Retailers' biggest holiday wish is to get rid of all that excess inventory

Retailers’ biggest holiday wish is to get rid of all that excess inventory

A clearance sale sign is seen at the Gap retail store on September 20, 2022 in Los Angeles, California.

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As some of the nation’s largest retailers report quarterly earnings and revenue this week, Wall Street will also be paying close attention to another number: inventory levels.

walmart, Target, Difference, Kohls and others are trying to sell through a glut of extra merchandise piling up in store backrooms and warehouses.

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Their quarterly filings will serve as progress reports, especially as retailers prepare for the holiday season, a time of higher foot traffic, fierce competition for consumer wallets and numerous sales events. Investors want to get a clearer picture of how much excess product retailers have sold — and how big of a discount they may have to make to keep the merchandise moving.

“Inventory is the most important factor,” said Michael Baker, retail analyst for equity research firm DA Davidson. “That’s usually not the case — usually it’s just one factor. The inventory is going to make more sense than other metrics.”

Retailers are under pressure to eliminate inventory and start fresh in the next fiscal year. Inventory balancing has become an added urgency as economists warn of dwindling savings accounts, rising credit card debt and the risk of recession.

“The idea is to come clean in the face of an environment where sales may be a little harder to come by,” he said.

A pandemic hangover

Retailers have faced a sharp turnaround over the past six months. Many of the same items that flew off the shelves in the early days of the pandemic — such as loungewear and coffee makers — ended up on the clearance rack.

With housing and grocery prices soaring, fewer Americans are buying big-ticket and discretionary items. Inventories, which represent the value of goods in transit as well as those in stock, also increased due to supply chain issues.

Sudden changes in tastes “from sweatpants to swimwear and suitcases” put businesses in a difficult position, said Oliver Chen, retail analyst at Cowen.

Retailers typically place their orders about six to 12 months in advance, with bulky items and homewares at the higher end. After seeing such strong consumer demand and dealing with supply chain-related stock-outs, some companies have placed larger or accelerated orders.

Major retailers have fought so long and hard to build up inventory that they have been unable to adjust properly when they needed to slow the influx of goods. “You can’t change in no time,” Chen said.

Walmart and Target were among retailers that shocked investors with big jumps in inventory levels in the first quarter, which ended April 30.

Target cut its forecast twice, once in May and again in June, saying it would cancel orders, cut prices and take other dramatic steps to eliminate crowding.

Walmart’s U.S. CEO John Furner acknowledged at an Investor Day in June that the company would “just like to get rid of” most of its excess inventory. He warned that it would take “a few quarters” to return to a healthier inventory position. A month later, the discounter cut its second-quarter and full-year profit outlook, in part due to aggressive markdowns.

Mall retailers, including Abercrombie & Fitch, american eagle and Gap, reported similar issues. Some have also reduced their forecasts.

Kohl’s went from having too little inventory last year to having an inflated inventory in the second quarter of this year. Part of that came from beauty products when Sephora stores opened and the decision to package and hold products that arrived at the wrong time or didn’t sell.

Gap’s inventory has been impacted by a size and assortment mismatch. At its Old Navy chain, a push to sell more plus-size items backfired on stores having too many stretch sizes and too few sizes with higher demand.

Not all retailers struggled with having too much to sell. best buy cut its full-year sales forecast in July as sales of consumer electronics such as laptops and televisions slowed, but its inventory fell year-over-year in the second quarter.

Like his peers, Macy’s saw a shift from casual wear and home categories to dressier wear. It also cut its forecast, citing weakening consumer spending. Yet in recent quarters, it has largely circumvented a dramatic inventory imbalance.

CEO Jeff Gennette said on an earnings call in August that the department store used data analytics to act quickly. He said it slowed orders for brands where he had more flexibility, as he noticed consumers cut back on spending and heard about competitors’ inventory issues.

Big business, tighter margins

For shoppers, efforts to eliminate inventory will mean bigger bargains this holiday season. For retailers, this will mean reduced profit margins.

Mall-based and other retailers selling apparel, home goods and electronics are more likely to still be in dire straits, said Neil Saunders, chief executive of GlobalData Retail, a consultancy .

Even at a much lower price, summer clothes are a tough sell in winter, he said. The same goes for one-time purchases many people already made during the early parts of the pandemic, like a flat-screen TV or a blender, he said.

Excess inventory could also degrade the shopping experience this holiday season at some stores. For example, on recent trips to Kohl’s stores, he said, he had trouble maneuvering the aisles “full of bump blocks.”

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Having too much — even on sale — could overwhelm shoppers looking for ease, speed and convenience during peak season. This could lead them to online competitors such as Amazon.

“A lot of people can walk into stores to look around and they might walk away and think, ‘I can’t deal with this,'” Saunders said.

Some analysts are already bracing for the stocks headache to linger. Last week, equity research firm Evercore ISI issued a negative tactical trading call on Target ahead of earnings, saying it expects the big-box retailer to post a shortfall and indicating that ‘it continues to unwind months of stockpiling.

The majority of Target’s sales come from discretionary products, unlike Walmart, which derives most of its sales from groceries.

Still, the holidays could help retailers who are still dealing with bloated inventory, said Greg Melich, retail analyst for Evercore ISI. Shoppers are still planning to hit the stores and hunt for freebies, although the holiday forecast is more subdued.

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