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As Excess Apparel Piles Up, Retailers Mull Viability of ‘Pack and Hold’

While the COVID-19 pandemic ultimately battered sales numbers across apparel, the longer-term consequences related to unsold inventory will continue to mount in the months ahead. Given the excess now accrued, fashion retailers are taking different approaches in a scamper to answer the question: “What are we going to do with all this merchandise?”

When stores started closing in mid-March, many retailers began delaying and cancelling orders for the summer season, extending payment terms with their vendors and tightening their second-half orders. As stores slowly start to reopen, retailers are either now deciding to sell the excess inventory in the short term anyway or are instead looking to explore “pack and hold” alternatives, in which they will sell the merchandise in a later season, often the next year.

In a first-quarter earnings call, Gap Inc. expressed plans to “pack and hold” until the 2021 selling season its summer, transitional fall and fall merchandise that suffered amid store closures. This includes merchandise that was never delivered to shops across Gap’s namesake brand as well as Banana Republic, Old Navy and Athleta. Gap has not said whether the items will be sold at a discount.

“We are cautious about whether this season’s products will resonate with consumers next year, given rapidly changing consumer preferences,” Oliver Chen, senior equity research analyst at Cowen, said in a research note to clients. “We also view there is a risk associated with the possibility of not having enough of on-trend items for the fourth quarter of 2020, which is the most important quarter for Gap.”

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The risk is an obvious one, as there is no guarantee that shoppers in the spring of 2021 will want to buy the merchandise, especially if it is no longer trendy. At the same time, Gap sells a lot of basic apparel including T-shirts and jeans that typically have a longer shelf life, making them prime candidates for a year-long hold.

Gap isn’t the only major retailer gambling on this strategy. The U.K.’s largest department store, Marks & Spencer, is packing away at a very high cost, deciding to store approximately £200 million ($252 million) in unsold seasonal stock in secured storage facilities until spring 2021. And while the long-term effects aren’t as clear, the company is already paying for the move, taking a charge of £145.3 million ($183.6 million) related to the handling, clearance, storage and write-off of the excess inventory.

Children’s wear retailer Carter’s is packing away as much as $110 million of unshipped spring and summer product and holding it until next year. G-III Apparel Group, which operates brands including DKNY and Karl Lagerfeld Paris, is packing away its “social dressing” category for next year, particularly due to the company’s social gathering and prom business taking major hits. But social outfits such as suits and dresses may not carry the trend shifts typical of everyday apparel.

“We’re sitting with some career suits. We’re sitting with some day dresses. But short of that, we’re OK on the inventory side,” Morris Goldfarb, CEO of G-III Apparel Group, said in an earnings call. “We’re going to put a ribbon around it, not sell it off, just bring it back into next year. The product is great. It’s first-class product. It’s not problem product.”

And even PVH, the parent company of Tommy Hilfiger and Calvin Klein, which historically doesn’t approach pack and hold as an inventory alternative, has reconsidered after reporting a $1.1 billion net loss for the first quarter.​

M&S is holding excess inventory for future seasons, at a cost running into the millions.
M&S is betting on the pack-and-hold strategy for millions of dollars of product. Ajay Aggarwal/Hindustan Times/Shutterstock

While chief operating officer and chief financial officer Mike Larson noted in an earnings call that PVH is taking the typical COVID-era measures to handle excess inventory such as reducing and canceling commitments and negotiating extended payment terms with suppliers, the apparel giant will pack and hold as much as $250 million of this year’s spring assortment into 2021, he said.

To further reflect the current demand picture, PVH also will redeploy basic inventory items to subsequent seasons and consolidate future seasonal collections.​

Although PVH wouldn’t normally discuss pack and hold, “this is a completely different situation,” CEO Manny Chirico admitted during an April earnings call. Exploring pack and hold likely hinged on whether the off-price promotional market would become “too aggressive,” Chirico said.

Pack and hold is a common practice by off-price retailers as they are buying other brands’ unsold inventory anyway. For example, 42 percent of inventory at Ross Stores is on packaway as of the first quarter of 2020, while packed and held items comprise 22 percent of Burlington’s total inventory (TJX doesn’t reveal packaway numbers). But these retailers have been able to thrive due to the price points and “treasure hunt” experience they deliver alongside the actual product, instead of a need to satisfy shopper trends.

Some retailers are instead taking a reserved approach to pack and hold, opting to sell most items at regular prices later. While Primark said that most of its excess stock mainly includes non-seasonal and non-fashion items so the retailer will sell them as is, the team has conducted a detailed review of the spring/summer stock on hand and has earmarked “certain” products to be held in storage for sale in spring/summer 2021. And Abercrombie & Fitch began packing away “basic, long-lived” items such as shorts and T-shirts early in the pandemic, but already has started to unpack these items, according to chief financial officer Scott Lipesky.

“The goal is to get rid of all that packaway and sell it to our customers now and come in fresh in next year,” Lipesky said in an earnings call.

A decision to pack and hold may have merit if fewer shoppers are going to come back to stores, but that all hinges on speculation. Only 34 percent of shoppers said they would expect to go to a shopping mall when they reopen, according to data from Refinitiv. Another 35 percent said they would only go when there is a vaccine, even if it takes as long a year from now to develop.

This aligns with a recent First Insight study indicating that 33 percent of shoppers say they would feel safe shopping in malls. With this level of concern surrounding the safety of the physical retail environment, some retailers may be estimating that they could time their merchandise relaunch to when more shoppers return.

Harrods launches first outlet store to eliminate unsold inventory

U.K.-based luxury department store Harrods is taking a decidedly un-luxury-like approach to offloading its pileup of product by launching a temporary concept store within a two-story, 80,000-square-foot space in Westfield London. The outlet store, a first for Harrods, will sell discounted stock left over from the spring season as part of its annual end-of-season summer sale, which typically is one of its most popular and crowded events.

The popup has been designed to support higher levels of social distancing as Harrods preps its Knightsbridge store for a June 15 reopening. With the outlet selling discounted stock, Harrods can offer a wider product selection of new-season products at Knightsbridge.

“In the new world in which we find ourselves, the economy needs businesses willing to look at its business model and current operations and think differently to enable growth, while protecting its customers and employees,” said Michael Ward, managing director of Harrods. “Harrods Outlet allows us to enable better social distancing across a larger footprint, move towards the new season decisively and confidently, and retail in a responsible way. Harrods has always sought to find creative solutions and has never been afraid to take the unexpected route.”

Gap, Marks & Spencer, PVH 'Pack
Consumers stand in social-distancing lines to enter Harrods, which reopened June 15 and launched a popup outlet in a separate location to clear excess inventory. Matt Crossick/PA Wire URN:54153723 (Press Association via AP Images)

Charitable donations are an underused asset

Despite being the face of the recent pack-and-hold conundrum, Gap is also taking more charitable steps to offload inventory as well, with Old Navy donating $30 million worth of clothing toward families affected by the pandemic. The retailer is working with several non-profit organizations, including Good360 and Baby2Baby to distribute the goods in communities that have been hit the hardest by the coronavirus. And what’s more, Banana Republic is working with Delivering Good to donate $20 million in new clothes to those who have recently filed for unemployment during the crisis. Guess also partnered with Good360 to get 45,000 apparel products like activewear and outerwear to consumers in need. Ralph Lauren, too, chipped in with a donation of its own, giving 1.5 million clothing items to “to support hundreds of thousands of frontline workers and families in need.” Aritizia gifted $10 million worth of custom-designed clothing packages to 100,000 frontline workers.

While apparel brands have pivoted to manufacturing and distributing PPE during the pandemic, fewer have turned to donating apparel even though it’s an obvious way to get rid of new, unsold clothes. If more apparel companies take this route with unsold spring/summer items, they would immediately alleviate portions of excess stock sitting in warehouses and could even build brand equity with a large subset of consumers due to their charitable initiatives. Additionally, they position themselves to get a tax write-off in the long haul.

Excess inventory largely evades footwear

While seasonality has forced apparel companies to reconsider how, when and where they want to sell products, the excess inventory issue hasn’t appeared to hit footwear retailers nearly as hard, even as they too experienced significant sales declines throughout the pandemic.

For example, Shoe Carnival reported first-quarter inventory increases of a mere 4.2 percent, and when it came down to moving seasonal footwear such as sandals, the company simply moved their ship dates to later in the summer.

Genesco, the parent company of Journeys, Schuh and Johnston & Murphy, saw inventory increase just 6 percent year over year in its first quarter, despite shuttering nearly 1,500 stores in mid-March. In May, when stores finally began reopening, inventory decreased 10 percent year over year, reflecting shoppers’ eagerness to spend on shoes.

“There has been a difference between perhaps footwear and apparel. I think the consumer’s appetite for footwear has been stronger,” Genesco CEO and president Mimi Vaughn said in an earnings call. “It’s an easier purchase. I think that perhaps some consumers are still just a little bit more cautious trying on apparel. But we’ll see. And I think that others who’ve reported on the footwear front have reported some pretty nice sales.”

Caleres, the parent company of Famous Footwear and Allen Edmonds, saw first-quarter inventory declines of 9.7 percent after reducing or delaying orders at the start of the pandemic. The company is opting to further narrow its assortment, particularly “some of the extraneous brands that really are in the casual and dress side of the equation where we don’t really need to carry those,” according to CEO, president and chairman Diane Sullivan.