Singing the inventory blues
(All photos credited to Depositphotos.com)
Many retailers are feeling inventory pains despite assuring analysts that they're quite pleased with their inventory levels. Mind you, some retailers may indeed be pleased with their inventory levels, but others may be trying to figure out where to store the excess inventory since so many warehouses are beyond full.
Consumers have not necessarily put the brakes on buying stuff, and it's just that some consumers are being more mindful of what to purchase thanks to inflation. In contrast, others have shifted their spending focus away from such pandemic favorites as furniture and other home goods and appliances to dressier clothing, makeup, nice shoes, and other items there had not been in demand since pre-pandemic days.
Some retailers may have seen these signs but could not pivot quickly enough because of supply chain delays. The adoption of just-in-case inventory strategies by many retailers due to supply chain disruptions also didn't help much.
As a result, we've seen such retailers as Abercrombie & Fitch making such statements as this in 2021: "We learned we can run this business with less, and you have much better margins."
To this in early 2022:
"We made the decision to take advantage of the unseasonably cold temperatures to proactively accelerate the sell-through of late holiday goods in Hollister and Gilly Hicks…These clearance sales came with a lower gross margin than our spring goods, causing a reduction in our Q1 rate."
This year, we see many retailers trying to unload excess inventory before the year-end holiday inventory arrives.
But, the double-digit year-over-year increase in inventories that many retailers report is, in most cases, compared to exceptionally lean inventory levels last year when consumers were consuming anything and everything.
This heightened consumption level combined with supply chain disruptions resulted in many retailers adopting just-in-case inventory strategies, that is, ordering extra inventory just in case there is a supply chain disruption.
Knowing how much inventory to keep on hand has always seemed more art than science for retailers, even before the pandemic. In 1966 Professor Benjamin Schwartz wrote that consumers' lack of stock will affect consumers' willingness to buy again and inhibit consumer demand, but excess inventory will also lead to increased inventory costs for retailers.
"While inventories were up $125 million in the Crocs brand, bear-in-mind, that last year at this time, inventories were exceptionally lean," CFO of Crocs, Anne Mehlman, told analysts on August 4.
That $125 million increase could also be attributed to inflation. Croc's latest quarter, ending June 30, reported record revenue, up 51% year-over-year and gross profit up 26% year-over-year.
However, Croc's days' inventory outstanding (DIO) was 88.85, up from the company's first quarter, ending March 31, when DIO was 84.53. This means it took longer to sell inventory on-hand in the second quarter.
Compared to previous years, for the second quarter in 2021, Croc's DIO was 75.34, which was above the same quarter in 2019 when it was 73.69. However, DIO was considerably lower than in the same period in 2020, when it was 103.08.
Meanwhile, Wolverine Worldwide noted in its second-quarter earnings that it began receiving order postponements from retailers that were faced with excess inventory.
"We are working closely with partners to move through product and, in some cases turning to drop shipping and direct the store shipments to help alleviate this current pressure. As such, some of these sales will shift to later in the year," Wolverine Worldwide CEO Brendan Hoffman told analysts on August 10.
Let's hope Wolverine will achieve these anticipated later sales. Its DIO for its second quarter, ending June 30, was 126.02, an increase from the first quarter's 109.55 and considerably higher than the same period in 2021 when it was 82.36. It's even higher than in the second quarter of 2019, when the DIO was 105.29.
Like Crocs, Wolverine also reported solid revenue and gross profits for its second quarter.
While many retailers are returning to the days of promotions to unload excess inventory quickly, some are reducing their SKUs. "We already have a number of initiatives underway to reduce our inventory, and we expect by year-end that our inventory units will be below last year's level. The reduction plans we have in place include temporarily reducing production shifts in our manufacturing facilities and strategic actions tied to our segment and supply chain initiative. On top of those is our ongoing initiative to reduce SKUs. We have plans to further reduce SKUs by another 30%, with some of the benefits coming this year. The impact from these actions is reflected in our updated financial guidance," Hanesbrands CFO Michael Dastugue told analysts on August 11.
However, as noted by eMarketer, while SKU rationalization makes sense from a production standpoint when resources are limited, retailers risk losing sales and potential customers.
Despite the disruptive nature of supply chains over the past couple of years, inventory management systems have not seemed to help retailers as effectively in forecasting and managing inventories - particularly as retailers made significant investments in omnichannel strategies. Perhaps as these technology tools improve with advanced predictive analytics that includes risk management tools and other such capabilities, retailers can manage inventories more effectively.
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I wear a number of hats these days. Catch my weekly column on air cargo, freight forwarding, and the express markets, and the occasional podcast on Air Cargo World. I’m also helping out the Reverse Logistics Association as a research manager and at JOC I help out as a research analyst and write a weekly LinkedIn article, Freight Forward, summarizing JOC articles and providing an outlook for the week ahead.
In September I’ll be participating in a panel discussion on returns at the CSCMP Edge conference in Nashville and I’ll be moderating a panel session on the middle and last miles at JOC’s Inland Distribution conference in Chicago.
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