Winners, Losers from the West Coast Port Slowdown

Cowen’s Oliver Chen considers the winners–TJX (TJX) and Burlington Stores (BURL)–and the losers–Lululemon Athletica (LULU) and Macy’s (M)–from a slowdown at West Coast ports:

Reuters

Negotiations are occurring between ILWU (representing West Coast port workers) and port employers to complete contract (no contract since July 2014). Just over 50% of total US container traffic comes through the West Coast (just under 50% on East Coast/Gulf of Mexico). We est. apparel/consumer goods typically rely more on West Coast vs. East…

Specialty Retailers Most At Risk Given Time Sensitive Product: In our view, fashion driven specialty retailers are most at risk (Lululemon Athletica), quantified misses are running ~2% of quarterly revenue; and broadlines (Macy’s, Target (TGT)) could have greater risk in 1Q & 2Q if their suppliers/vendors experience problems in 4Q. Quarterly EPS impact is tracking ~2-5% and delays are on average 7-14 days.

Off-price retailers, such as TJX/Ross Stores (ROST)/Burlington Stores, could have upside benefit on inventory dislocation. Delays are likely to increase availability of compelling product supply, given late product could yield excess inventory. Our favorite ideas are TJX and Burlington Stores. TJX keeps high open-to-buy levels given lean inventories (+3%/store @ end of 3Q vs. comps +2%), and their $23bn+ buying pencil provides ample flexibility to capitalize on advantageous product opportunities. We are raising our Burlington Stores price target to $54 (from $52) given structural tailwinds behind the Off-price group as it relates to inventory availability and Burlington’s already improving inventory position. Burlington’s recently opened west coast buying office should be helpful in acquiring inventory. We see upside to consensus merch margin estimates through next year given current inventory position.

Shares of Lululemon have gained 0.4% to $53.74, while Macy’s has risen 0.4% to $62.86, Burlington Stores has ticked up 0.2% to $46.95 and TJX has risen 0.9% to $66.66.