Will Panama Canal Restrictions Impact Shoe Companies?

Steve Madden Ltd., Wolverine World Wide Inc., and Columbia Sportswear are among the footwear and apparel companies  insiders say may be impacted by draft restrictions for vessels utilizing the Panama Canal.

In order to mitigate the impact of the El Niño phenomenon, the Panama Canal Authority’s (ACP) said, effective Sept. 8, it will enact “temporary and preventative” measures to restrict the of draft — or depth — for all shipping agents utilizing the canal.

El Niño, the ACP says, has triggered a drought in the Canal Watershed, causing the water levels of Gatun and Alhajuela Lakes to fall substantially below their average for this time of year.

Citi Research analyst Kate McShane said she “believes a meaningful shift of freight back to the West Coast is possible — at least temporarily — as a result of the new restrictions.”

“It’s likely that container ships in route to East Coast ports from Asia will be more greatly impacted given their average size near the Canal’s maximum depth,” McShane wrote on Aug. 12. “The last time the Canal restricted draft depth in 1998, the growth rate of inbound loaded containers at [Los Angeles and Long Beach ports] more than tripled from the run rate of the previous eight months and an elevated level of growth persisted for three months.”

Assuming a 40 percent impact to Panama Canal East Coast traffic, McShane added, 20 percent of East Coast imports could be disrupted.

Matt Priest, president of the Footwear Distributors and Retailers of America (FDRA), said he expects only a minimal impact on footwear companies stemming from the Panama Canal situation.

“Close to 70 percent of our footwear comes in to the West Coast ports—if we were to prioritize the ports of entry around the country, the West Coast ports have a much more dramatic impact on our industry,” Priest said.

Meanwhile, McShane has already posited that companies such as Steve Madden—which significantly rerouted cargo to the East Coast during the West Coast Ports fiasco—Wolverine and Columbia could be exposed to pressures if the East Coasts ports are disrupted.

CL King & Associates analyst Steve Marotta has already countered — defending his buy-rated Wolverine stock.

“We note that Wolverine’s comprehensive exposure to East Coast ports represents only low-single-digits as a percent of total mix,” Marotta wrote in Aug. 13 note. “Most recently, the West Coast port issue was deftly managed by Wolverine’s tight and pro-active logistics team with negligible adverse effects on shipments to wholesale accounts and company-owned retail units.”

Marotta said he expects the combination of Wolverine’s minimal exposure to East Coast ports and its “proven supply chain strengths” to counter potential 2H15 impacts from the developing situation.

The bigger concerns related to the East Coats ports, Priest said, are the upcoming labor contract negotiations — for the current labor contract that expires in September 2018 — and how any potential unrest could impact the shoes that come in via the East Coast ports.

“Over time, the East Coast ports may take on a larger significance because sourcing is shifting somewhat to Africa and the Western hemisphere,” Priest said.

The American Apparel and Footwear Association (AAFA) has also said that it will be watching Panama for any potential impacts on footwear.

“While most of our footwear comes directly into the West Coast from Asia, some does transit through the Panama Canal. Anything that removes capacity in that transit channel creates concerns, particularly as the industry continues to recover from the long term impact of the recent port slowdowns.  Moreover, our ports are interconnected; reduced capacity through Panama may push more traffic back to the West Coast,” Steve Lamar, AAFA’s EVP, said. “Though this may not have as big of an impact of something like the West Coast port situation, what’s coming into focus for people – and what the industry has always known – is that the conditions and operations at our ports matter and there are real bottom line impacts.”

The nine-month-long West Coast ports stalemate, stemming from a contract dispute between dockworkers and their employers, climaxed in February just before a resolution was met. During the tumultuous nine months, footwear and apparel companies shouldered losses from late deliveries, air-freight costs and rerouting cargo to the East Coast ports. The impact still lingers into the second quarter and 2H15.

“For the most part, the companies that rerouted cargo to the East Coast ports have returned to their normal operating procedures,” Priest said.

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