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

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

Allison Lunch | Getty Images

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

walmart, Target, Gap, Kohl’s and others try to sell from the abundance of extra goods stockpiled in the store’s back rooms and warehouses.

related investment news

Here are Wall Street analysts’ favorite retail stocks, like giants like Target

Their quarterly presentations will serve as progress reports, especially as retailers prepare for the holiday season, more foot traffic, fierce competition for consumers’ wallets and plenty of sales events. Investors want to get a clearer sense of how much excess merchandise retailers are selling and how much they need to discount to keep merchandise moving.

“Inventory is the most important factor,” said Michael Baker, retail analyst at equity research firm DA Davidson. “Usually not – usually it’s just a factor. Inventory will mean more than other metrics.”

Retailers are under pressure to clear inventory and start fresh in the next financial year. Balancing inventory has taken on added urgency as economists warn of shrinking savings accounts, rising credit card debt and the risk of a recession.

“The idea is to be clean in the face of an environment where selling may be a little more difficult,” he said.

Pandemic hangover

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

As housing and grocery prices rise, fewer Americans are buying big-ticket and discretionary items. Inventory, which is the cost of goods in transit and in storage, also rose due to supply chain issues.

Oliver Chen, a retail analyst at Cowen, says sudden changes in tastes “from pants to swimwear to suitcases” are putting companies in a difficult position.

Retailers typically place orders about six to 12 months in advance, with bulk items and home furnishings at the top. After seeing such strong consumer demand and struggling with supply chain-related stockouts, some companies placed larger or expedited orders.

Big retailers have struggled so long and hard to build inventory that they have not been able to adapt properly when the flow of goods has to slow. “You can’t change it on a dime,” Chen said.

Walmart and Target were among the retailers that shocked investors with significant jumps in inventory levels in the first quarter 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 clear the mess.

Walmart’s U.S. CEO John Furner admitted at an investor day in June that the company wants to “just wish away” much of its excess inventory. It warned it would take “a couple of quarters” to return to a healthier inventory position. A month later, the discounter cut its second-quarter and full-year profit forecast, partly due to aggressive discounting.

Including mall retailers Abercrombie & Fitch, American Eagle and Gap reported similar problems. Some have lowered their forecasts.

Kohl’s went from very little inventory last year to ballooning inventory in the second quarter of this year. Some of this came from beauty products opening Sephora stores and the decision to pack and store products that arrived at the wrong time or didn’t sell.

Gap’s inventory was plagued by inconsistencies in size and assortment. The Old Navy chain’s push to sell more plus-size items has backfired on stores that carry multiple sizes and more in-demand sizes.

Not all retailers struggle with having too much to sell. Best Buy It cut its sales forecast for the year in July as sales of consumer electronics such as laptops and TVs slowed, but its inventories fell year over year in the second quarter.

Like his peers, Macy’s saw a shift from the casual wear and home categories to more fashionable wear. He also lowered his forecast citing weakening consumer spending. However, in recent quarters, it has underpinned a dramatic inventory imbalance.

CEO Jeff Gennette said on an earnings call in August that the department store is using data analytics to move quickly. He said consumers were pulling back on spending and slowing orders for brands where he was more flexible as he heard about competitors’ inventory problems.

Big deals, tighter margins

For shoppers, the effort to clear out inventory means more great deals this holiday season. For retailers, this will mean squeezed profit margins.

Neil Saunders, managing director of consulting firm GlobalData Retail, said mall-based retailers and others selling clothing, home goods and electronics would still be in trouble.

He said that it is difficult to sell summer clothes even at a very low price in winter. He said there were also one-time purchases that many people had already made in earlier periods of the pandemic, such as flat-screen TVs or blenders.

Excess inventory can also dampen the shopping experience at some stores this holiday season. On recent visits to Kohl’s stores, for example, she said she had trouble maneuvering the “cramped” aisles.

BofA's Lorraine Hutchinson says excess retail inventory will drive holiday discounts.

Having too much—even at a discount—can overwhelm shoppers looking for convenience, speed, and convenience during the busy season. This can push them to online competitors Amazon.

“A lot of people can walk into stores to look around, and they can come out and think, ‘I can’t handle this,'” Saunders said.

Some analysts are already bracing for continued inventory headaches. Last week, equity research firm Evercore ISI issued a negative tactical trade call on Target ahead of earnings, saying it expected the big-box retailer to miss gains, indicating inventory growth is still months away.

Most of Target’s sales come from discretionary merchandise versus Walmart, which draws most of its sales from grocery.

Greg Melich, a retail analyst at Evercore ISI, said the holidays could help retailers still struggling with bloated inventory. Shoppers still plan to hit the stores and look for gifts, even if the holiday forecast is more muted.

Source link