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Here’s the Dilemma Retailers Face in the Scramble to Sort Out Inventory

Retailers are tightening second-half orders, and leaning on their supply chains to help repurpose original orders not yet in production. Some are asking factories to use raw materials for a different season or collection and are seeking to lower costs instead of paying penalties for outright cancellations.

Apparel stores in the specialty and department store channels have been temporarily closed since mid-March to help curb the spread of the coronavirus outbreak in the U.S. Those with stores overseas had closed those doors at varying times starting with Asia in late January and then parts of Europe at the beginning of March, although retailers in Asia have started to reopen. In the U.S., state governors are starting regional, collaborative conversations over when some areas across the country might be able to begin easing the shelter-in-place restrictions that began last month.

While some retailers have discussed canceling deliveries as early as April, that might be more the exception than the rule, according to Rafe Jadrosich, Bank of America’s Asia Apparel Supply Chain analyst. Third-quarter orders are being finalized now, and so far are tracking down by as much as 30 percent to 50 percent, with the holiday order book also down, although that could reflect a delay in placing orders as long as possible given the ongoing uncertainty for when stores can actually open.

Retailers face penalties if they cancel during the four months between final order and delivery, meaning that retailers will be “facing a cost for canceling any product set to be delivered before August,” noted Michael Hartnett, chief investment strategist at BofA Merril Lynch Global Research.

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Retailers are leaning on their supply chains to help manage through the downturn, Hartnett said, noting that the high cost of canceling summer and early back-to-school orders has them considering other options.

“Many retailers are repurposing raw materials purchased to make summer-early back to school product for future seasons where they can. If the materials haven’t been utilized, factories can change design, color or size. Retailers are also asking factories to make and hold product for future seasons instead of canceling,” Hartnett said, indicating from Jadrosichs’ data that some Summer 2020 product is being repurposed for Fall 2020 and even Summer 2021.

And while retailers pay a carrying fee to factories for this option, “it’s far less punitive than the cancelation penalty for sharp markdowns,” Hartnett said.

While a later finalization of orders and the shifting of product to other seasons means less visibility on third-quarter inventory declines, Hartnett said with certainty that those “declines will be severe.”

Retailers face a dilemma, Hartnett said. “If inventory is below demand, that will slow the sales recovery, but over-ordering is a cash flow drain that could lead to higher markdowns,” he added.

He believes retailers that can “chase” product that sells will have the competitive advantage. That means focusing on core, basic items with shorter lead times and that can be bought again to restock inventory, instead of fashion and seasonal product that have longer lead times and might not be relevant to the consumer by the time they hit the sales floor. While lead times for fashion and seasonable items are possible, it’s only doable if retailers are willing to foot the additional costs to air freight the goods.