Swelling Retail Inventories Have Analysts Concerned for Second Half

Arthur Zaczkiewicz

Wed, June 26, 2019 at 4:30 AM UTC

As retailers fret over where they source goods to avoid the impact of the ongoing trade war with China, retail analysts are expressing concern that inventory levels may be creeping up for some companies, which could hurt margins in the third quarter if product isn’t moved this summer.

The solution? Continue to focus on sourcing goods from countries other than China while being disciplined in regard to the cadence of markdown activity over the next few months. One bright spot is the resale and secondary market, which continues to grow and is likely more resistant to global, macroeconomic issues.

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Antony Karabus, chief executive officer of retail consulting firm HRC Advisory, said his firm is seeing “a number of clients increase their inventory purchases for holiday 2019 in order to get ahead of the 2020 Chinese tariffs.” He said while he understands “the desire to avoid the potentially severe tariff impacts on cost of goods, this increase in purchase value arguably replaces a cost risk with a major inventory and margin/markdown risk as these retailers will be buying more than they need for the 2019 holiday season.”

Karabus said the only way to clear the excess on goods “other than offering ‘all year-round basics’ will be steep markdowns as numerous apparel and department store chains are already reporting negative comparable sales in 2019.”

“While no one has a crystal ball to gauge what the end result of the China-U.S. trade negotiations will be, we recommend that retailers look to diversify their supply chains well beyond China in order to lower their political/tariff risks,” Karabus told WWD. “Other benefits may result from sourcing from countries with shorter lead times than China, or even domestically when it makes sense and is possible, as retailers increasingly desire to buy closer to demand to minimize the risk of missing trends and to better control inventory risk.”

Stacey Widlitz, principal at SW Retail Advisors, said clearing inventory will be challenging. Widlitz said she didn’t think the inventory ramp up had as much to do with mitigating the impact of tariffs as much as it is about “disappointing [first quarter] and disappointing early [second quarter] results that will leave retailers trying to clear the inventory decks to get healthy for the back half.”

“The problem is retailers will have to pass through at least half of the tariff impact in the back half,” Widlitz told WWD. “Unfortunately there is no way to get clean other than markdowns. the heavily covered rental business is an attempt to solve that problem, but that is not the answer for end-of-season undesirables.”

Widlitz said the disappointing first-quarter results left many companies with higher inventory and said she wasn’t surprised when the “overwhelming commentary from retailers coming out of [the second quarter] was that promotions/markdowns will be the name of the game in [the second quarter] — and that is very much the reality of what is going on now.”

“To add insult to injury, the promotional sales environment may perhaps pull forward sales into the second quarter as consumers are being bombarded with media headlines regarding price increases coming down the pipeline,” Widlitz added. “When those price increases actually happen late second quarter and third quarter, this will be a double whammy as consumers may have pulled sales forward.”

In a research note, Ike Boruchow, senior analyst at Wells Fargo Securities, said with “summer now officially upon us, we continue to see a challenging environment for retail.”

Boruchow said while store traffic has improved slightly, “we believe that this has been promotionally driven.” He said this assessment is based on retail store checks, “in addition to recent commentary from multiple mall-based apparel retailers such as Gap Inc. and American Eagle Outfitters citing elevated inventory levels and markdown activity across the space.”

“This makes some sense to us given the commentary from many management teams coming out of first quarter was that inventory levels were in decent position, [but] many retailers warned if trends do not pick up in the second quarter, we could begin to see accelerating markdown pressure across the apparel/footwear space,” Boruchow said.

Regarding the strength of the resale and consignment market, Dana Telsey, chief research officer of Telsey Advisory Group, said this week that, while this market “has been around for quite some time, the evolution of online-only entrants to include physical location options also is only enhancing the visibility of this industry.”

“In addition, traditional retail businesses are also now beginning to figure out ways to incorporate consignment/resale into their business models,” Telsey said. “The rise in value-conscious shoppers, as well as the growing importance of being more environmentally friendly, is supporting growth in the consignment/rental market.”

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Swelling Retail Inventories Have Analysts Concerned for Second Half

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