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From Pileups to Promising, How Inventory is Separating the Winners and Losers

This year has been repeatedly referred to as the year of the haves and the have nots, the leaders and the laggards and the winners and the losers when it comes to retail, and the second quarter earnings reports show this divide in stark relief in the department store sector.

While some stores have figured out how to tune up their supply chains, capitalize on the strong economy and harness technology, others have been slower to start or just generally headed in the wrong direction.

One key area that those on the upswing have demonstrated a good handle on is inventory. Macy’s, Nordstrom and Kohl’s seem to be successfully working toward creating supply chains that support buying strategies that better deliver goods where and when consumers want them. On the other hand, for those that had a rough quarter, a lack of inventory management was often to blame.

Kohl’s and J.C. Penney, in particular, are a tale of two retailers, one that’s gaining traction from recent inventory efforts and another that’s barely off the starting line. Analysts looking at the latter’s Q2 performance are even asking whether a company that’s lagging that far behind has already lost the race.

JCP reported a net loss of $120 million for the quarter compared to a $23 million loss during the same period last year. Moreover,  the company’s 0.3% increase in comp sales, which fell short of analysts’ predictions and sent its stock spiraling. Discounting drove cost of goods sold up 160 basis points to 66.3%.

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Business Insider quoted an investor note from Neil Saunders, managing director of GlobalData, that sums up what many have been saying. “It is hard to see how the company will turn this around in the near-term, especially with a vacuum in the leadership team. We remain somber about JCP. The company just feels increasingly tired and lacking in spirit,” he said.

In that same vein, Forrester retail analyst Sucharita Kodali posed a hypothetical to CNN, “If they can’t make decent numbers in this great retail environment, what will they do in a downturn?”

Once again, JCP has found itself in a position in which it needs to turn to heavy markdowns to clear out the glut of goods nobody wanted. In fact, it’s a repeat of the company’s first quarter woes.

Discussing the retailer’s current position during its second quarter earnings call, CFO Jeff Davis said it’s “critical” for JCP to get a handle on inventory. To that end, the retailer announced plans to reduce inventory by at least $250 million by the end of the 2019 fiscal year. To do so, the chain plans to switch up its game plan by buying into hot products and categories rather than focusing on filing fixtures in its stores.

Buying less—and only what’s likely to sell—has been the strategy for Kohl’s, and it seems to be paying off.

Comp sales for the second quarter increased 3.1% over the prior-year period. The company reported gross margin increased 42 basis points, which CFO Bruce Besanko attributed to Kohl’s focus on managing shipping costs as well as achieving its 10th consecutive quarter of inventory reductions.

Kohl’s credited its clean inventory position to a four-part strategy that includes its standard-to-small initiative, which has seen 500 locations shrink selling space within their existing footprints. “There’s been an inventory reduction, obviously, as a consequence of the standard-to-small, it’s a low double-digit percentage decrease in inventory in those stores,” Besanko said during Kohl’s Q2 earnings call.

In addition to doing more with less, Kohl’s said focusing on localization has allowed it to better deliver merchandise where it’s most needed.

The company is also going more narrow and deep in assortments that are working, a move that CEO Michelle Gass said helped the women’s category outperform the company for the first time in two years.

“Our focus on brand clarity, product assortment and narrow choice has been a key driver of the improved results in our women’s business,” she said.

A push for speed in Kohl’s owned brands is also reportedly showing positive results, giving Kohl’s the agility to respond to demand, according to Gass. “The speed model has provided the ability to make decisions closer to the season, to test key programs before companywide rollout and to enable our teams to respond to the specific business trends allowing us to chase strength while reducing exposure to weaker performers,” she said.

Chasing goods that are working is also a part of the strategy at Macy’s, which reported flat comp sales for the quarter due to a shift in its Friends & Family promotion from the second to first quarter this year.

Macy’s ability to chase trends in addition to better inventory control led the retailer to a gross margin for the quarter that was 80 basis points higher than the same period last year, according to CFO Paula Price. Additionally, inventory was down 40 basis points year on year.

With less inventory, the department store was left with more open to buy. CEO Jeff Gennette again pointed to the retailer’s newly restructured merchandising team as a major benefit when it comes to delivering on the speed to market needed to capitalize on opportunities.

“The speed of decision making is significantly just shorter than it used to be,” Gennette said, when speaking to analysts. “And because we’ve got so much liquidity in our receipts to be able to respond to customer needs, we were able to respond in getting more customer wanted products, the wanted trends into our stores faster.”

The company said there’s a direct link to what Gennette called a more “customer centric” approach to buying and the 50 basis point increase in total transactions in the first half as well as the 4.6% increase Macy’s experienced in average unit retail during that period.

Nordstrom too credits its strong quarterly performance to its ability to offer exactly what customers were looking for. But to do that, the company said, must have liquidity. And being in “relatively good shape” inventory wise leaves dollars open.

“We’re just trying to keep—have our whole physical setup being absolutely nimble and fluid as it possibly can be,” Peter Nordstrom said, adding “we’re really funding and chasing the things that are working and then working hand in hand with the stores to make sure that [we’ve] got the floor space to do that.”

The company attributes a higher percentage of regular price sales to the 91 basis point improvement in gross margin. Comp sales were up 4 percent for the quarter.

In Nordstrom’s off-price business, the company has made “great strides” in this area to the tune of an $85 million reduction on a comp store basis, according to Blake Nordstrom. The result, he said, was faster turns and better margins, contributing to the Rack’s 4 percent increase in comp sales for the quarter.

“The strength of our inventory position allowed us to be fluid and respond quickly,” he said.