Retailers Are Drowning In Inventory

TargetTGT
is the latest retailer to reveal that it bought too much stuff and will need to take aggressive action to get its inventory levels back in line. These moves will include cancelling orders and hitting a lot of products with the old markdown gun.

CEO Brian Cornell warned investors that profit margins will contract in the near-term, while sounding a cautiously optimistic tone about the latter part of the year. The stock, which took a big move downward a few weeks back after a disappointing earnings report, is down again today on the news.

Target is hardly alone. In its recent quarterly earnings report, WalmartWMT
saw its inventory levels grow 33% while comp stores sales were up just 3%. A number of other retailers have also commented on how they have too much of the wrong stuff.

Shift Happens

While supply chains issues are surely to blame for some of the mismatch between supply and demand, it’s also clear that retailers that should have known better failed to anticipate two important shifts in consumer behavior.

The first is the shift toward consumers spending more on services. After two years of Covid induced cocooning, folks are heading back out: to a show, to dinner, to travel, and more.

The other shift is what consumers are buying. A rebalancing in apparel and accessories spending is the most obvious, as “occasion-based” buying is coming out of a period of extended hibernation, at the expense of casual and athleisure merchandise.

The Pig In The Python

Given both low unemployment and growing wages, the consumer remains in decent shape. But inflationary pressures are starting to have a dampening effect on purchasing activity overall and how spending is prioritized in particular.

As the pace of overall product purchasing moderates, and the rebalancing of category spending we are witnessing in a post-Covid, post-stimulus world becomes more pronounced, retailers are going to be especially challenged to move through high inventory levels quickly and without significant damage to their bottom lines.

Let That Markdowns Begin!

Informal store checks I conducted this weekend reveal an unusually high level of markdowns on the part of many national retailers whose stores I visited. I suspect that this is just the tip of the proverbial iceberg. The breadth and depth of promotional efforts is likely to widen considerably in the coming weeks.

Some of the retailers with the most challenging inventory levels have struggled to get top-line sales moving in recent quarters (I’m looking at you Kohl’s). What it will take to move a lot more units through their system in the months ahead will be a bonanaza for consumers, but very ugly for investors.

Mistakes Were Made

The shifts in spending patterns are hardly surprising. What is fairly shocking is the degree to which big, seemingly sophisticated, companies got it so very wrong.

For brands that offer a remarkable value proposition and generally execute very well (e.g. Target, Walmart) this is a quite the own goal, but one they should emerge from in relatively good shape by the time the holiday season rolls around.

For retailers that typify the unremarkable, decidedly mediocre middle and are, shall we say, operationally challenged (Macy’s, Kohl’s, GapGPS
), this could not have come at a worse time.