The bloated stocks of FOCUS-US retailers set the stage for deep discounts

(Adds comments from a retail investor)

Written by Siddharth Kaval and Ariana McLemore

NEW YORK (Reuters) – Major U.S. retailers who recently scrambled to restock shelves amid product shortages revealed this week that their stores are now stocked with merchandise, and some are even doing what they wouldn’t have imagined a few months ago: discounting. Unsold merchandise.

It’s a sign of the potential for more trouble for retailers amid rising inflation and higher gas prices. With the rapid change in shoppers’ tastes, many retailers now find themselves with a surplus of merchandise, driving up costs.

Costco Wholesale Corp. said its inventories ballooned 26% in the fiscal third quarter ended May 8, which included “a few hundred million dollars” of additional holiday items and being “a little heavy” on small appliances and household items.

Chief Financial Officer Katrina O’Connell said Thursday at Gap that the 34% rise in inventories was due to poor sales at Old Navy and longer transit times for merchandise.

Similarly, Macy’s CEO Jeff Gennette this week cited a stock “glitch.” “Supply chain constraints eased, resulting in it receiving goods from abroad earlier than we expected,” he said. Meanwhile, shoppers have changed buying patterns, purchasing fewer household items while purchasing occasion-appropriate clothing and other merchandise.

Average US retail inventories are rising faster than sales growth, according to Citi’s research on results for 18 retailers for the first quarter as of May 22. In 11 out of 18, inventories rose 10 percentage points more than sales. According to Citi Analyst Paul Lejuez. This is the widest gap since before the coronavirus pandemic began, illustrating the trend that began in March 2022.

During a supply chain crisis, large retailers went to buy, loading up on a batch of merchandise and increasing investments in merchandise until they had enough merchandise in stock for the cash-flow shoppers due to stimulus checks.

But the retailers’ moves backfired, according to executives and analysts. With inflation soaring and fuel prices rising, shoppers fell back too quickly, buying less clothing, TVs, and higher-margin appliances.

This scenario prompts retailers like Walmart and Macy’s to dump excess inventory by discounting more items and offering deeper promotions, a move that could erode margins. Walmart CEO Doug McMillon said on its earnings call that it had begun “hard” price pullbacks to boost sales of some higher-margin goods, including clothing.

To be sure, retailers are still struggling with high costs of sourcing goods and hiring workers, which could limit the breadth and depth of the promotions they offer, said Jason Benowitz, senior portfolio manager at Roosevelt Investment Group.

“You will see some cuts and it will be more than last year, but eventually it will be delayed because of the higher cost of acquiring inventory and labor,” said Benowitz, whose company owns shares in Amazon.com Inc, Ross Stores and Autozone. a company

Excess merchandise

As inflation has raised prices for everything from televisions to toothpaste, some low-income consumers have limited their spending, according to Walmart and Target.

High-income shoppers showed resilience, wearing suits, gowns and shoes and spending more on services, economic data and results showed from retailers serving wealthier families.

Keeping excess goods proves to be costly with higher storage costs. Retailers said Walmart stores and distribution centers had 32% more merchandise, while Target had 43% more merchandise than a year earlier, and Best Buy had 9% more merchandise in the first quarter. Macy’s said its earnings call stocks are up 17% compared to the same period in 2021.

Macy’s chief financial officer, Adrian Mitchell, said Thursday that consumers’ rapid shift away from “pandemic categories” and the receipt of items sooner than expected, due to a lax supply chain, is causing inventories to rise. He expects Macy’s gross profit margins in the second quarter to reach 2019 levels.

Some expect many retailers this year to start discounting more to remove unsold merchandise. Macy’s CFO warned of a “high promotional environment,” for example.

Data from research firm StyleSage showed that mid-tier stores, such as Macy’s and Kohl’s, increased their promotional bids in mid-May, implementing them on 57% of items.

In the apparel category, retailers placed discounts on 36% of items as of mid-May, up from 32% in the whole of April, according to StyleSage. However, the average discount has held steady at 12% since January.

Kohl’s offered eight promotions in the second week of May, versus three in the same period last year, according to research from Jane Hali & Associates.

Similarly, Walmart was offering up to 65% off top-rated items and up to 25% off tech and household goods during the week of May 9. At the same time last year, deals on tech products were only 10% and deals on home products were only on select items.

(Reporting by Siddharth Caval and Ariana McLemore in New York; Editing by Vanessa O’Connell and Nick Ziminsky)