The biggest holiday wish for retailers is to get rid of all that excess inventory

The biggest holiday wish for retailers is to get rid of all that excess inventory
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A clearance sale sign is seen at the Gap retail store on September 20, 2022 in Los Angeles, California.

Allison Dinner | Getty Images

As some of the country’s biggest retailers report quarterly earnings and earnings this week, Wall Street will also be paying close attention to another number — inventories.

walmart, target, gap, cabbage and others try to sell through a barrage of additional goods piling up in the back rooms and stores of the stores.

Their quarterly filings will serve as progress reports, particularly as retailers prepare for the holiday season, a time of higher visitor traffic, stiff competition for consumer wallets and numerous sales events. Investors want a clearer sense of how much excess merchandise retailers have sold out — and how heavily they may need to discount to keep merchandise moving.

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

Retailers are under pressure to clear their inventory and start fresh next fiscal year. Inventory balancing has gained additional urgency as economists warn of dwindling savings accounts, rising credit card debt and the risk of a recession.

“The idea is to come clean from an environment where it might be a bit harder to get sales,” he said.

A pandemic hangover

Retail has seen a sharp turnaround in the last six months. Many of the same items that flew off shelves in the earlier days of the pandemic — like loungewear and coffee machines — have ended up on the clearance shelf.

As home and food prices soar, fewer Americans are buying expensive and discretionary items. Inventory levels, which account for both the value of goods in transit and those in stock, also rose due to supply chain issues.

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

Retailers typically order around six to 12 months in advance, with bulky items and housewares at the higher end. After seeing such strong consumer demand and dealing with supply chain-related stockouts, some companies placed larger or expedited orders.

Large retailers have struggled so long and hard to build up inventory that they have not been able to adjust properly when faced with slowing the flow of goods. “You can’t change for a dime,” Chen said.

Walmart and Target were among the retailers that shocked investors with significant jumps in inventories in the first quarter ended April 30th.

Target cut its forecast twice, once in May and again in June, She said it would cancel orders, lower prices and take other dramatic steps to clean up the mess.

Walmart’s US CEO, John Furner, conceded at an investor day in June that the company would “just wish away” most of its excess inventory. He warned it would take “a couple of quarters” to return to a healthier inventory position. A month later the discounter lowered its earnings outlook for the second quarter and full yearpartly due to aggressive discounts.

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

cabbage fluctuated from too little inventory last year to have an increasing inventory in the second quarter of this year. Some of that came from beauty items when Sephora stores opened and the decision to package and store merchandise that arrived at the wrong time or didn’t sell.

Gap’s inventory was hit by a mismatch in size and assortment. On his Old Navy chain a boost to sell more plus size items backfired as stores had too many extended sizes and too few higher demand sizes.

Not all retailers struggle with overselling. best buy lowered its sales guidance for the year in July as sales of consumer electronics such as laptops and TVs slowed but second-quarter inventories fell year-over-year.

Like his colleagues Macy’s saw a shift from casual wear and home textiles to more dressy attire. It also lowered its forecast citing weaker consumer spending. In recent quarters, however, it has largely sidestepped a dramatic inventory imbalance.

CEO Jeff Gennette said at an earnings call in August that the department store used data analytics to move quickly. He said it slowed orders for brands where it had more flexibility, noticing consumers were pulling back spending and hearing about competitors’ inventory problems.

Big deals, tighter margins

Efforts to clear inventory will be helpful for buyers mean bigger bargains this holiday season. For retailers, this means shrunken profit margins.

Mall retailers and others that sell apparel, home goods and electronics are likely still in a tough spot, said Neil Saunders, managing director of GlobalData Retail, a consulting firm.

Even at a much lower price, summer clothes are hard to sell in winter, he said. This also applies to one-off purchases that many people have already made in earlier parts of the pandemic, such as B. a flat screen TV or a mixer, he said.

Excess stock could also affect the shopping experience at some stores this holiday season. For example, on recent visits to Kohl’s stores, he’s had trouble maneuvering through “crammed” aisles, he said.

Excess retail inventory will increase the magnitude of holiday markdowns, says BofA's Lorraine Hutchinson

Having too much stuff — even if there’s a discount — could overwhelm shoppers looking for ease, speed, and convenience during peak seasons. It could put them to online competitors such as Amazon.

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

Some analysts are already preparing for inventory problems to continue. Last week, equity research firm Evercore ISI initiated a negative tactical trade call on Target ahead of earnings, saying it expects the big-box retailer to miss earnings and saying it’s still handling months of inventory building.

Most of Target’s sales come from consumer staples, unlike Walmart, which derives most of its sales from groceries.

Still, the holidays could help retailers still dealing with bloated inventories, said Greg Melich, retail analyst at Evercore ISI. Shoppers still plan to hit the stores and even shop for gifts when holiday forecasts are more muted.

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