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Feb. 12, 2020, 8:00 a.m. EST

Coronavirus could drive up out-of-stocks at stores by April: Wells Fargo

Wells Fargo says Walmart and Target may be first to suffer supply issues related to coronavirus

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By Tonya Garcia, MarketWatch


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Even though businesses are reopening in China after the Lunar New Year some still aren’t returning to work

Shoppers could start seeing empty store shelves as soon as mid-April due to the coronavirus outbreak, according to Wells Fargo analysts who say concern about the supply chain is rising among retailers.

Store closures and guidance cuts have been the primary impact of the outbreak on the retail sector thus far, leaving the supply chain largely unaffected.

Wells Fargo said that inventories are healthy at the moment, thanks to retailer efforts to get ahead of tariff issues and the Lunar New Year. Moreover, merchandise for spring and summer has shipped.

Read: Nike’s coronavirus-related store closures in China could result in an earnings miss

“That being said, our sources indicate that out-of stocks at retail for replenishment product could start within 60-to-90 days if disruptions continue beyond the next few weeks, with more significant inventory issues in seasonal product possibly by midsummer if disruptions stretch longer,” wrote analysts led by Edward Kelly.

Analysts say that retailers have been looking to other parts of Asia for their production needs, but raw materials come from China.

Businesses have started to reopen after the Lunar New Year break, but reports say many consumers have continued to stay home. Cases of coronavirus and deaths from the disease have spread beyond China’s borders.

See: Coronavirus plunges China into massive work-at-home pilot program

The latest coronavirus figures show 42,968 cases, 1,018 deaths and a new case of the illness in San Diego.

“The Chinese manufacturing model is highly dependent on migrant workers from inland provinces like Hubei that live at the factories and return home for holidays like Lunar New Year,” Wells Fargo wrote.

Wuhan is in Hubei province.

“Aside from uncertainty around when factories actually reopen, staffing could be impacted by continued transportation issues, quarantine periods for some workers, or the simple fact that people may not return to work after the holiday due to fear of catching the virus in crowded factories,” Wells Fargo said.

Also: Ralph Lauren has closed about half of its stores in China due to the coronavirus

Analysts’ logistics sources have compared the situation to a port strike in which each day of inactivity leads to a delay in an order of up to one week. Analysts also say there is product in Chinese factories and distribution centers that haven't begun to travel to their intended destinations.

Among the companies at high risk, according to Wells Fargo, are Best Buy Co Inc. /zigman2/quotes/205918291/composite BBY +0.29%  , Target Corp. /zigman2/quotes/207799045/composite TGT +0.10%  , Walmart Inc. /zigman2/quotes/207374728/composite WMT -0.27% , Dick’s Sporting Goods Inc. /zigman2/quotes/200566298/composite DKS +0.32%   and G-III Apparel Group Ltd. /zigman2/quotes/201364718/composite GIII -0.08%  

“It’s worth noting that big-box players like Target and Walmart could be the first to experience out-of-stock issues, as they are more heavily dependent on a shorter lead time replenishment model,” Wells Fargo said.

At low risk are off-price retailers like Burlington Stores Inc. /zigman2/quotes/203203718/composite BURL +0.35%  , Kroger Co. /zigman2/quotes/206215053/composite KR +0.69%  , and Ulta Beauty Inc. /zigman2/quotes/210513442/composite ULTA +2.66%  

Don’t miss: Canada Goose downgraded over coronavirus, but there are other issues as well

Also at high risk is the U.S. toy industry, according to UBS. More than 85% of toy industry sales come from China, analysts said; 69% for Hasbro Inc. /zigman2/quotes/201249319/composite HAS +0.32%   and a little less than 75% for Mattel Inc. /zigman2/quotes/209819189/composite MAT +1.68%  Hasbro has been trying to shift its dependency away from China to places like Vietnam and Mexico, UBS said.

Cowen analysts think luxury retail could be most materially affected due to revenue exposure to China (about 17%) and broader Asia-Pacific (about 34%). Analysts haven’t identified an “explicit risk” to the supply chain, but say a disruption is “likely.”

Moreover, it isn’t just stores that will be impacted, but e-commerce as well as shipping problems mount.

“Industrywide, we believe the coronavirus impact could be material in 1Q20 for retailers with high sales exposures to China,” Cowen wrote. “Also, note that the March ending quarter typically benefits from higher sales volume from Lunar New Year, and sales exposure to China could be larger than other quarters.”

The Consumer Discretionary Select Sector SPDR Fund ETF /zigman2/quotes/200844504/composite XLY +2.37%   has gained 8.1% over the last three months, the SPDR S&P Retail ETF /zigman2/quotes/206947004/composite XRT +1.77%   is nearly unchanged, and the S&P 500 index /zigman2/quotes/210599714/realtime SPX +1.59%   has gained 8.6% for the period.

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/zigman2/quotes/201249319/composite
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/zigman2/quotes/206947004/composite
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Tonya Garcia is a MarketWatch reporter covering retail and consumer-oriented companies. You can follow her on Twitter @tgarcianyc. She is based in New York.

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