Retailers Face Struggle with Excess Inventory as High-Season Approaches: Will They Successfully Liquidate Stock Piles?
Nike and other retail giants are grappling with excess inventory as demand for discretionary goods wanes amid high prices for necessities. In late September, Nike's Chief Financial Officer Matthew Friend announced decisive action to address the issue, with the word "inventory" appearing 48 times during the call with analysts.
Friend and other executives, like Target's Brian Cornell, have emphasized the need for markdowns and other measures to offload unwanted products amid sluggish sales. According to S&P Capital IQ and FTI Consulting analysis, retail inventories climbed by 31% in Q2 of 2022 compared to the same period last year. The mounting inventory, warns FTI Consulting's Global Co-Leader of Corporate Finance and Restructuring, Michael Eisenband, could signal "the most troubling sign that the tides may be turning against the retail sector."
Such concerns were amplified when Nike reported in September that its inventory grew by 65% in the quarter ending Aug. 31, causing a 220-basis-point drop in gross margin due to markdowns, supply chain costs, and unfavorable currency exchange rates. This followed Adidas' announcement in late October of a significant inventory buildup in major Western markets, leading to expected markdowns for the rest of the year.
Another casualty was Hasbro, which reported a 31% decrease in operating profit in its consumer products unit due to excessive inventory and associated costs. The excess inventories across the retail industry have raised concerns about the holiday season. The question at hand is whether companies will be able to achieve the Goldilocks level of inventory—neither too much nor too little to avoid a lingering inventory hangover.
The situation is so dire that Alexa Driansky, a director in AlixPartners retail practice, has predicted "a bloodbath" in the year ahead for the retail sector. The inventory levels have reached record and peak levels, as noted by Cowen analysts. This massive inventory, driven by both unit increases and acquiring costs, threatens to push gross margin expectations into 2023 too high, as markdown allowances, storage costs, and currency transactional pressures rise.
Retailers, indeed, are drowning in their inventories. With sales growth significantly exceeding inventory growth in several recent quarters, retail margins are nearing their trough. The hope is that with major players' decisive actions, retailers can clear their seasonal or outdated items and reset for the holidays, ministering to the products that people will actually buy.
However, the success of these efforts remains uncertain. Some retailers might still be grappling with the repercussions, as evidenced by Matt Garfield, managing director of FTI Consulting, who mentioned that many players are "still in the throes of it." The options for coping with overages, such as markdowns, clearing sales, or returns to vendors, always come at a cost to the bottom line.
In KPMG's survey of retail executives, 56% expected an inventory hangover following the holiday season, with 52% planning to use clearance sales to manage excess inventory, 48% expecting to cut receipts, and 41% using sell-downs or returns to vendors. Another 24% intended to sell inventory to liquidators and discount retailers.
- Nike and other retail giants are struggling with excess inventory, as demand for discretionary goods decreases due to high prices for necessities.
- In late September, Nike's Chief Financial Officer, Matthew Friend, announced decisive action to address the issue, with the word "inventory" mentioned 48 times during his call with analysts.
- Friend and other executives, like Target's Brian Cornell, have emphasized the need for markdowns and other measures to offload unwanted products amid sluggish sales.
- According to S&P Capital IQ and FTI Consulting analysis, retail inventories climbed by 31% in Q2 of 2022 compared to the same period last year.
- The mounting inventory could signal "the most troubling sign that the tides may be turning against the retail sector," warned FTI Consulting's Global Co-Leader of Corporate Finance and Restructuring, Michael Eisenband.
- With sales growth significantly exceeding inventory growth in several recent quarters, retail margins are nearing their trough.
- Retailers are drowning in their inventories, and the question at hand is whether companies will be able to achieve the Goldilocks level of inventory.
- In KPMG's survey of retail executives, 56% expected an inventory hangover following the holiday season, with many players still in the throes of addressing the issue.
