“Let the good times roll” seemed to be the mantra for many retailers heading into this year. Unfortunately, roll they did not.
That bit of hubris saw most retailers keeping up their high level of orders at the start of 2022, following a year of booming sales. But 2021 proved to be an aberration due to pent-up demand and stimulus-infused spending power. Retailers, thrilled about consumer willingness to buy everything in sight and at full price, failed to foresee the pull back on the horizon. Nor did many question when it would end. The thinking was that consumers had built up healthy levels of savings and could use some of that to help bankroll their shopping sprees.
Retailers aren’t done clearing out the excess
Cristina Fernández at Telsey Advisory Group said brands such as Nike Inc. promoted early to clear excess spring and fall inventory that arrived late. She said that better-than-expected sales from retailers such as Foot Locker and Dick’s during the third quarter likely provided a boost to lowering inventory levels.
But not all analysts are as hopeful. Wells Fargo’s Ike Boruchow said that while optimists are focused on clean post-holiday inventory levels, he’s finding it difficult to see where the upside is for the apparel sector. He said last week that he and his research team are “growing more concerned with the trajectory of the holiday selling season in softlines.” Boruchow also said the most companies appear “in line to slightly below holiday plan.”
One concern is that retailers have had to fight hard to capture each sale. Most often that entailed deep discounting to get consumers to buy, which will have an impact on fourth-quarter margins.
Some retailers such as Buckle and Burlington Stores have layaway options, and many retailers such as Walmart offer a Buy Now, Pay Later (BNPL) program where purchases are financed through a third-party payment method. BNPL consumers can take their purchases home with them instead of waiting weeks until payment is made in full.
Chris Dodd, who heads up operations at Gelmart, the world’s largest intimates manufacturer, said there’s a chance retailers will still have some excess inventory at the start of the first quarter, which begins in February. “I also expect to see retailers with these inventory pressures struggle to transition to Spring-Summer merchandise and remain seasonally relevant,” he said.
According to Stylitics founder and CEO Rohan Deuskar, “The shopper is showing up and buying as a result of the heavy promotional activity. We are seeing higher units per transaction versus last year, although slightly lower average order values. So yes, inventory is being cleared.”
His firm provides retailers with a tool for the upselling of goods. Visual options show up on the product page to suggest how other merchandise in the retailer’s inventory can be styled with the selected item. But Deuskar said that even though Stylitics has helped sell an additional 3.1 million items to date in the fourth quarter using the styling strategies, “it does look to me like there will still be inventory to be cleared in the first half of the next year.”
How the inventory problem started
Delayed receipts resulted in an influx of goods coming in late that consumers no longer wanted. Think holiday and winter merchandise coming in during the spring, a time when fashionistas in 2022 were thinking more about updating their working wardrobes than the comfortable, “cozy” fleece apparel for lounging at home. But it wasn’t just fashion that got hit. Everything from big-screen televisions to barbecue grills were in abundance too, due to both over-ordering and late deliveries for items.
Retailers found themselves with another problem. In addition to having too much inventory, they also had nowhere to store it. They scrambled fast to cancel all the orders that they could, except private label merchandise where that wasn’t an option. Warehousing became and obstacle as retailers grabbed whatever excess storage space they could.
The first inkling of trouble came from Amazon.com when it posted a $3.8 billion first-quarter loss this past April. The marketplace firm built out its infrastructure and operations to meet consumer demand during Covid, but ended up with excess fulfillment and transportation capacity once demand eased. Now Amazon is looking at lease terminations or subleasing the space it no longer needs.
But it was far worse than almost anyone expected.
Walmart Inc. followed with a miss on first quarter adjusted earnings per share estimates. “We like the fact that our inventory is up … but a 32 percent increase is higher than we want. We’ll work through most or all of the excess inventory over the next couple of quarters. We started being aggressive with rollbacks, in apparel for example, during Q1,” Walmart CEO Doug McMillon said at the time.
Excess inventory remained a problem in the second quarter, as well. Chief financial officer John David Rainey disclosed in August that the mass discounter had $1.5 billion in inventory “that if we could just wave a magic wand, we’d make it go away today.” And the retailer’s battle to get its overstocks under control included slashing billions of dollars in fourth-quarter orders to get back on track. The company also added more price reductions in the third quarter to improve its inventory levels. While Walmart in November said its inventory problems eased in the third quarter, it now had concerns about the impact of inflation on consumer spending.
Things weren’t much better at Target Corp. The discounter’s chief operating officer John Mulligan said in May that the retailer “ended up carrying too much inventory in several categories where the slowdown in sales was more pronounced than expected.” Demand slowed in apparel, home and hardlines. And he added that Target secured temporary storage so that less of the excess inventory would be “jamming store sales floors.” The retailer also ended up slashing $1.5 billion in upcoming “discretionary” receipts to fix its inventory mess.
In its third-quarter earnings report in November, Target was still trying to figure out what consumers want. “We’re moving proactively in a period of rapidly softening demand and elevated uncertainty to successfully navigate near-term challenges, Target CEO Brian Cornell said, adding that discretionary categories showed a “persistent softness” that “worsened at the end of the quarter.”
Specialty chains also faced challenges trying to navigate the inventory mess. Several executives at various outlets spoke about inventory issues in their third-quarter earnings results in November. Jen Foyle, American Eagle Outfitters’ president and executive creative director, said that the brand is working on rationalizing excess inventory. Its mall competitor Abercrombie & Fitch Co. made inventory adjustments to match customer buying trends in the second quarter. That move resulted in inventory that is 92 percent current season as the chain headed into the holiday selling period, CEO Fran Horowitz said. Gap Inc.’s CFO Katrina O’Connell said third-quarter results, which bested Wall Street’s quarterly revenue expectations, underscored the initial progress the company was “making toward rebalancing our assortments and reducing inventories.”
At the department store level, Macy’s Inc. didn’t show any signs of inventory stress. In its third-quarter report in November, it said its stock was up just 4 percent from year-ago levels. The retailer has been investing in modernizing its supply chain to gain efficiencies, including an overhaul on inventory management procedures that began three years ago.