Daily Management Review

Swelling Stockpiles Of U.S. Retailers Have Laid The Environment For Huge Discounts


Swelling Stockpiles Of U.S. Retailers Have Laid The Environment For Huge Discounts
Major U.S. retailers who recently hurried to resupply shelves due to inventory shortages said this week that their stores are again overflowing with merchandise, and some are even discounting unsold items, which was unfathomable only a few months ago.
It's an indication that, in the face of rising inflation and petrol prices, retailers may face even greater problems. Many merchants now have an excess of merchandise due to changing consumer demands, which is driving up costs.
Costco Wholesale Corp said its stocks grew by 26 per cent in the fiscal third quarter ended May 8, owing to a "few hundred million dollars" of extra holiday merchandise and a "little heavy" inventory of small appliances and household items.
Poor sales at Old Navy and longer transportation delays for goods generated a 34 per cent increase in stocks at Gap Inc, according to CFO Katrina O'Connell.
Similarly, Macy's CEO Jeff Gennette highlighted an inventory "imbalance" this week. "Supply chain bottlenecks alleviated," he claimed, resulting in the company obtaining supplies from overseas "earlier than expected." Meanwhile, buyers' purchasing habits shifted, with fewer home products being purchased in favour of occasion-specific apparel and other merchandise.
According to Citi research based on 18 retailers' first-quarter data as of May 22, average retail inventories are expanding faster than sales growth in the United States. According to Citi analyst Paul Lejuez, inventories climbed by ten percentage points more than sales in 11 of the 18 cases. This is the biggest gap since the beginning of the coronavirus pandemic, exhibiting a trend that began in March 2022.
During the supply-chain crises, big retailers went on shopping sprees, stocking up on a variety of items and increasing their merchandise investments so that they would have adequate things in stock for buyers who had received stimulus checks.
But, according to executives and analysts, the shops' measures backfired. With inflation and fuel prices skyrocketing, consumers cut back quickly, buying fewer clothes, televisions, and high-margin gadgets.
As a result of this scenario, retailers such as Walmart (WMT.N) and Macy's (M.N) are attempting to remove surplus inventories by discounting more items and giving deeper promotions, a move that may reduce margins. On the company's earnings call, Walmart CEO Doug McMillon stated that the company had begun "aggressive" price rollbacks to stimulate sales of some higher-margin items, such as clothes.
To be sure, retailers are still dealing with high expenses of sourcing goods and recruiting personnel, which may limit the breadth and depth of deals they can provide, according to Senior Portfolio Manager Jason Benowitz of The Roosevelt Investment Group.
"You will see some discounting and it will be more than last year but ultimately it will be held back by the still high cost of sourcing inventories and labor," said Benowitz, whose firm holds shares in Amazon.com Inc, Ross Stores and Autozone Inc.
According to Walmart and Target, some lower-income shoppers have cut back on their purchasing as inflation has pushed up prices on everything from TVs to toothpaste.
According to economic data and findings from stores that cater to more wealthy households, higher-income buyers have shown resiliency, snatching up suits, gowns, and footwear and spending more on services.
As warehousing expenses grow, storing extra inventory becomes more costly. In the first quarter, Walmart stores and distribution hubs had 32 per cent more inventory, Target had 43 per cent more goods, and Best Buy had 9 per cent more merchandise than a year ago, according to the retailers. On its earnings call, Macy's stated that inventories were up 17% over the same period in 2021.