Local ShoppingRetailers take expensive measures to clear inventory ahead of peak season

Retailers take expensive measures to clear inventory ahead of peak season

With consumer demand cooling, retailers have shifted from scrambling to secure supply to aggressively clearing excess inventory.

Rising inflation has tempered spending and pushed many businesses to deploy steep markdowns and other measures to move unsold products. The Census Bureau reported that July retail sales remained flat compared to June, with the National Retail Federation noting clothing and clothing accessory store sales were down 0.6% month-over-month.

“I think a lot of companies said, ‘Oh there’s a buying spree,’ and forgot the spree part,” said Erika Marsillac, professor of supply chain management at Old Dominion University. “A spree ends, this is not something that continues forever.”

Slowed spending came just as many companies were receiving orders placed months ago when demand was higher. As a result, retailers are now overwhelmed with a “sonic boom of inventory,” Urban Outfitters CEO Richard Hayne said on a Q2 call.

Businesses are employing a variety of tactics, including steep discounts, order cancellations and pack and hold strategies, in an attempt to clear their shelves of stagnant products and make room for holiday inventory.

“None of them is a perfect tool, but retailers have to resort to them for lack of better options,” Jie Zhang, a marketing professor at University of Maryland’s Robert H. Smith School of Business, said in an email.

“I hesitate to call it a blood bath, but it’s going to be ugly in terms of the amount of discounting and markdowns”

Richard Hayne

CEO of Urban Outfitters

After suffering slow sales beginning in late June, Nordstrom is among retailers now prioritizing product markdowns and inventory clearance to make room for new products, Nordstrom President and Chief Brand Officer Pete Nordstrom said on the company’s Aug. 23 Q2 earnings call.

Urban Outfitters, which owns brands including Free People and Anthropologie, is also striving to reduce inventory through the second half of the year with increased markdowns and order cancellations.

When it comes to markdowns for the retailer’s lower-tier brands, such as Urban Outfitters, Hayne was pragmatic. “I hesitate to call it a blood bath, but it’s going to be ugly in terms of the amount of discounting and markdowns,” the CEO said on the call.

Markdowns and order cancellations, while effective in clearing excess stock, are “very hurtful” to retailers’ bottom lines, Zhang said. That is proving true for Nordstrom – the retailer estimates it will lose $200 million in gross profits in the second half of the year due to markdowns and clearance efforts.

Promotion-heavy environments also risk making discounts the norm for shoppers, hurting retailers’ further, Marsillac noted.

“As [discounts] become more frequent, they then become almost expected,” Marsillac said. “But first of all you have to get that markdown in front of people for the right things. If someone is not in the store, is not looking online, they’re not going to see those markdowns.”

Some retailers like The Gap and Kohl’s are pulling less seasonal items from the shelves to attempt to sell them at a later date when demand improves. Kohl’s is saving its fleecewear to sell during the holidays, CFO Jill Timm said on the company’s Q2 earnings call, while Gap is holding on to basics like T-shirts and shorts.

“We’re confident that we will be able to integrate our pack and hold inventory with future assortments as the majority of goods are carefully selected seasonal core items we routinely use to round out our assortments,” CFO Katrina O’Connell said during the company’s Aug. 25 Q2 earnings call.

No matter what, clearing out inventory won’t be cheap, as even pack-and-hold strategies require higher costs for storage. It’s also still unclear if retailers will be successful in their efforts to stabalize inventory levels, especially if inflation remains high and consumers continue to slow their spending.

“If in fact that is what most other consumers are going to do, then companies are going to have a whole bunch of inventory left over,” Marsillac said.

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