Global supply chain challenges will have a limited effect on the ratings of US consumer and retail issuers in our portfolio, says Fitch Ratings. A generally strong topline and margin environment, good pricing power, benefits of scale for most rated issuers and leverage headroom mitigate risk. Although downgrade risk is generally limited, Fitch is closely watching sectors with lags in ability to pass on prices, like consumer and packaged foods, and segments with high business seasonality such as apparel and toys.
The vast majority of rated issuers in Fitch’s US coverage have seen accelerated topline growth and margin expansion since the pandemic began. These trends have continued through 2021 despite shifts in spending back toward consumer services given a strong economic backdrop and high levels of consumer savings.
High consumer demand, coupled with broad-based awareness of supply chain challenges affecting many segments, support the ability of companies to pass on raw material and supply chain-driven cost inflation to consumers, limiting margin risk without materially affecting volumes. To the extent companies are forced to absorb some portion of cost increases, the negative impact is expected to be mitigated by strong overall operating momentum and pandemic-driven expense reductions taken over the past 18 months.
Scale will benefit most companies within Fitch’s rated universe, given strong relationships with vendor partners and a better ability to navigate supply chain issues than smaller companies. Fitch expects most rated issuers are partners of choice to vendors, who may prioritize them in inventory allocation, transportation resources and other matters. Large companies also have more ability to adjust to logistics challenges, as illustrated by certain retailers chartering shipping vessels to ensure inventory availability.
Issuer ratings are supported by Fitch’s through-the-cycle view and the belief that supply chain challenges should taper by mid-to-late 2022 given some easing of demand pressures, reduced lockdown activity globally and improvements to labor force statistics. Fitch expects inflation across the broad spectrum of product costs, transportation/logistics and wages to moderate to the low single digits exiting 2022.
Recent upward pressure in areas like wages throughout the supply chain is most likely to continue, while commodity price increases could be more cyclical, particularly if consumer demand for goods subsides. Agricultural commodity prices, while cyclical, are expected to remain in the higher part of the cycle over the medium term driven by increased demand. However, most issuers should remain within current rating sensitivities or just modestly outside, particularly given strong current operating momentum and opportunities to mitigate current challenges.
Segments with the most near-term risk appear to include those with limited or delayed ability to pass on prices and those with a seasonal component to their mix. Some consumer product and packaged food players, for example, are likely to see margin pressure during 2H21 given a lag in their ability to pass on inflation to retail partners. Inventory shortfalls could yield lost revenue and the need to take markdowns on inventory which misses sales windows in segments like toys and apparel, particularly as the holiday season approaches.
Source: Fitch Ratings