Brambles (ASX:BXB) $17.63

BXB -20.23%: Smashed today after downgrading FY26 guidance, its worst day in more than 20 years. Interestingly, this is not a demand problem in the traditional sense – the opposite in fact, with customer demand stronger than expected and BXB unable to service parts of that demand efficiently because of repair capacity constraints in the US pallet network. The issue has been driven by labour shortages, subcontractor turnover and the need to repair pallets to a higher standard as customers increasingly automate their supply chains.

Todays update:

• FY26 underlying profit growth guidance was cut sharply to +3% to +5% at constant FX, down from prior guidance of +8% to +11%.
• Sales revenue growth guidance was also lowered to +2% to +3% at constant FX, from +3% to +4% previously.
• The downgrade reflects an estimated US$60m earnings hit in FY26 from repair capacity constraints, including around US$40m of additional supply chain costs linked to more repairs, handling, transport and storage.
• The pressure is concentrated in parts of the US, particularly Texas and the north-eastern US, where subcontractor exits and labour shortages have limited repair capacity.
• Brambles is buying around 2 million new pallets in 4Q, with further pallet purchases expected in 1H27 to improve availability.
• The company announced a new US$400m on-market buyback, to start after the current US$400m program is completed.

The key issue is that customers are increasingly automating warehouses and logistics operations, which means pallet quality needs to be more consistent. A slightly damaged pallet that may have been acceptable in a more manual environment can create issues in an automated handling system. Brambles has been lifting repair standards to meet this shift, but the additional repair requirements have collided with labour shortages and subcontractor disruption in parts of the US network.

This leads to a short-term capacity and cost problem, even though demand appears solid, customer wins remain supportive and the company still has confidence in its longer-term margin ambitions.

When the dust settles, this could be an interesting time to re-look at BXB – high quality stock, no demand issues, impacted by a very specific operational/execution challenge. We don’t own BXB.