Disruption faced by European retailers from ships being forced away from the Red Sea should be manageable in the near term, according to Royal Bank of Canada (TSX:RY) analysts.
“Although we do expect to see longer transit times, cost increases should be manageable in the context of an overall favourable buying environment in Asia,” the bank said in a note.
Shipping companies have taken to diverting freighters following an increase in the number of attacks on boats passing through the Suez Canal by Houthi rebels in Yemen since October’s outbreak of war between Israel and Hamas.
RBC projected that such diversions would lead to between 10 and 14-day increases in transit times, coinciding with an uptick in freight rates.
These will likely hit non-clothing retailers harder as shipping amounts to around 6% to 7% of their sales costs. Shipping only amounts to 3% to 4% of sales costs for clothing retailers.
“If the disruption persists we are likely to see a headwind for gross margins from the second half of 2024 and into 2025,” the bank warned.
Associated British Foods PLC (LSE:ABF)-owned Primark and H&M are among the “big volume players” in terms of importing from Asia, RBC noted, while Inditex is less exposed.
B&Q-owner Kingfisher PLC (LSE:KGF) and Dunelm are not significantly exposed to Asia sourcing, RBC said.
Next PLC (LSE:NXT) was granted an upgraded share price target of 8,000p by RBC, which noted the retailer had accounted for an uptick in sales costs due to the disruption.
This was down on Friday’s close price of 8,466p though, after Next unveiled a strong update last week.
JD Sports Fashion PLC (LSE:JD.) and Superdry PLC (LSE:SDRY) faced share price target downgrades from 185p to 150p and 75p to 40p respectively after both revealed worse-than-expected trading updates in recent weeks.