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Retailers’ biggest holiday wish is to get rid of all that excess inventory

A sale sign is seen at the Gap store on September 20, 2022 in Los Angeles, California.

Allison dinner | Getty Images

As some of the nation’s largest retailers report quarterly earnings and revenue this week, Wall Street will be keeping a close eye on another number as well — inventory levels.

Walmart, Goal, Space, Kohl’s and others try to sell through an abundance of extra merchandise piling up in the store’s backroom and warehouse.

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Their quarterly filings will serve as progress reports, especially as retailers prepare for the holiday season, a time of higher foot traffic, fierce competition for consumers’ wallets and abundant sales events. Investors want a clearer sense of how much excess stuff retailers have been selling off — and how deeply they can discount to keep items moving.

“Inventory is the most important factor,” said Michael Baker, a retail analyst for equity research firm DA Davidson. “That’s usually not the case — usually it’s just one factor. Inventory is going to matter more than the other metrics.”

Retailers are under pressure to clear out inventory and start fresh in the next financial year. Balancing inventories has become extra urgent, as economists warn of shrinking savings accounts, rising credit card debt and the risk of a recession.

“The idea is to get clean in front of an environment where the sale might be a little tougher to come by,” he said.

A pandemic hangover

Retailers have had a major upheaval in the past six months. Many of the same goods that flew off the shelves during the earlier days of the pandemic – such as loungewear and coffee makers – have ended up on the clearance rack.

With housing and grocery prices rising, fewer Americans are buying big-ticket items and discretionary items. Inventories, which account for the value of goods in transit as well as those in storage, also rose due to supply chain issues.

Sudden changes in taste “from sweatpants to swimsuits and briefcases” put companies in a tough position, said Oliver Chen, a retail analyst for Cowen.

Retailers typically place orders about six to 12 months in advance, with large goods and home goods at the higher end of that. After seeing such strong consumer demand and dealing with supply chain-related stockouts, some companies placed larger or expedited orders.

Major retailers fought so long and hard to build up inventory that they were unable to adjust properly when they needed to slow the influx of merchandise. “You can’t trade for a dime,” Chen said.

Walmart and Target were among the retailers that shocked investors with significant jumps in inventory levels in the first quarter, which ended April 30.

Target cut its forecast twice, once in May and again in June, saying it would cancel orders, cut prices and take other dramatic steps to clear the mess.

Walmart’s U.S. CEO, John Furner, acknowledged at an investor day in June that the company wants to “just wish away” most of its excess inventory. He warned that it would take “a couple of quarters” to return to a healthier stock position. A month later, the low-cost carrier cut its earnings outlook for the second quarter and the full year, partly due to aggressive write-downs.

Mall retailers, included Abercrombie & Fitch, american eagle and Gap, reported similar problems. Some are also cutting their forecasts.

Kohl’s swung from having too little inventory last year to having ballooning inventory in the second quarter of this year. Some of that came from beauty products when it opened Sephora stores and a decision to package and hold items that arrived at the wrong time or didn’t sell.

Gap’s inventory was affected by discrepancies in size and assortment. At the Old Navy chain, a push to sell more plus-size items backfired with stores carrying too many extended sizes and too few higher-demand sizes.

Not all retailers have struggled with having too much to sell. Best buy cut its sales forecast for the year in July as sales of consumer electronics such as laptops and TVs slow, but inventories fell year over year in the second quarter.

Like their peers, Macy’s saw a shift from casual clothing and home categories to more elegant clothing. It also cut its forecast, citing weakened consumption. Nevertheless, in recent quarters it has mostly gone beyond a dramatic inventory imbalance.

CEO Jeff Gennette said on an earnings call in August that the department store was using data analytics to move quickly. He said it slowed orders for brands where it had more flexibility as it noticed consumers pulling back on spending and heard about competitors’ inventory problems.

Big deals, tighter margins

For customers, the effort to clear inventory will mean bigger bargains this holiday season. For retailers, it will mean squeezed profit margins.

Mall-based retailers and others who sell clothing, home goods and electronics are more likely to remain in a difficult situation, said Neil Saunders, managing director of GlobalData Retail, a consulting firm.

Even at a much lower price, summer clothes are tough to sell in the winter, he said. So are one-and-done purchases that many have already made during earlier parts of the pandemic, such as a flat-screen TV or a blender, he said.

Excess stock can also downgrade the shopping experience this holiday season in some stores. For example, on recent trips to Kohl’s stores, he said, he had trouble maneuvering around “crowded” aisles.

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Carrying too much stuff — even if it’s discounted — can overwhelm shoppers seeking ease, speed and convenience during the busy season. It can drive them to online competitors such as Amazon.

“A lot of people can go into stores to look around and they can just walk out and think, ‘I can’t handle this,'” Saunders said.

Some analysts are already bracing for the inventory headache to persist. Last week, equity research firm Evercore ISI initiated a negative tactical trade call on Target ahead of earnings, saying it expects the big-box retailer to miss earnings and indicating it is still winding down months of inventory building .

The majority of Target’s sales come from discretionary goods, versus Walmart, which derives most of its sales from grocery.

Still, the holidays could help retailers still dealing with bloated inventory, said Greg Melich, a retail analyst for Evercore ISI. Shoppers still plan to hit the stores and search for gifts, even though the holiday forecast is more muted.

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