Frontloading by US retailers driving inventory buildup

US retail sales are slowing, creating an imbalance with the high inventory levels some retailers are facing amid front-loaded cargo, maxed-out warehouses, and a shift in consumer demand.

Consumer sentiment dropped from 58.4 in May to 50.2 this month, according to the University of Michiganʼs Surveys of Consumers June consumer sentiment index — the lowest level recorded by the survey since it began in the 1970s. As a result, last monthʼs retail sales dropped 0.3 percent on a seasonally adjusted basis from April, the US Census Bureau reported.

A series of investor calls over the past month from retailers gave a sense that while a poststimulus slowdown was expected, it wasn’t anticipated to happen so early in the year, leaving inventories higher than expected on things such as apparel, appliances, and furniture. The latest US inventory-to-retail sales ratio, or inventory compared with the number of fulfilled sales, was 1.18 as of April — below pre-COVID levels of 1.52 in March 2020.

US imports from Asia hit a record in May, and were up 13.2 percent through May year-to-date, according to PIERS, a sister company of within S&P Global. Official PIERS data for Asia’s June imports will be available in mid-July.

A CFO said the women’s clothing company ended its first-quarter inventory position up 7 percent compared with the same period last year.

The increase in in-transit goods resulted from some delays to planned end-of-quarter receipts as well as the strategic decision to ship summer collections one to two weeks earlier than normal to help onset longer transit times.

Companies such as Dickʼs Sporting Goods have struggled to find the right product to stock as consumer habits shift. While footwear sold well in the first quarter, the CEO said in a late May earnings call that clothing has been tougher to figure out.

“On the apparel side, we did have some inventory challenges during the [first] quarter, just making sure that we have the right product, the right season product in stock,” she said. “But we are planning to buy around anything that came in late, so it’s not a markdown risk for us, and we believe that by back-to-school, apparel should be getting better.”

Cost-conscious consumers
Overall, retail sales for May 2022, excluding automobiles, gasoline, and restaurant purchases, were up 8.1 percent year over year and 6 percent from pre-COVID May 2019. The National Retail Federation (NRF) forecasts that sales for 2022 will grow between 6-8 percent — lagging last yearʼs 14 percent gain, which was the highest in more than 20 years.

US retailers project near-record import volumes for this summer and into fall, with June volumes projected to be 7.5 percent higher than June 2021 — the third-highest month for imports on record.

Already-stressed ports and inland supply chains should prepare for continued challenges through the peak shipping season, the vice president at the NRF, said in the group’s latest Global Port Tracker (GPT).

To combat too much inventory as peak season approaches, stores such as home goods retailer Tuesday Morning, which ended the first quarter with inventory levels up 29 percent compared with the 2021 third quarter, are slashing prices to clear out shelves and make room for new merchandise, the CFO said in the companyʼs May 12 earnings call. She added Tuesday Morning has been able to quickly adjust fourth-quarter receipt flow because the majority of new purchases are made in-season.

Consumers are on the hunt for those deals, too. It was reported earlier this month in its BOXpoll consumer survey that 60 percent of respondents are looking to seize markdowns amid inflation and rising interest rates and are more likely to buy casual apparel, home appliances, and furniture online in the next six months if it discounted.

“Overstocks and markdowns will impact [retailer] profitability, but also create new openings to sell as a large portion of consumers seek out deals — further aided by the return of [Amazon] Prime Day and other mid-year promotions,” the VP of market strategy, said in a statement June 23. “At the same time, our survey found a growing number of consumers cutting back on retail spending altogether as they react to record inflation and gas prices and rising interest rates.”

Front-loading by big box stores
After last year’s Halloween goods arrived for some retailers as late as December, and big-box retail stores such as Walmart and Target began front-loading inventory to avoid a recurrence for this year’s holidays, which is now adding to the overstock. In addition to having a glut of bulky merchandise that consumers have shifted away from — TVs and kitchen appliances — retailers already have Christmas seasonal merchandise on the water or waiting on land.

Kohlʼs, which reported that first-quarter inventories were up 40 percent over Q1 2021, has also built-in additional in-transit lead time to ensure the company is meeting customer demand, the CFO said in a statement.

According to Salesforce, 37 percent of consumers are looking to shop for the year-end holidays a month earlier than normal — and some have already started to shop. Adding to inventory concerns, though, Salesforce reported that 51 percent of consumers plan to make fewer holiday purchases this year than in 2021.

Although retail sales have slowed this spring, data from the Bureau of Economic Analysis shows that the anticipated switch from goods to services still hasnʼt happened and spending remains heavily elevated for retail.

Source: The Journal of Commerce

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