One of the overlooked elements from the retail earnings reports of recent weeks is inventory levels. With more dramatic numbers like eCommerce spikes and same-store comp sales decreases available, inventories are easy to miss. But several reports are pointing to healthy inventory positions as a point of optimism in retailing’s comeback progress.
For example, Macy’s Q2 net sales fell from $5.55 billion to $3.56 billion. Bad news, but expected. However, Macy’s total merchandise-on-hand was scaled back by 27 percent from Q1 to Q2 from $4.92 billion to $3.58 billion. On the earnings call for Q2 several Macy’s executives referred to its “clean” inventory position, meaning it could bring in new, more current goods. According to The Motley Fool, it was a decision also taken by Kohl’s and Dillard’s, but not Nordstrom. Even after blowing out inventory at discounts up to 80 percent, Nordstrom’s inventory change from Q1 to Q2 was only 1.5 percent.
“Unlike most of the goods carried by the likes of Walmart or Dollar General, fashion-oriented apparel has something of a shelf life,” says The Fool. “Spring goods don’t sell well in summer, and summer goods don’t sell well in the fall. Fall goods don’t sell well in the winter. You get the idea. The longer an article of clothing sits unsold in a store, the deeper the markdown needed to sell it. Older merchandise also takes up valuable floor space, and it even ties up money that can be used to procure more marketable and higher-margin inventory. That’s why, in this volatile retailing environment, most retailers are looking for ways to commit to a minimum degree of inventory — not more.”
The inventory positions could be a reason that some positive department store news is starting to show up. Placer.ai, which uses location analytics to measure retail foot traffic, shows that weekly visits to department stores were down 49 percent for the week of July 13 compared to 2019. By Aug. 10 that number had improved to 41 percent.
“While there are brands that are struggling, the overall weakness presents an opportunity for other variations of this concept to succeed,” says Placer. “Whether it be a Neighborhood Goods model that emphasizes DTC brands, a Kohl’s style approach that focuses its attention to outdoor centers or even a revival for some of the traditional brands as they optimize their retail footprint — a future for the space is clearly there.”
The U.S. Census Bureau’s also noted the drop. Its latest monthly retailer inventory-to-sales ratio report for June indicates a significant drop — from 1.35 in May to 1.23 in June, and down 11 percent from June 2019.
Excluding auto dealers, the most significant decline was in clothing and accessories stores, which reported a 4.5 percent month-to-month drop in the inventory-to-sales ratio from May to June, and a 7 percent drop from June 2019. That’s good news for department stores.
Another key inventory metric is imports. Import traffic through the Southern California gateway rose 33.8 percent in July from June, while total U.S. imports in July increased only 0.9 percent month over month, according to JOC, citing PIERS, a JOC.com sister company within IHS Markit.
“According to IHS Markit, the combined inventories of wholesalers and retailers rose 0.5% in July,” says JOC. “This followed sharp declines over the prior three months and led IHS Markit to raise its forecast of the change in inventory investment in the third quarter by about $107 billion. As a result, IHS Markit expects inventories to decline in the third quarter by far less than they did over the second quarter, contributing 3.5 percentage points to third-quarter GDP growth.”