Urban Outfitters is taking on tariffs by shifting its primary mode of cargo transportation from air freight to ocean freight, cutting a major cost in its inbound logistics network.
Even as trans-Pacific ocean freight rates have accelerated since the Trump administration’s 145-percent tariffs on Chinese imports were scaled back for 90 days, ocean freight is generally significantly cheaper than air freight. As of September 2024, Drewry Airfreight Insights calculated that air cargo costs 5.6 times more to ship than its oceangoing counterpart.
The air-to-sea conversion would protect margins, but won’t come without its drawbacks. Urban Outfitters CEO and president Dick Hayne said the ocean-bound voyage adds about 30 days to delivery times.
It remains unclear what percentage of cargo Urban Outfitters moves via ocean with the switch, or if the retailer has stopped shipping via air entirely. Sourcing Journal reached out to Urban Outfitters.
“There is always a risk as you go out in time that the fashion might not be as accurate as we would like it to be,” Hayne acquiesced in the Wednesday first-quarter earnings call, noting that the company is trying shorten that time period via merchandise planning and inventory management technologies.
To account for the 30 extra days at sea, the lifestyle apparel retailer is planning to bring in fall product earlier in the second quarter.
“While there is some fashion risk of bringing product in early, we believe that it is prudent planning to bring in fall inventory—which is less sensitive to fashion—early, given the uncertain tariff outlook and any potential supply chain disruptions that could occur in the future,” said Urban Outfitters’ chief financial officer Melanie Marein-Efron.
With that in mind, Marein-Efron noted that the Anthropologie and Free People parent would likely see inventory growth ahead of sales growth in Q2.
The shift runs counter to moves the retailer made during the Covid-19 pandemic, when supply chain congestion snarled activity at seaports worldwide.
During the late-summer peak shipping season in 2021, the retailer pivoted to bring most of its inventory from Vietnam into the U.S. via air freight. This was due to the port congestion alongside record-high ocean spot freight rates that swelled north of $10,000 per container in September that year, according to the Drewry World Container Index (WCI).
As of Friday, the average container costs $2,276.
According to co-president and chief operating officer Frank Conforti, the company is also mitigating tariffs in ways similar to its retail counterparts: shifting countries of origin where possible, negotiating better terms with vendors and sparingly raising prices.
The retailer is already well-hedged against the higher tariffs levied on China, with the country representing less than 5 percent of worldwide production.
India, Vietnam, and Turkey are the retailer’s three largest countries of origin, with no single country accounting for more than 25 percent of production.
“Over the last several years the teams have worked hard to diversify our countries of origin as well as dual source most of our own brand products,” said Conforti. “This means many of our products are made in two different origins, enabling us to shift production from one country to another if needed.”
Urban Outfitters had a strong first quarter in the face of the tariff concerns, with net sales jumping 10.7 percent to a record $1.3 billion. The retailer also generated a record $108.3 million. But the forward-looking projections for margins were a promising sign for the business, with the company expecting to achieve 50 to 100 basis points of gross margin improvement for the fiscal year.
Stock has jumped more than 22 percent since the Wednesday earnings call.
Capacity shortages on the horizon for West Coast shipments
Urban’s shift to ocean freight reflects a wider trend as more companies scramble to import cargo into the U.S. ahead of the July 9 country-specific tariff deadline and the Aug. 14 China duty deadline.
For the week ending May 12, U.S. import bookings expanded 48.5 percent from the week prior, according to data from container tracking platform provider Vizion.
But with the flood of cargo back on the oceans, a shortage of capacity is already rearing its head across container shipping. Multiple freight forwarders have indicated that additional space isn’t expected to open until June, as shippers also sought to get ahead of peak season surcharges and general rate increases (GRIs) set to be implemented that month.
Earlier this week, American Shipping Company told customers that booking requirements are now at a minimum of three to four weeks before the target vessel sailing date.
Maritime trade advisory service Sea-Intelligence issued warnings Thursday that in the immediate future, “there is not yet a meaningful injection” of new capacity on trans-Pacific trade to the North American West Coast.
“This development, or lack thereof, to the West Coast becomes even more noteworthy in the face of the development to the East Coast, where it does appear that there is already some attempt to increase capacity, relative to a week ago,” said Alan Murphy, CEO of Sea-Intelligence, in the weekly update.
According to Sea-Intelligence, there is a continuing year-over-year reduction in ocean freight capacity to both coasts until the start of June, before the West Coast availability tapers off again throughout the month.
“The West Coast only sees a meaningful increase from mid-July, whereas the East Coast sees a significant capacity growth from end-June,” Murphy said. “But this is still very late for a capacity increase, if there is an imminent surge of cargo from China.”
