The biggest wish of holiday retailers is to get rid of all that excess inventory

A clearance sale sign appears at the Gap retail store on September 20, 2022 in Los Angeles, California.

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As some of the nation’s largest retailers report quarterly earnings and returns this week, Wall Street will be paying close attention to another number as well – inventory levels.

Walmart , targetingAnd the the differenceAnd the kohl Others are trying to sell through a glut of extra merchandise that accumulates in stores and warehouses.

Their quarterly filings will be progress reports, particularly as retailers prepare for the holiday season, a time of high traffic, fierce competition for consumer wallets, and bumper sales events. Investors want a clearer understanding of how much extra stuff is being sold from retailers — and how deep they might have to discount to keep merchandise moving.

“Stock is the single most important factor,” said Michael Baker, retail analyst at equity research firm DA Davidson. “This isn’t usually the case – it’s usually just a factor. Inventory will take on more meaning than other metrics.”

Retailers are under pressure to liquidate inventory and start over in the next fiscal year. Stock-balancing is becoming more urgent, as economists warn of dwindling savings accounts, increasing credit card debt, and the risk of a recession.

“The idea is to be clean in front of an environment where sales might be a little more difficult,” he said.

epidemiological waste

Retailers have dealt with a sharp turnaround over the past six months. Many of the same items that flew off shelves during the early days of the pandemic — like loungewear and coffee makers — ended up on the clearance shelf.

With housing and groceries prices soaring, fewer Americans are buying expensive items and discretionary items. Inventory, which represents the value of goods in transit as well as those in stock, has also gone up due to supply chain issues.

The sudden changes in tastes “from track pants to swimwear and travel bags” are putting companies in a difficult position, said Oliver Chen, a retail analyst at Queen.

Retailers usually place their orders six to 12 months in advance, with bulky items and household goods at the higher end of that. After seeing this strong consumer demand and dealing with the out-of-stock associated with the supply chain, some companies have placed larger or faster orders.

Big retailers struggled long and hard to build inventory they couldn’t properly adjust when they needed to slow the flow of merchandise. “You can’t change for a small coin,” said Chen.

Walmart and Target She was among the retailers who shocked investors With big jumps in inventory levels in the first quarter, which ended on April 30.

Target lowered his expectations twice, Once in May And the back in June, Saying it will cancel orders, lower prices and take other dramatic steps to clear up the clutter.

John Woerner, Walmart’s US CEO, admitted on an investor day in June that the company wanted to “dispose” of most of its excess stock. He warned that it would take “a few quarters” to return to a healthy stock situation. After a month, the discount It lowered its second-quarter and full-year earnings forecastsThis is due in part to the large-scale write-offs.

Mall retailers, including Abercrombie and FitchAnd the american eagle And Gap, for similar problems. Some also cut their expectations.

kohl Swing from having very little stock last year Inventory inflation in the second quarter of this year. Some of that came from beauty products as Sephora opened and a decision to pack and carry merchandise that arrived at the wrong time or wasn’t sold.

Gap stock has a mismatch in size and assortment. In her old marine series, Boost to sell more plus size items It backfires with stores with too many extended sizes and too few sizes with high demand.

Not all retailers have a hard time owning so many things to sell. best buy Lower your sales forecast for this year In July, sales of consumer electronics such as laptops and televisions slowed, but their inventory fell year-over-year in the second quarter.

like her peers, Messi It has seen a shift from casual wear and home categories to more elegant clothing. like that It cut its forecast citing weak consumer spending. However, in recent quarters, it has largely avoided a dramatic stock imbalance.

CEO Jeff Jennett said on an earnings call in August that the store used data analytics to move quickly. He said it has slowed orders for brands as they have had more flexibility, as they notice consumers pull back on spending and hear about competitors’ inventory problems.

Big Deals, Tight Spreads

For shoppers, efforts to remove inventory will do That means bigger deals this holiday season. For retailers, this will mean compressed profit margins.

Neil Saunders, managing director of GlobalData Retail, a consultancy, said mall retailers and others that sell clothing, home goods and electronics are likely to remain in a tough spot.

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

Excess stock may reduce your shopping experience this holiday season in some stores as well. For example, on recent trips to Kohl’s stores, he said, he had difficulty maneuvering around “full chockablock” aisles.

Bank of America's Lauren Hutchinson says excess retail inventory will drive up mass writedowns during the holidays.

Having too much stuff – even if it’s at a discount – can confuse shoppers looking for ease, speed and convenience during the busy season. It can push them to online competitors like Amazon.

“A lot of people may enter stores to look around and they may go out again and think I can’t handle this,” Saunders said.

Some analysts are already preparing for the continuation of the stock headache. Last week, equity research firm Evercore ISI launched a negative tactical trading call on Target ahead of earnings, saying it expected the big-box retailer to post a profit loss and noting that it was still unraveling months of inventory buildup.

The majority of Target’s sales come from discretionary goods, as opposed to Walmart, which derives most of its sales from groceries.

The holidays may offer a hand for retailers still dealing with bloated inventory, said Greg Milic, retail analyst at Evercore ISI. Shoppers still plan to go to stores and look for gifts, even If the holiday forecast is more muted.

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