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The Inventory Diet: How Retailers Are Learning to Do More With Less

The turmoil facing much of the apparel retail sector has put inventory in the spotlight.

Faced with rampant store closures, meager foot traffic and sagging comp sales, execs are actively trying to reduce the glut of product in the market while developing new goods with more appeal.

Through this better inventory control coupled with improved merchandising, stores are looking to reduce the need for perpetual promotions, boost full-price sell-throughs and fatten up margins.

During the second quarter earnings calls, there was much fanfare from the majors regarding their current inventory positions. For instance, the Bon-Ton reported a 5.1% reduction in the quarter, while Target trimmed down by 4 percent and J.C. Penney decreased inventory by 6.8%.

Already some stores are being rewarded with gains on the bottom line. Merchandise margin improvement at Kohl’s was credited to the company’s 2 percent reduction in inventory while ongoing efforts by Ross Stores over the last eight years has resulted in inventory that’s down 40 percent as well as “significant margin improvements,” according to Group SVP and CFO Michel Hartshorn.

Source: Moody’s Investors Service

Though margins were down at J.C. Penney due to the company’s effort to dispense with some of its “less desirable” inventory, the company said the ability to move in new merchandise that’s more targeted to consumer demands will prove beneficial through the end of the year.

A deliberate focus on moving out old merchandise is one reason for the inventory declines but it’s not the only one.

“Inventories are lean because they closed stores they didn’t need. I think it’s healthy, and they’re in a better position,” said Phyllis Shapiro, president of fashion, retail and design management consulting firm Innovative Consulting Solutions. She also says retailers, both big and small, are embracing omnichannel to their benefit. “There’s a big shift there where inventory management is being looked at in the aggregate and not in a siloed way and that’s really helping. So hopefully there will be less markdowns and discounting.”

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Even with that though, she warns, “price is still driving the business.”

Neil Saunders, managing director and retail analyst at Globaldata Retail, agrees that weaning stores—and, more importantly, consumers—off of discounts will be a challenge. “Although you can control excess discounting due to excess inventory, you don’t necessarily reduce the need to discount per se in order to get things sold,” he said.

Better is better

According to Saunders, that’s because when it comes to inventory, it’s not just about quantity, quality also counts.

“If you look at department stores like Macy’s, for example, the reason there’s a lot of discounting is because the product isn’t very good,” Saunders said. Consumers, he said, have no sense of urgency when they know they can find similar middle-of-the-road goods almost anywhere. “You have to create much more excitement and much more interest in the ranges and much more exclusivity as well.”

Finally, it seems retailers are getting that message.

Stores are increasingly looking to exclusive merchandise to drive excitement and also loyalty since these goods can’t be price shopped. For Kohl’s, its owned brands saw double digit sales increases in the quarter, while Macy’s is boosting its exclusives with new labels Avec Les Filles and Anna Sui. J.C. Penney is ramping up with three new proprietary brands on tap: Libby Edelman, City Streets and Project Runway. And Target might have the biggest overhaul planned with 12 new private label collections across men’s, women’s, kid’s and home.

[Read more about retailers’ merchandising plans: Speed, Exclusivity & Fashion Lead Department Store Goals for Second Half]

And the company’s update is directly attributable to better merchandise management, said Target EVP and CMO Mark Tritton. He says better sell-throughs and “lower inventory levels have created the capacity for us to invest in what’s new and what’s working.”

This isn’t the first time retailers have touted the importance of differentiated product though, and Saunders said too often it’s been big talk with disappointing execution. “A lot of it comes down to a lack of expertise in developing these ranges and confidence about how you execute it in store and an operation that’s still rooted in an old fashion way of buying rather than a more nimble and innovative way,” he said.

For instance, if you’re Macy’s and you’re buying to fill the same fixtures you’ve had in place for years, you’re doing it wrong, Saunders said. Buying needs to be based on demand, and the number and type of displays and fixtures should follow from there. A fact that some executives seem to be getting. Target and Kohl’s are both re-imagining their store floors to follow this demand-based model.

Less is more

While it may sound counterintuitive that less product could produce better profitability, Shapiro said, it can work. “If the store offers newness and speeds up their supply chain, that could replace the loss of sales,” she said.

According to Cathy Smith, EVP and CFO of Target, the company’s quicker supply chain along with having less unproductive inventory “are driving continued strong in-stocks and sales growth on a smaller base of inventory.”

At Kohl’s, stores are shrinking in their existing footprints—without eating into sales.

“The standard-to-small store strategy where we’ve taken 300-plus stores, which are standard in size and created footprints inside the store on a physical basis, on a fixture basis, and inventory basis that are much smaller has resulted in somewhere in the range of 10 percent less inventory and essentially no change in to sales,” Kohl’s CEO and president Kevin Mansell said during the company’s Q2 earnings call.

[Read more about Kohl’s plans: Kohl’s Aims for Efficiency With Smaller Stores]

“It’s Retail 101: the right product at the right price and the right quantity,” said Shapiro, adding the task of a merchant hasn’t changed. Their job is to read and react to the market.

The difference is retailers now have an advantage with data analytics and RFID tags, which can provide a better picture of what’s selling. That’s if they know how to interpret it. “You need a strategic mindset to figure out how it affects you and the agility to react here and now,” she said.

Putting that vast amount of sales data to good use is now the challenge. Saunders says if you can’t drill down to the individual stores or regions, the information won’t be useful. Just look at J.Crew, he said. The ailing retailer currently has corduroys and heavy sweaters on the sales floor, months before consumers, who are typically buy-now, wear-now oriented, would ever be interested in it. “That’s where data analytics fall down,” he said. “Everyone has it, but they can’t execute on a local level.”

For its part, Kohl’s is going for “hyper local” in attempt to offer the most relevant assortment in each store. “Our speed initiative and our sourcing strategy is going to allow us to deliver product more often and closer to need,” Mansell said.

It’s this strategic approach to merchandise management that will help retailers bounce back. Just cutting inventory alone won’t be enough—and in some cases could even leave stores vulnerable. “It’s not about not having enough overall,” Saunders said, “it’s more about making sure you have enough quantity of the key lines and trends to sell to capacity, especially in peak season.”