After last year's inventory surge, how are retailers doing? (2023)

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Nothing has been easy for inventory planners in retail over the past three years. After suffering shortages in 2020 and 2021, the industry scrambled to shed products last year as consumers cut back amid strong inflation.

Although stocks are below the peak, they are still high for the current level of sales.

"I've worked at a lot of clothing retailers lately and they have more inventory than I've ever seen," said Matt Garfield, managing director of FTI Consulting. "It looks like you're entering a peak season distribution center and we're in mid-February, March."

Although the industry is not far from the era of bare shelves, many are learning to live with reduced inventory and plan to shop for what they need in 2023 and beyond.

Retailers value cost control and profit protection against the risk of lost sales.

"A little shortage is not a bad thing," said Joe Feldman, senior managing director of Telsey Advisory Group.

Inventory levels have peaked. But they are still bloated.

Last June, Target released oneMid-quarter warningIts current profit isheavy blowThe retailer struggled to "stock the right size for the rest of the year" in a "rapidly changing environment". The retailer blamed strong inflationary pressures on consumer spending on staples such as groceries and gasoline.

Target led the way, but franchise retailers tried to disengage for the rest of the year, with few exceptions. Analysts at Telsey Advisory Group analyzed retailers across major industries and found that inventory growth across all divisions averaged 46% in the second quarter of last year. In apparel and e-commerce, the number is significantly higher at 65.6% each.

"Going into 2021, stocks are really low, lower than they should be because you can't get them and everybody's chasing them," Feldman said. "I think the miscalculation is in the level of demand."

Retail inventories peaked in October and are up 18% from 2021. Inventories have fallen significantly since then, but are still well above where they were three years or even a year ago.

After last year's inventory surge, how are retailers doing? (1)

Supply chain improvements have exacerbated the problem, at least on paper. Until February, general observance of sea transport schedulesAn increase of 7.7 percentage points compared to the previous quarterAccording to DHL, the year-on-year increase was a "stunning" 26 percent.

For consumer goods companies, that means goods are moving faster and arriving sooner than a year ago, which is reflected in inventories. Apparel retailers like Under Armor and PVH have factored it into their profits. At PVH, which owns the Calvin Klein and Tommy Hilfiger brands,Stocks up 34%annually at the end of the fourth quarter.

"In 2022, we have made solid progress on pre-pandemic capacity and are significantly reducing lead times," said Zac Coughlin, PVH's chief financial officer.analysts said in March."In the fourth quarter of this year, we received inventory earlier as those supply and logistics disruptions eased."

The upstream and downstream supply chain costs are very high

The stock situation is different for retailers and the many brands they carry. Wholesalers tend to have excess inventory while retailers begin to reduce their positions.

"The wholesalers have been hit really hard," Garfield said.

For example, apparel retailers GIII Apparel Group and VF Corp both posted 100 percent inventory growth over the past year, according to an analysis by Telsey Advisory Group. Nike, one of the biggest clothing brands in the world,Stocks up 44%In the period until August 31.

"When retailers have too much inventory, they will stop buying, slow purchases or delay purchases from suppliers," said Joel Wolitzer, senior vice president and business development officer at Rosenthal & Other Financing Services. "We've seen a slowdown on many levels."

Life can get tough for merchandise suppliers as many retailers don't place firm orders, meaning their suppliers have to make smart speculative bets on how much retailers will buy based on their forecasts. This gets harder. Even orders can be changed or delayed.

Suppliers who produce private label for retailers could find themselves in a particularly difficult position if buyers decide to cancel orders.

“These items can only be sold at this retailer. Suppliers can't sell them anywhere else,” Wolitzer said. "So you're kind of stuck."

Larger wholesale brands may have higher inventories than their retail partners, but that's not necessarily a bad thing when they have their own distribution channels.

"Maybe it would be better for Nike or Adidas to control how they dispose of excess inventory," Feldman said. Another option is to "put it out there, let the retailers decide what to do with it, and then lower the price and potentially have an impact on the brand."

Excess inventory is costly for all market participants. Additional storage can be expensive. As Wolitzer points out, when a company needs to borrow money to finance storage, there are financing costs, such as interest.

Once a certain amount of space in a warehouse is occupied, operational efficiency and capacity also drop, Garfield noted.

"It has a very big impact on your overall profitability — cost per pick, cost per unit, those key profitability metrics that we look at for distribution," he said.

Have retailers learned their lesson? Which class?

The past two years have raised fundamental questions about purchasing and inventory planning and potentially lead to conflicting answers. One of the big questions is: Is it worse to be under-stocked during a boom or over-stocked during a downturn?

“Two years ago there was only stock. If you had, there would be buyers,” said Oliver Timsit, founder of clothing brand Oliver Logan. "We've accepted the fact that we can't have something for everyone."

Many of the pre-pandemic tensions are now resurfacing as supply chain issues ease. While understocking can mean an opportunity cost of lost sales, overstocking has financial costs in the form of storage and financing costs.

Excess inventory also has an opportunity cost as it ties up working capital and, perhaps more importantly, means less space to store fresh produce.

"While we all think retailers have learned their lesson - it's better to order less, chase demand a bit and have very clean, profitable sales, which means less discounting - they all fall into the trap of 'Oh, if we had does “More, we would sell it,” Feldman said. "And then they got caught."

When demand picks up, Feldman believes retailers will have an easier time tracking inventory than they did in 2021, given the normalization of the supply chain.

"Those bottlenecks are gone," Feldman said. “So if you have a more normal ramp on the construction side, it shouldn't be a big deal, at least in the short term, to bring it here. I hope these people will be smarter."

However, retailers are unlikely to increase orders anytime soon -- even if demand picks up.

"I think it's going to be a while before traders and executives are really willing to play big stock," Garfield said. “These talks last year were brutal. Win - these are not fun calls and I don't know what to say." "I don't think anyone will want to call them again until then."

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