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Rising Inventories at Macy’s and Other Major Stores Fuel Holiday Profit Worries

Is Macy’s choking on merchandise?

The department store retailer’s inventory levels have grown at an alarming rate in the most recent two fiscal quarters, increasing by 2.7% and 3.8%, respectively, while total sales in those periods fell by 0.7% and 2.6%.


In the first quarter, which ended May 2, the company blamed the higher-than expected increase in stock levels on the resolution of the West Coast ports slowdown and the weaker-than expected sales, particularly in high tourist traffic markets hit hard by the strong dollar.

Three months later, on the company’s second quarter earnings call, Macy’s (M) CFO Karen Hoguet said the inventory uptick for the second quarter, which ended Aug. 1, happened because they “brought in merchandise earlier than last year to get better set for back to school.”

What will be the next excuse?

“Retailers are already starting to blame the unseasonably warm weather in September,” said Rebecca Duval, VP Equity Analyst for Blue Fin Research. “But when you think about it, it’s never really that cold in September anymore.”

Then what’s causing the inventory build-up?

“People were expecting a pickup in September that just didn’t materialize,” said John Kernan, managing director at Cowen and Company. “It’s a total mess out there. Absolutely horrible numbers from North American retailers. Everyone just mis-planned demand. In the third quarter they’re going to guide fourth quarter weakly.”

Kernan, who covers branded apparel and footwear at the financial services firm, went on to say “When you’re seeing gross and merchandise margins going in the direction we’re seeing, it’s clear there’s a total oversupply of inventory in the retail apparel market.”

Although Macy’s—which opened three of its test concept Backstage off-price stores in the New York area in September—might be the most dramatic example of sales growth in large apparel retailers failing to keep up with rising inventories given its size and market share, it’s certainly not the only one.

Dillard’s (DDS), which until late last year had been enjoying a turnaround in its business, saw sales growth slow in the first and second quarters of 2015, and inventory jump a higher-than-expected 4.8% and 3.3%. Gross margin declined by 54 basis points in the most recent quarter.

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And at Nordstrom (JWN), whose off-price unit Rack sales have been growing faster than its full retail division, inventories have experienced faster growth than sales in each of the past four fiscal quarters on a year-over-year basis.


Mid-tier department store Kohl’s (KSS) has also been feeling the glut, with inventory growth accelerating in each of the past two quarters, but sales increases remaining in low single-digits.


At off-price leader TJX Companies (TJX), inventories have increased by more than 10 percent in each of the past two quarters, while sales growth has been at a more modest mid-single-digit level.


Off-pricer Ross Stores (ROST), whose sales are 40 percent of TJX’s, but whose revenue growth has been impressive over the past several quarters, is also contributing to the oversupply in the sector, with inventories rising by around 20 percent in each of the last two quarters, at more than twice the level of sales growth.


Department, chain and discount store sector sales have declined in eight of the past 10 months on a smoothed annualized basis, according to the U.S. Department of Commerce, but total inventory in the sector has steadily risen. DDCSalesInvGrth

“Some stores are planning and managing inventory better than others,” said Blue Fin Research’s Duvall. “The teen and millennial space, for example, is more trend-driven, which is motivating consumers to buy, allowing retailers like American Eagle and Express to have an easier time, but for the older missy mainstream consumers, who do more of their shopping in department stores, there isn’t a compelling style trend motivating them to buy, so there is more inventory build-up.”

Duvall also feels there’s some consumer fatigue around fast fashion. “We’re hearing that Forever 21’s business is challenged, and has been for some time. H&M is expanding its footprint really rapidly in the U.S.”

Duvall then added: “I think consumers are tired of buying something you can’t really wash.”

She went on to say that although the sourcing strategies employed by fast fashion players are starting to be implemented by their slower counterparts, without a clear market direction the payoff is sometimes elusive. “Retailers who can chase business, and who are platforming fabric, can keep inventory and promotional levels at bay. Many are trying to do that, but with traffic and sales declining, it’s very difficult to know which direction to go.”

Meanwhile, merchandise shipments keep coming. Government data shows that imports of apparel have increased year-over-year in each of the past six months. In July and August, the last months for which apparel import data are available, imports hit new record levels.


All in all, it looks like this year will be an even more promotional holiday season than last year, if that’s even possible. But then what?

Cowen’s Kernan predicts there will be an imminent rationalization of square footage in the market. “There’s an enormous amount of bad real estate out there that people are trying to get out of. Sears needs to close a lot of square footage and when they do, other stores in the mall have clauses in their contracts allowing them to get out of the mall if the anchor leaves, so we are going to see a right-sizing of brick and mortar square footage. We clearly need to see a lot of supply come out of the market. 2016 is the year in which everyone’s going to try to get this right.”