You are currently viewing On the supply side: Retailers grapple with a general glut of inventory in the last quarter

On the supply side: Retailers grapple with a general glut of inventory in the last quarter

It’s been a feast or a famine for many retailers over the past two years amid supply chain challenges stemming from the 2020 COVID-19-induced global shutdown to the Russian invasion of Ukraine. which resulted in a slow and more expensive supply chain.

Last month, Walmart surprised investors by reporting inventory 32% higher than expected for the first quarter ending Feb. 1. gain in its last quarter.

The cost of carrying additional inventory weighed on the company’s revenue last quarter. The inventory glut was widespread across the retail landscape with a 17% gain at Macy’s, inventory growth of 40% at Kohl’s and Dick’s Sporting Goods, with Gap recording a 34% oversupply.

Walmart CEO Doug McMillon joked at the company’s annual shareholder meeting in early June that Walmart could hire mentalist Lior Suchard who performed at the event. He said Suchard could probably better forecast inventory needs. He said the company had missed the “too little” and “too much” sides in recent quarters.

Walmart U.S. CEO John Furner said about a fifth of the 32% rise in inventory in the first quarter came from goods piling up faster than the company wanted. Another part of the increase comes from the desired restocking of goods after supply chain disruptions last year led to more out-of-stock items.

“It’s probably a few more quarters until we manage inventory where we want it,” Furner told financial analysts June 3, after the retailer’s annual employee meeting in Fayetteville.

Gordan Storch, a consultant at Storch Advisors, said retailers were too eager to stock stores for the holidays and ordered well ahead of the usual time given a slow supply chain. He said retailers were also banking on consumers continuing to buy goods through the first quarter of this year. He said with the unpredictability in China with ongoing COVID shutdowns, retailers have opted to order summer patio furniture and other seasonal items early and in higher volume in hopes that consumers would continue to spend.

Storch also said retailers were eager to restock stores after nearly two years of depletion, with demand outstripping supply on everything from bicycles to toilet paper.

When the inventory arrived, retailers like Walmart and Target found that consumers had already begun to shift away from commodity shopping habits toward experiences like concerts and dining out. To complicate matters, gas and food inflation also began to impact how and where consumers spent their money.

Target CEO Brian Cornell recently cut the company’s revenue forecast due to ongoing price cuts to remove excess inventory from the company’s books. Cornell said it has too much discretionary inventory like patio furniture, electronics and kitchen appliances that will go on sale immediately. He said the company chose to right ship and align inventory levels to prepare for a strong holiday season.

Walmart said it would discount seasonal clothing to move them. The retailer also recently held an online sales event with discounts on surplus electronics, TVs and other items.

Citi analyst Paul Lejuez found that of the first quarter results of 18 retailers through May 22, inventory rose 10% more than sales for 11 compared to the pre-pandemic first quarter of 2019. Lejuez said retailers would likely be challenged to go through rising fuel/supply chain costs amid inventory imbalances and inflationary pressure already being felt by low-income consumers.

“This is particularly true in clothing where promotions are already multiplying,” he added.

Moody’s retail analyst Mickey Chadha said being stuck with a lot of inventory isn’t ideal for retailers with high inventory costs.

“When you look at the cost of these items, they are more expensive. And they take up a lot of space to store them,” Chadha said.

Brian Yarbrough, analyst at Edward Jones, also noted that markdowns associated with gluts of inventory are tricky and pose profit risk.

“Maybe you mark it at 20% off. It’s maybe 40%, maybe 50%,” he said. “And when you do that, your profits are cut, and potentially – if you have to mark it up too much – you end up losing money on this product.”

Olgo Cotago, a retail analyst at Deutsche Bank, predicted in December 2021 that by 2022 retailers would have plenty of inventory, “lots of stuff, everywhere.”

“A glut of inventory will follow as retailers don’t want to be caught off guard by a lack of product as they were last year and this year. Although their inventory is currently low (partly due to auto shortage), there are signs that retailers are overordering ahead of the busy holiday season. Meanwhile, manufacturers are already producing and holding far more inventory than before COVID,” Cotago noted on Dec. 8, 2021. .

As retailers swim in excess inventory this summer, the real concern will be how far discounts will have to go to displace products. Richard Charkravaty, research analyst at market intelligence firm IDC, said the main task for retailers would be to figure out whether they can absorb the costs of markdown from the excess reserve stock they bought to cover stock-outs during a market recovery.

“The real issue will not be inventory holding costs, which they have already factored in, but liquidation at less than full margin, especially if demand levels drop. Now, however, the market is seeing only a slight drop in demand with a high customer confidence index,” he added.

Wells Fargo Securities analysts said high prices will likely continue to dampen consumer spending over the next quarter or more and could force retailers to take larger markdowns that further squeeze profits. Wells Fargo economist Sarah House said rising prices show little to no sign of slowing, meaning little relief for consumers this summer. “Slow descent” is how House described the likely downward path for inflation this year.

“If you think about inflation, a lot of it is about momentum. Pricing is slow. Companies don’t just change their prices on the spur of the moment,” House said.

While retailers continued to report strong consumer demand, price inflation is also a major concern as the year progresses. The National Retail Federation remains bullish on the consumer.

“The economy is in the process of rebalancing and there will probably be no major setbacks,” said NRF chief economist Jack Kleinhenz.

Editor’s note: The Supply side section of Talk Business & Politics focuses on the businesses, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.

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