Dive Brief:
- Gap saw improved operating margins in Q3 due to lower air freight rates, according to a Nov. 17 earnings call.
- Freight costs have been trending down YoY, normalizing spending levels in comparison to 2021’s high-rate environment, CFO Katrina O’Connell said on the call.
- The retailer expects to reap even greater air freight benefits next quarter as rates continue to normalize, O’Connell noted.
Dive Insight:
Retailers have been optimistic about freight-related tailwinds headed into 2023 as rates become more favorable in comparison to the past year’s elevated cost environment.
“Air freight contributed approximately 200 basis points of leverage as spend levels normalized during the quarter, and [Gap] lapped the $70 million of incremental air freight expense last year,” O’Connell told investors.
Although air cargo rates are still higher than in 2019, spot rates have seen a steady decline as capacity constraints soften. In September, spot rates were down 9% YoY and 20% YoY in October, according to previous reports from Clive Data Services.
Gap further expects air freight rates to continue to normalize, according to the call.
The retailer’s transportation costs skyrocketed last year as Gap spent hundreds of millions of dollars to move inventory by air to avoid ocean congestion and disruption, spending $245 million on air freight alone in Q4 2021, according to a Nov. 17 earnings report. At the time, Gap noted that they hoped to spend roughly 20% to 25% less on air freight in 2022, and anticipated that starting in 2023, it would rely less on air transport.
Looking forward to its freight strategy, the retailer won’t see as much additional ocean benefit in Q4 compared to air, given that Gap is already locked into long-term ocean contracts below market rate, O'Connell said.
Gap is not the only retailer looking to benefit from reduced freight costs. Discount retailer Burlington also noted lessening supply chain headwinds in Q3, with CEO Michael O’Sullivan noting in a Nov. 22 earnings release that the company is seeing improvements in freight rates.
