Sagging retailers keep a close eye on their stock management, but for how long it helps?
For the first time in a long time, retailers are being disciplined about their inventory. But the benefits of their restraint can only last for so long.
Inventory levels for retailers are the healthiest they have been since the fourth quarter of 2013, as measured by the spread between inventory growth and projections for next quarter’s sales growth, according to Nomura. Sales for specialty retailers are expected to climb by 2.5 % in the third quarter while inventory is up only 2.2 %. Even department stores are in good shape, with sales expected to fall by 3.8 % and inventories down a greater 4.4 %.
Leaner inventory suggests retailers won’t end the season with excess merchandise, which they would be forced to discount. The good times could continue through the holiday quarter as suppliers, including Michael Kors and Coach, follow through on their recent pledges to cut back sales to department stores. Ralph Lauren plans to reduce the number of styles it will produce for its spring season. Macy’s, meanwhile, continues to close stores and plans to eliminate USD 1 billion of revenue as it shutters 100 more stores beginning early next year.
But while the second half of 2016 may be a strong period for the industry as a whole, that doesn’t mean each individual retailer will fare well. Those that fail to hit the fashion mark will once again be left with extra goods to discount, fuelling competitors to do the same and sparking another round of promotional activity throughout the mall.
For retailers, the problem is that consumers accustomed to sales are calling the shots.
“At the end of the day, all a retailer can try to do is put out the right amount of perfect product,” said Nomura analyst Simeon Siegel. Only if retailers can successfully achieve this ideal can they hope to have pricing power.
The other side of tight inventory plays out at discounters, but they aren’t concerned. Management at TJX Cos. and Ross Stores expressed confidence in their ability to get access to discounted merchandise. There is “a tremendous amount of availability in the market,” Ross Chief Executive Barbara Rentler said on an Aug. 18 call to discuss her company’s results.
That excess inventory could be coming at the expense of brands that may have had orders returned by department stores. Under that scenario, things could look good for both discounters and department stores over the next couple of quarters. But there is a risk that department-store sales projections are still too high, benefiting discounters.
Discounters will also be the ones to benefit when the right amount of inventory suddenly becomes excess inventory. Full-price retailers may look stronger over the next couple of quarters, but in the long run, discounters should still win the day.