Retailers Face ‘Goldilocks’ Inventory Gambit That May Benefit Bargain Hunters

retail inventory

By most accounts, the cardinal sin of retail is being “out of stock.”

Being unable to meet customer demand for certain items, sizes and colors is a far more costly problem with potentially lethal long-term customer relations implications than overshooting inventory a bit and then having to liquidate your leftovers.

In short, the gold standard is to always order too much and never turn a customer away.

But while that is easy to say, actually hitting a predictive bullseye on that front — often six to 12 months in advance — is never an easy task, and the so-called “Goldilocks” inventory call has only gotten harder over the past few years of supply chain bottlenecks.  

“Although we expect to be in a better inventory position in the coming weeks, demand has far exceeded our sales forecast, and as a result, we do anticipate that we will be chasing additional inventory for the remainder of the year,” Lululemon CEO Calvin McDonald told investors last week (June 2) on the athletic apparel retailer’s first-quarter earnings call. 

As such, Lululemon’s Q1 inventory was up 75% in dollar terms versus a year ago, due in large part to the inflated cost of bringing stuff in via air, a challenge that has been compounded by rapid growth (LULU Q1 sales were +32%), a significant expansion of new products (such as footwear and golf), and the need for longer lead times for everything.

“While our levels are higher than our historical norms, we are comfortable with the quality and composition of our inventory,” McDonald said, calling the retailer’s inventory position “strong” and “balanced” between strong business momentum and ongoing global supply chain challenges. 

Inventory Goes Mainstream

While retail industry investors typically want to focus on core metrics such as sales, earnings or customer growth, Wall Street’s sharp pencil analysis is currently drilling down into inventory levels like never before.

PVH, for example, the maker of Calvin Klein, Tommy Hilfiger, IZOD and other brands, told investors its current inventory level was down 4% from a year ago, as the New York-based apparel firm said it was continuing to work through significant COVID-related delays that it expects will gradually improve in the back half of this year.

Like its peers and rivals, PVH has been trying to refill its warehouses and hasten its supplier and delivery routes, it has had to make a big, costly, upfront bet that it will be able to get enough of the right stuff — but not to0 much — onto store shelves in time for holidays.

“The downside with that is it is costing us airfreight in the first half of the year,” PVH CFO Zachary Coughlin told investors on the company’s Q1 earnings call Thursday (June 2) afternoon, pointing to a $12 million airfreight impact last quarter that will be similar this quarter, before reversing in the second half.  

“We expect to abate that in the second half as well,” Coughlin said. “We’ll be getting both higher inventory levels and less airfreight [costs].”

In Transit vs on the Shelf

For most retailers, much of the inventory build-up they are reporting and counting on for the busy season is still in transit or sitting in a container somewhere trying to get to its final destination, whether that’s at sea, anchored offshore or stacked up in a port.

The longer it takes to get these goods off-loaded, the more nervous retailers are getting to make sure they arrive. To ensure this delivery, some form of expedited freight will likely be needed, a service upgrade that not only goes up in price as time frames compress, but one that puts retailers into a market that has dwindling spare capacity.

Fabric and craft retailer Joann said its inventory and logistics costs were up $40 million last quarter versus a year ago, an expense the 70-year-old operator of 850 stores said it had no choice in paying.

“We also made a conscious choice to bring in our peak inventory-build earlier this year to mitigate the risk of supply chain disruptions,” Joann CFO Matthew Susz said on the company’s Q1 earnings call last week. “As a result, at the end of the quarter, we had $23 million more in in-transit inventory on its way to our distribution centers than at the same point last year.” 

With retailers, seemingly without exception, taking extraordinary steps to ensure they have more than enough stuff to sell this fall and winter, the collective inventory build that is currently underway is — by design — almost certain to overshoot demand. In doing so, merchants are clearly more comfortable with holding clearance sales than they are pushing their luck with another round of “out of stock” notices.