Photo: RetailWire
Full-price clothing retailers me-too off-pricers with a packaway inventory strategy
Gap, Express and Kohl’s are among the retailers getting ready to employ packaway sales to reduce the markdown blow of last holiday’s late deliveries.
The practice is more commonly used by off-pricers, such as TJX and Nordstrom Rack.
On Gap’s analyst call last week, Katrina O’Connell, Gap’s EVP and CFO, said the strategy enables Gap to use cash to optimize margins in the near term and benefit working capital the following year as the packaway inventory lowers receipts.
“We’re confident that we will be able to integrate our pack and hold inventory with future assortments as the majority of goods are carefully selected seasonal core items we routinely use to round out our assortments. Examples of these more timeless styles are basic shorts or short sleeve tees and tanks,” Ms. O’Connell said.
Kohl’s inventory at the end of the second quarter included $82 million in packaway goods from late holiday receipts for basics, such as sleepwear and fleece. Jill Timm, CFO, said on Kohl’s earnings call, “This merchandise will be set in Q3 ahead of the holiday season.”
On Express’ first-quarter conference call, Tim Baxter, CEO, said the retail only held packaway products that had an extended shelf life, repositioning some for Express’ outlet business. “We packed and held full-sized runs of that product, and there had to be two things that were true in order to pack and hold the product. Number one, it had to have a high sell-through for the products that did get out to the stores and the website. And number two, it had to fit into the assortment architecture for EFO [Express Factory Outlet] next year. And we were very clear with the teams on both of those, and that’s why we have high confidence we’ll be able to sell that at full price next year,” he said.
Five Below, however, now emphasizes markdowns to clear excess inventories after being “too heavily invested” in packaways a few years ago. Joel Anderson, CEO, said on Five Below’s first-quarter call, “I think that worked really well when we were just a small regional player. But as you become national, that becomes a really complex thing.”
- Gap (GPS) Q2 2022 Earnings Call Transcript – The Motley Fool
- Gap to ‘mothball’ unsold inventory until next year – RetailWire
- Kohl’s (KSS) Q2 2022 Earnings Call Transcript – The Motley Fool
- Express (EXPR) Q1 2022 Earnings Call Transcript – The Motley Fool
- Five Below, Inc. Q1 2022 Earnings Call Transcript – Seeking Alpha
Discussion Questions
DISCUSSION QUESTIONS: Has packaway become a more standard and less risky practice for full-price retailers looking to maximize inventory clearance? What advice would you have about limiting the losses from holding packaway inventory?
Poll
Loading …BrainTrust
David Naumann
Marketing Strategy Lead - Retail, Travel & Distribution, Verizon
Bob Phibbs
President/CEO, The Retail Doctor
Packaway makes sense for some retailers, and especially apparel. Given the supply-chain disruptions, retailers are holding more of the wrong kind of inventory than they need. As noted in the Five Below example, packaway is a good strategy as long as the merchandise eventually finds its way to store shelves, otherwise it just gets marked down even further over time.
The success of packaway really depends on the retailer and the type of product. It makes sense for basics and more generic items which don’t go off-trend. For fashionable pieces it can be problematic as they can become stale. And there is a big difference between off-price, where this is a deliberate and planned strategy, and mainstream retailers where this arises from overbuying and poor inventory control.
On point. It is about the numbers and the product category. Seasonal businesses, such as Party City, always pack away leftovers, and that works for them, while fashion apparel is a candidate for further markdowns when it is passé on returning to the selling floor.
Savvy shoppers know when retailers try and pass off last year’s fashions as new arrivals.
The instant poll question this morning could use another choice: “It depends on the product category.”
If these items are seasonal items that sell each year then retailers should be looking at using forecasting and inventory management for these seasonal items and not old school planning type processes that create open to buys and end of season clearance. It is not great practice to be taking inventory back, holding it for next season, multiple handling, damage and cost of inventory and storage are all unnecessary. Other retailers with seasonal items use forecasting and replenishment processes that manage inventory to the end of season with very little clearance or carry over, fashion retailers need to look at their processes and technology and not stick to the age old fashion process.
Packing product away for sale at a later date is always risky. If the product is a basic and is sold season after season, it probably doesn’t matter, but packing away fashion apparel is never a good idea. Or as my partner Rich always says, “Merchandise, unlike fine wine, does not get better over time.” Clearly, these retailers are desperate.
So are consumers like me, who for years have wanted new clothing but can’t find anything to buy. Have you seen what’s in-store lately? Little House on the Prairie flouncy tiers for younger generations, and more polyester, leopard and sequins for those of us over 50. Size 10 is still an XL and assortments are bland. Perhaps fashion retailers wouldn’t be in this bind if they focused more on their customers and what those customers actually want to buy.
This is a math problem and a bit of a gamble, but I believe this strategy works in our current environment for many segments of retail. The cost of holding has to be carefully weighed given the cost of storage and the more recent supply chain disruptions — and their likelihood of recurrence. If a retailer has the back-room, warehouse, or MFC space to manage packaway logistics, then it’s a viable strategy. As Five Below mentioned, this is not that easy to scale. Lots of moving parts. But then it comes down to the merchandise itself.
Packaway merchandise has to be close to the attributes of a basic item in style, color, etc., to insure its viability in future seasons. In other words, what is each SKU’s fashion window? Also, size-related returns are off the charts everywhere, something that deserves attention here, too. But it sounds like Express knows this info in spades, and every retailer who uses packaways needs to have that same level of knowledge.
Products that have long-term demand are prime candidates for packaway. Analysis of the trade-off of discounting items today versus packing away in hopes of higher selling prices is essential in making the best decisions. This analysis needs to consider the inventory carrying costs and any shipping costs if the products are shipped to a warehouse for storage.
Packaway is a purposeful strategy by off-pricers and an “oops strategy” by full-price retailers. These are two distinct business models that require different sets of skills, processes, and systems. Full-price retailers should improve their decision-making, from buying and assortment range to pricing and markdown management.
Optimizing two distinctly different systems invites unanticipated problems. Imagine a buyer taking unnecessary risks because there’s now a backup packaway strategy. What’s to say that the macro conditions that caused poor sales or being over-inventoried will recede the following season? Do it right the first time, get rid of stale inventory, free up your open-to-buy, and continue to get better at the process. Don’t invest in two different processes that dilute focus and complicate decision-making, even if it looks good on paper – execution is what matters.
It’s very generous to include Gap under the umbrella of “full-price retailer.” Ditto Kohl’s.
Tim Baxter explains it all very clearly. Sometimes the packaway math makes total sense. Now let’s figure out how to never do it again. Or, at worst, occasionally and surgically. And in a manner that doesn’t create headlines.
I am no fan of carrying inventory or giant markdowns. The solution to both these issues is better buying. However when you look at a packaway versus giant markdowns, the cost of markdowns far exceeds the cost of holding the inventory. It may not look pretty on the balance sheet, but it is generally a good dollars and cents decision.
News flash: If your merch is so generic it can be packed away, you’ve got BIG problems.
Packaway is a classic risk/reward scenario. The answer for each retailer will be different based on a number of factors including, but not limited to, how much excess inventory they have and what it is. Another factor is also likely to be how much and how badly they need the cash that could be raised by discounting and selling the product now.
Packaway should be a last resort to deal with excess inventory, especially for fashion apparel retailers. The short-term margin benefit (“I don’t have to mark down these sweaters right now”) is offset by the logistical costs and the tie-up of inventory dollars better spent on fresh goods.
And don’t underestimate the discerning eye of the customer: “Didn’t I see these sweaters last year? I didn’t like the style and color then, why should I like them now?” Some retailers might be better off selling those old goods to off-pricers or even to resort to tax-deductible donations.
Over my years, Packing goods for later sale scares me. First of all, it affects the value of product and creates erosion of value. Not to mention its effect on GMROI. Packing goods away is no strategy to depend on for customer reaction purchases. It is simply a way of making undesired inventory disappear for a while. Venture this plan with care.
One aspect which definitely impacted most brands during the pandemic was brand image, due to discount strategies. Now, with endemic covid and trace evaporating, it’s time to focus on brand building. Packaway make sense and also gives analysts a way to divert merchandise to stores which are still struggling or marketplaces where discounts are still way high.
Also, with inflation gearing up momentum, packaway can protect brands from increased price by shifting more sales to full-price items.
The most crucial factor while implementing the practice of packaway inventory is choosing the right assortment. Retailers can consider packing and holding “basics” as an option but retaining on-trend fashion products may not resonate with customers’ tastes and preferences the following year. Therefore, it’s important for retailers to ensure the apt assortment.
Additionally, given the steep rise in inflation, offers and discounts will certainly have a bigger impact on customers’ purchasing decisions. Retailers must cautiously evaluate options before executing any strategy to get rid of excess inventory.