Luxury brands’ latest revenue results and official reports on U.S. consumer spending, which held “steady” in July despite rising inflation, indicate that shoppers are shopping – but that does not mean that brands/retailers’ inventories are not also rising. Retail inventories grew by 2 percent in June (up from a 1.6 percent increase in May), the Commerce Department revealed this past week, pointing to an 18.5 percent overall rise in “business inventories” on a year-on-year basis in June. Retail titan Walmart, whose inventory is up by 25 percent compared to this time last year, said last week that “it had cleared most of its summer seasonal inventory,” per Reuters, “but still had work to do in reducing stock of electronics, home goods and apparel.”
Reporting its results for the 3-month period that ended July 30, Target revealed that its profit fell by nearly 90 percent year-over-year due, in large part, to “steep markdowns” on sizable quantities of unwanted merchandise. The company said that unsold inventory for the quarter rose by 36 percent. Kohl’s also reported higher inventory levels – up 47.6 percent for the quarter that ended on July 30, with chief financial officer Jill Timm saying in a corresponding call that the company is “address[ing] inventory, including increasing promotions, being aggressive on clearing excess inventory and pulling back on receipts.”
Not limited to mass-market entities, Michael Kors and Versace owner Capri Holdings reported earlier this month that for the quarter ending on July 2, it was left with $1.27 billion in inventory, a 66 percent increase over “a historically low level [of inventory] last year” when the group did “did not have enough inventory to meet consumer demand.” In a call with analysts, Capri chief financial and operating officer Thomas Edwards said that “first quarter inventory increased 25 percent,” but noted that the group “anticipated elevated inventory levels as we implemented new programs to receive seasonal merchandise earlier as well as hold more core inventory given supply chain delays.” Edwards contends that Capri expects that inventory levels “will moderate sequentially [for the remainder of the year] and as planned, be below prior year by the end of the fiscal year.”
As for the impact of such enduring inventory excess on off-price market retailers, which have built big businesses by acquiring – and then selling – over-produced and/or unsold goods from brands and other retailers, the effect may not be as glowing or as straightforward as the media has been suggesting. Ross Stores reported its Q2 earnings on Thursday, stating that while average store inventory during the quarter was up by 15 percent compared to last year and total consolidated inventories were up 55 percent at the end of the quarter versus the same period in 2021, sales results were still “disappointing,” management said. Sales for the three months ending on July 30 totaled $4.6 billion versus the $4.8 billion in sales the Dublin, California-based generated during the same period last year. And its comparable store sales were down 7 percent on top of a “robust” 15 percent gain in the second quarter of 2021.
Reflecting on the results of Ross Stores, one of the biggest players in the off-price space, Neev Capital managing director Rahul Sharma stated that a 55 percent rise in inventory and a five percent drop in sales makes for “one of the worst spreads in retail.”
At the same time, revenue for T.J. Maxx, Marshalls, and HomeGoods-owner TJX Cos. similarly fell short of expectations in Q2, despite an influx of buying opportunities for the retail group, which reported a 5 percent decrease in comparable store sales for the quarter ending on July 30. The Framingham, Massachusetts-headquartered company’s net sales dropped to $11.8 billion for the quarter from Q2 2021’s $12.08 billion. Analysts expected TJX to generate $12.05 billion in revenue, and CEO Ernie Herrman blamed “historically high inflation” as putting a dent in consumers’ discretionary spending. In connection with its Q2 results, TJX updated its expectation for U.S. comparable store sales for the full fiscal year in 2023, projecting a decrease of 2 to 3 percent, versus its previous guidance of an increase of 1 to 2 percent.
These results seem to stand in contrast with the usual course of business for off-price retailers, which traditionally benefit from economic downturns and consumers’ corresponding practice of “trading down” when it comes to discretionary goods, and also whose success is not not just dependent on price but by supply – namely, the companies’ abilities to provide consumers with access to desirable products at lower prices. This model makes the offerings, themselves – and the timeliness and attractiveness of those offerings – a vital part of the equation in driving demand. (This is likely part of why even off-price retailers are currently stock up excess inventory.)
After all, TJX previously stated in a routine filing with the Securities and Exchange Commission that one of its core advantages is the way that it “consistently offer[s] customers a rapidly changing merchandise assortment at everyday prices,” a point that emphasizes the important of both price and selection of goods. (The demand-driven-by-supply model is not terribly unlike the resale market, with The RealReal founder and CEO Julie Wainwright previously asserting that supply is the “lifeblood” of the company’s business and the primary driver of demand.)
Stumbling by off-price retailers comes as the off-price segment has “increasingly been a growth engine: it expanded faster than the overall industry before the pandemic, it experienced a less pronounced dip in the initial phases, and it is set to grow five times faster than the full-price segment from 2025 to 2030,” McKinsey stated in a report this spring, which noted that growth will likely be compounded by the fact that off-price “has been well positioned to capture an increasing percentage of shoppers moving online.” It also follows from predictions from analysts that off-price names are among those that are situated to fare well in furtherance of the larger return to retail in the post-Covid marketplace.