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Cowen: Inventory “Surgery” Comes to an End, Second Half Looks Brighter

Retailers are finally whittling down the inventory glut they were left with after unseasonable weather over winter, slowing sales and disinterested consumers.

The inventory to sales spread, which looks at sales growth minus inventory growth (with currency effects factored in), according to Cowen and Company’s latest Inventory Tracker report, has shown further improvement over the first quarter of the year and last year this time as retailers work to clear out goods to be “clean” for back-to-school.

“Sporting goods and department store retailers had the best recovery in the period and updated outlooks and plans don’t seem to imply dramatic improvement which could provide a set up for positive sales and earnings revisions in 2H [second half] if seasonal weather conforms,” the report noted.

Dick’s Sporting Goods, PVH, Adidas and Under Armour could be in a position to raise their guidance, according to analysts.

For many retailers, like Hanesbrands and Skechers, inventory is outpacing sales, which could mean increasing markdown allowance due to promotion glut and gross margin risk.

In looking at the inventory spread (quarterly sales growth minus inventory growth, where a negative number points to more inventory than sales), department stores were all down.

For the second quarter, Macy’s inventory spread was negative 1 percent and Dillard’s was down 6 percent. In broadlines, Target’s inventory spread was down 12 percent while Walmart saw a positive 4 percent. Off-price was the only category reporting straight positives in the spread, with both TJX and Ross Stores showing a positive 4 percent. (Hanesbrands and Skechers, by comparison, were down 17 percent and 16 percent).

Nearly all retailers’ inventory spread, however, is improved over last quarter, and according to Cowen, the improved position will be a boon for newness in the market, increased replenishment business, gross margin recovery and maybe even higher stock prices.

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Brands and retailers cut orders to help rid themselves of some of the excess, which left the Asian supply chain community has been operating factory capacity akin to the levels seen in 2008-2009, and forced unit costs lower.

But, as Cowen noted in the report, “As retailers are cleaner on inventory it will support the ability to invest in new product, reduce promotions, increase full price selling in the face of depressed gross margin from fall/holiday 2015.”

“With lower inventory levels across the group, there should be more demand for replenishment product, leaving vendors to the brick and mortar channel in a much better position as we enter a potentially colder fall/holiday period with seasonal weather better matched to fall/holiday trends.”