and apparel units are made in the country.
For the next few quarters, Nike predicts consumer demand will outweigh supply. This means Nike will need to be much more strategic about where it’s stocking running shoes and workout tops. It will likely opt for its own stores, over wholesale partners.
“As long as inventory is constrained, it’s fair to assume the pivot to direct will be accelerated,” BMO Capital Markets analyst Simeon Siegel said. “They’re prioritizing their own channels with product first.”
Before the Covid pandemic struck, Nike was on a path to grow its direct-to-consumer business. It has been cutting partnerships with some wholesale retailers, while building its online business and opening Nike stores around the world. Over the past three years, Nike has pulled out of about 50% of its wholesale accounts.

Nike calls the transition a “consumer direct offense,” a play on sports terminology. In fiscal 2021, Nike’s direct revenue represented roughly 39% of sales for the Nike brand, up from 35% in the prior year. Selling more goods at full price has also been aiding profits. Nike’s gross margins for fiscal 2021 grew to 44.8%, from 43.4% in 2020.
Industrywide supply-chain havoc could accelerate Nike’s DTC push at an even faster clip and in turn drive profitability higher.

Nike ‘still has the demand’

“This means Nike now gets a free excuse to accelerate its DTC transition and say, ‘We don’t have the supplies to get to our wholesalers,'” said Stacey Widlitz, president of SW Retail Advisors, in an interview. “This is a major opportunity, because you’re seeing all of these other brands cut wholesale, but they don’t have the top line like Nike. Nike still has the demand.”
And even if Nike’s shelves are a bit bare in the coming months compared with normal times, Widlitz said, she doesn’t think it will permanently drive shoppers away to other retailers.
“People are always going to be drawn back to the big brands,” she said. “It’s the greatest pent-up demand, because they are basically telling the consumer, ‘You can’t have it right now.’ You’re creating FOMO [fear of missing out] by not having supply. It’s a no-brainer to take advantage of that.”
On Thursday’s earnings call, Nike’s management team said it is prioritizing its direct channels.
Nike’s top partners include Foot Locker, Dick’s Sporting Goods and Nordstrom, and investors in these stocks are concerned about what Nike’s troubles will mean for their businesses. On Friday, Foot Locker shares were down more than 6%, while Dick’s shares shed nearly 2%. Nordstrom’s stock was about flat.
Chief Financial Officer Matt Friend said temporary supply chain disruptions will “likely trigger an even greater acceleration in the transformation of the marketplace — toward Nike and our most important wholesale partners.”
“We’re going to have lean inventory,” he said. But he added, “Strong brands get stronger in this environment.”
And according to Citi analyst Paul Lejuez, a temporary supply chain problem is a much better issue to have than a demand problem. He doesn’t see Nike as having a demand problem.
“We view these supply chain disruptions as transitory … and [the delays] are impacting the athletic footwear space broadly,” Lejuez said in a research note. “The most significant impacts from Vietnam factory closures should happen post-holiday.”

Another way to shore up growth

Strengthening Nike’s North American business will be even more important if growth in China slows. Greater China has long been Nike’s most profitable and important growth market. But in Nike’s latest quarter, revenue in the region grew the slowest of all geographies.
Chief Executive John Donahoe said Nike is playing the long game in China. Supply constraints will impact the region’s second-quarter performance, he said, but the company will “invest for the long term, and we’re confident in the long-term opportunity.”
Wall Street research firm UBS said it expects Nike’s stock to bounce back from Friday’s sell-off. UBS has a $185 price target on shares, with a buy rating. Nike was trading around $149 per share by Friday afternoon. Analysts’ average rating on shares is $184.35, according to FactSet.
“While some uncertainty still exists around how long it will take supply chain issues to clear up and if Nike’s China sales growth rate will accelerate, our view is investor sentiment will improve now that Nike has quantified the Vietnam factory shutdown impact,” analyst Jay Sole said. “We believe most investors will look to fiscal 2023 and see a rebound scenario.”
— CNBC’s Michael Bloom contributed to this report.

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American Airlines pilots’ union said middle managers should be replaced over flight disruptions.
The Allied Pilots Association is in the middle of contract negotiations with the company.

Pilots talk as they look at the tail of an American Airlines aircraft at Dallas-Ft Worth International Airport.
Mike Stone | Reuters

American Airlines pilots’ union says that company managers should be replaced because of the hundreds of flight disruptions that affected tens of thousands of customers this year.
The board of directors of the Allied Pilots Association this week approved a resolution that calls on the company to change out the managers responsible for the airline’s operations, saying that staff failed to provide a reliable service and in turn, hurt the carrier’s brand.

The board of directors “believes it is in the best interest of the American Airlines shareholders, employees, the communities it serves, and the traveling public for the management team members who control the American Airlines operation be replaced,” said the resolution. The union isn’t seeking top management be removed.
The resolution said 60,000 customers were affected by cancellations over Father’s Day weekend in June.
American had cut its schedule by about 1% in early July amid staffing shortages. The carrier and other airlines including Southwest have had to trim ambitious flight schedules after a lack of workers exacerbated flight disruptions over the summer.
American declined to comment on the union’s resolution but provided a company memo sent to pilots before Labor Day that said that pilot staffing had improved during the summer.
“We feel good about where we are today and have worked hard to be able to ensure we are set up for success the rest of this year and beyond,” the memo said.

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