A clearance sale sign is seen at a Gap retail store on September 20, 2022 in Los Angeles, California.
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As some of the nation’s biggest retailers report quarterly earnings and sales this week, Wall Street will also keep an eye on another number — inventory levels.
Walmart, Target, Distance, Kohl’s and others are trying to sell through the excess stock piled up in the store’s backrooms and warehouses.
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Their quarterly records will serve as a progress report, especially as retailers prepare for the holiday season, when traffic is higher, competition is fierce for wallets. of consumers and abundant sales events. Investors want a better idea of how much inventory retailers have sold out of — and how deeply they may have to cut prices to keep stocks running.
“Inventory is the most important factor,” said Michael Baker, retail analyst at equity research firm DA Davidson. “That’s usually not the case – often it’s just one factor. Inventory will mean more than other metrics.”
Retailers are under pressure to clear inventory and start new operations in the next financial year. The inventory balance has become more urgent as economists warn of dwindling savings accounts, rising credit card debt and the risk of a recession.
“The idea is to pre-clean an environment where selling can be a little more difficult,” he said.
A pandemic hangover
Retailers have been dealing with a drastic change over the past six months. Many of the same items that flew off shelves in the early days of the pandemic – such as home wear and coffee makers – have appeared on the liquidation shelves.
With housing and grocery prices soaring, fewer Americans buy expensive and discretionary items. Inventory, which accounts for the value of goods in transit as well as goods in stock, also increased due to supply chain problems.
Oliver Chen, retail analyst at Cowen, said sudden shifts in tastes “from tights to swimwear and suitcases” put companies in a quandary.
Retailers typically place orders about 6 to 12 months in advance, with bulky items and household goods at higher rates. After seeing such strong consumer demand and dealing with supply chain-related out-of-stocks, some companies have ordered larger or rushed orders.
The big retailers have fought so long and hard to stock up on inventory that they can’t make reasonable adjustments when it comes to slowing the flow of goods. “You can’t change in a dime,” Chen said.
Walmart and Target is one of the retailers that shock investors with a significant increase in inventory for the first quarter, which ended April 30.
Target slashed its prediction twice, once in May and again in June, said it would cancel orders, lower prices, and take other dramatic steps to resolve the mess.
Walmart’s US chief executive officer, John Furner, admitted at an investor day in June that the company just wanted to “get rid of” most of its excess inventory. He warned it would take “a few quarters” to return to a healthier inventory position. A month later, the discounter cut its second-quarter and full-year profit outlookpartly due to aggressive discounts.
Shopping mall retailers, including Abercrombie & Fitch, O My and Gap, reported similar problems. Some also cut their forecasts.
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Kohl’s change due to too little inventory last year to have inventories swell in the second quarter of this year. Some of that came from beauty items when they opened Sephora stores and decided to pack and keep the goods arriving at the wrong time or not selling.
Gap’s inventory is affected by size and type mismatches. At the Old Navy chain, promote sales of larger size items counterproductive with stores having too much scale to expand and too little to scale with higher demand.
Not all retailers struggle with having so much to sell. Best buy cut sales forecast for the year in July, as sales of consumer electronics such as laptops and TVs slowed, but inventories fell year-over-year in the second quarter.
Like its peers, Macy’s witnessed the shift from casual clothing and home categories to finer clothing. It also cut its forecast, citing weak consumer spending. However, in recent quarters, it has largely overcome significant inventory imbalances.
CEO Jeff Gennette said during an earnings call in August that the department store used data analytics to move quickly. He said it has slowed down orders for more agile brands, as they’ve noticed consumer spending cuts and heard about competitors’ inventory troubles.
Big deals, tighter profit margins
For shoppers, efforts to clear inventory will means bigger bargains this holiday season. For retailers, that means tight margins.
Neil Saunders, chief executive of GlobalData Retail, a consulting firm, said mall retailers and others selling clothing, home appliances and electronics are more likely to remain in difficult situation.
Even with much lower prices, summer clothes are still hard to sell in winter, he said. So do the one-time purchases that many people have made in earlier stages of the pandemic, such as flat-screen TVs or blenders, he said.
Excess inventory can also detract from the holiday shopping experience at some stores. For example, on recent trips to Kohl’s stores, he said, he had trouble moving around “chockablock-filled” aisles.
There are too many things — even at a discount — that can overwhelm shoppers looking for ease, speed, and convenience during the busy season. It can push them to online competitors like Amazon.
“A lot of people might walk into the store to look around and they might walk out again and think ‘I can’t deal with this,'” Saunders said.
Some analysts braced themselves for the inventory headache to continue. Last week, equity research firm Evercore ISI initiated a negative tactical trading call against Target ahead of earnings, saying it expected the big box retailer to misrepresent earnings. entered and said they were still releasing the accumulated monthly inventory.
Most of Target’s revenue comes from discretionary goods, while Walmart draws most of its revenue from groceries.
The holiday season can support retailers still dealing with overstocked inventory, said Greg Melich, retail analyst at Evercore ISI. Shoppers still plan to go to stores and look for gifts, even if the holiday forecast is more muted.
