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Panic at the Department Store? Not Yet, Despite High Inventory Ahead of Holiday

Despite industry concerns over bloated department-store inventories and categories selling poorly, there’s no indication yet that retailers have started panicking in the lead up to holiday sales.

A Cowen & Co. research note Monday from John Kernan described inventory positioning within the U.S. wholesale channel as “challenged,” due largely to over-storing, tariffs, unseasonal weather, geo-political turmoil and consumers purchasing when they need something instead of investing well in advance.

Much of the rise in “inventory levels outpacing sales growth reflects the pull forward of receipts to mitigate tariff impacts from goods imported to the U.S. from China,” Kernan  said. And if all the early holiday discounting and friends and family events aren’t yet a panicked attempt to move goods, then the sales can best be described as planned promotions.

Sales-to-inventory growth spreads have remained negative for most of the brands and retailers tracked by Cowen analysts. That means that a continued sales slide would coincide with recent declining volume trends at the department-store level.

“Momentum heading into the holiday period, if one were to only look at brick-and-mortar traffic, has been pressured. Brick-and-mortar traffic, both overall and for apparel, has been consistently negative through the majority of 2019, including this fall, which reflects a deceleration from fall 2018, which benefited from colder temps and saw positive apparel traffic,” he said.

October and November last year saw the snowiest weather for that period in two decades. While a warm and dry December followed those inclement months, the early frost did help drive full margins for all seasonal items, such as coats, batteries and shovels, the analyst said.

In contrast this year, Weather Trends International CEO Bill Kirk has forecasted a cold December. That means that while seasonal sales will be slow at the start due to the warmer weather experienced this past fall, those purchases will likely shift into the first half of December. Kernan said Kirk believes that “every one-degree change in weather can produce sales growth of 2 percent to 5 percent in cold-weather apparel categories.”

With structural headwinds remaining around much of the U.S. wholesale channel, Kernan believes Burlington, Lululemon Athletica, Ross Stores, TJX Cos. Inc. and Nike are the firms more likely to raise fiscal year guidance into year-end, with Ralph Lauren and G-III as the ones who are considered “out of favor.”