As the holiday season approaches, major US Retailers, from Dollar General (DG.N) to Walmart (WMT.N) to Macy’s (MN), could ending up with too much inventory for the second year in a row, according to a Reuters analysis, jeopardizing profit margins for retailers and generating deep discounts for shoppers.
LSEG Workspace, a financial information and data platform, calculated inventory turnover rates for 30 major U.S. retailers. To determine which chains are most vulnerable to excess inventory – a problem that increases retailers’ costs – LSEG divided each retailer’s cost of goods sold by the average value of its inventory in the second quarter.
Plush warehouses are especially tough for retailers this year, as U.S. shoppers are only expected to spend 3% to 4% more this season, about in line with inflation. That would represent the slowest pace of growth in five years, according to industry estimates.
“I’m relatively pessimistic about the holiday season,” said Gerald Storch, a retail consultant and former Target vice president and ex-CEO of Hudson’s Bay. “It’s possible that some retailers are being too optimistic and once again making the mistake of buying too much.”
Having too much inventory is a problem for many retailers because it increases retailers’ expenses for product handling, warehousing and transportation, said Jeff Bornino, president of North America at TMX Transform and former supply chain manager at Kroger (KR.N). “The undeniable reality of retail is that 15 to 20 percent of the products occupying store shelves must go,” he said.
Two-thirds of 30 retailers, including sporting goods company Foot Locker (FL.N) and beauty supply store Ulta Beauty (ULTA.O), experienced inventory turnover. lower than their peers, indicating either slow sales or excess inventory.
This discovery is remarkable because history could repeat itself for certain channels. Excess inventory hit gross margins and profits for many retailers last year when shoppers suspended discretionary purchases due to high inflation.
While most retailers, including Foot Locker and Target, have lower inventories than last year, according to quarterly reports, LSEG inventory turnover data shows their levels remain elevated.
This is particularly serious for dollar stores, department stores and clothing and accessories chains, according to the analysis. The holiday season at department stores “probably won’t be that intense,” said Morningstar analyst David Swartz.
Dollar General (DG.N), TJX Companies (TJX.N) and Dick’s Sporting Goods (DKS.N) declined to comment on their revenue ratios compared to their peers. Dollar Tree (DLTR.O), Walmart, Best Buy (BBY.N), Macy’s, Foot Locker and Ulta did not respond about their stocks. Target (TGT.N) highlighted recent remarks from its CFO that it had taken a “conservative planning approach” and that its second-quarter inventory was down 17% from a year earlier.
To be sure, inventory turnover isn’t the only metric Wall Street investors use to assess retailers’ inventory levels. Some investors will personally visit stores to check inventory levels and measure the frequency and extent of retailer discounts in order to sell off merchandise. Others pay attention to a retailer’s quarterly margin. A decline in margin could indicate that a retailer has significantly reduced prices to reduce a surplus.
The possibility of another year of retail stock glut has sparked concern among investors who own retail stocks.
“Stocks have been a roller coaster for major U.S. retailers,” said Jason Benowitz, senior portfolio manager at CI Roosevelt, which owns shares in Home Depot (HD.N).
Retailers should use promotions and discounts to drive traffic to stores, said Joseph Feldman, an analyst at Telsey Advisory Group. Some are already slashing prices and offering discounts to clear out excess inventory before Black Friday, the start of the holiday shopping season.
Research firm Jane Hali & Associates said discounts at Kohl’s (KSS.N) and Macy’s were as high as 60%, with lower foot traffic at those two retailers and Nordstrom (JWN.N) compared to last year . Kohl’s and Nordstrom did not respond to requests for comment.
As shoppers become cautious due to financial constraints such as high interest rates and a resumption of student loan payments, some retailers are offering holiday discounts earlier than usual, said Brian Mulberry, manager of client portfolio at Zacks Investment Management, which owns Walmart shares.
“And this is simply driven by the fear that the consumer, by the end of the year, will be in a weaker state,” he said.
