U.S. Fashion stockrooms are bursting at the Seams

Unsold merchandise has piled up at clothing retailers during lockdowns. That is bad news for profit margins but great for shoppers.

By Guest author Carol Ryan from Wall Street Journal

With fashion retailers sitting on a glut of unsold clothing, shoppers can expect serious bargains once shops reopen. The hit to profit margins could be dire.

Caption and Graphic courtesy by Wall Street Journal

Merchandise has piled up at stores since they were closed by lockdown measures. For all U.S. retailers, the inventory-to-sales ratio—a measure of how much stock they hold relative to monthly sales—hit an almost 11-year high of 1.53 in March, according to the Federal Reserve Bank of St. Louis. April data, due to be released in a few weeks, will likely show another jump.

Clothing retail’s dependence on fast-changing seasons and fashion trends makes it particularly exposed to the problems caused by high inventory levels. Swedish chain H&M Hennes & Mauritz HM.B +1.19 % reported a 10% jump in stock-in-trade for the end of April compared with two months earlier.

Weak online demand means retailers haven’t been able to shift as much merchandise as they would like via home deliveries. At Zalando, one of Europe’s biggest fashion e-commerce players, garments now spend a median of five weeks on the site before being sold, up from two weeks in the fourth quarter of last year, according to research by UBS analyst Olivia Townsend.

Retailers have taken some action to tackle the stock overhang, but the effects will be limited. The average fashion chain can cancel less than one-fifth of orders placed with suppliers, according to supply-chain experts. Since many large retailers source garments from Asia up to six months in advance, most of their inventory for the spring and summer was already in warehouses or in transit when stores closed.

And while some stock can be carried over to next year to increase the chance of selling it at full price, few brands are in a position to tie up precious cash in working capital for months on end. One of Britain’s biggest fashion retailers, Next PLC, has said it would carry over just 15% of its collection.

Despite the desperate situation, clothing prices have held up surprisingly well online. Discounting activity was lower in April than during the same month of 2019, according to data scraped by UBS from the websites of major European retailers including Zara and H&M. U.S. mall stores have upped their average discount to 21 % from 16 % this time one year ago, Refinitiv data shows—hardly a dramatic increase.

But the apparent price discipline is deceptive. Hard-pressed warehouse and delivery workers are struggling to fulfill existing web orders on time, giving many retailers a reason to avoid a surge in digital sales. Most are probably waiting until stores reopen to slash prices: The economics of offloading inventory in a bricks-and-mortar shop are better than they are online, where the retailer often covers the cost of returns.

The task of clearing stock in the aftermath of the pandemic could depress retailers’ profit margins for years. If weaker players go under— J.C. Penney and Neiman Marcus have already filed for bankruptcy protection—stock liquidations could unleash fresh waves of inventory into an already promotional clothing market.

Shares in Zara owner Inditex and H&M, the world’s two largest clothing retailers, have performed worse than the wider European stock market this year. But the companies—particularly H&M, which was struggling with slow sales and excess stock well before the coronavirus pandemic—could also take longer to recover than businesses for which inventory management matters less.

Shoppers can pick up bargains in the epic end-of-season sale, but investors have fewer reasons to snap up cheap clothing stocks.