Why are retailers struggling so hard to balance inventory?
Many retailers in the first quarter found themselves with inventory levels that exceeded sales gains. This after dealing with two years of shortages tied to supply chain disruptions.
Walmart’s inventories at the close of the quarter were up 32 percent relative to a two percent quarterly revenue gain. Target’s inventories were up 43 percent against a four percent revenue gain.
Among other retailers, inventories were up 26 percent year over year at Costco, 17 percent at Macy’s, 40 percent at Kohl’s and Dick’s Sporting Goods, 37 percent at both TJX Cos. and Foot Locker, 34 percent at Gap, 45 percent at Abercrombie & Fitch and 32 percent at Urban Outfitters.
The unfavorable retail inventory/sales ratios reflect inflationary pressures, depleted stocks in the year-ago period and aggressive inventory buying in recent quarters in anticipation of supply chain delays. Macy’s said it received items sooner than expected due to an improving supply chain, although many retailers indicated a larger-than-normal portion of receipts remain “in-transit” due to ongoing supply chain issues.
A number of retailers admitted to carrying more of the wrong merchandise as people further returned to pre-pandemic behaviors, including purchasing more on services, like eating out.
The cost of store inventory can eat into a retailer’s cash flow and take up space that could be used to stock higher-demand products. Discounts may be necessary to wean down inventories.
In downgrading several stocks, Citi analyst Paul Lejuez found that of 18 retailers’ first-quarter results as of May 22, inventories rose by 10 percentage points more than sales for 11 versus the pre-pandemic first quarter of 2019.
Mr. Lejuez said retailers will likely be challenged passing through higher fuel/supply chain costs amid the inventory imbalances and the inflation squeeze already felt by lower-income consumers. He wrote in a note, “This is especially true in apparel where promos are already increasing.”
“Excess inventory is now a risk the market cares about,” wrote Mike Wilson, chief U.S. equity strategist at Morgan Stanley in a note last week, according to Barron’s. “The excess inventory element and the associated risk to pricing is less understood and is just now beginning to be reflected in stock prices.”
- Companies Are Finally Rebuilding Their Inventories. What That Means for Profits. – Barron’s
- American Stores Have Too Much of the Wrong Stuff – The Wall Street Journal
- U.S. retailers’ ballooning inventories set stage for deep discounts – Reuters
- Retailers bulked up their inventories during the worst of the pandemic. Now they’re stuck with them. – Marketplace
- What retail inventory misses and markdowns signal about the market’s fight against inflation – CNBC
- Walmart, Gap and Others Amass $45 Billion in Extra Stuff to Sell – Bloomberg
DISCUSSION QUESTIONS: Are the inventory imbalances faced by many retailers likely a temporary or longer-term issue? What’s your advice on rebalancing inventories amid the inflationary costs pressures?