Retail inventories hit record highs, which could be bad news for the economy

Dell has too many computers. Nike swims in summer clothes. And the Gap is awash with basics like t-shirts and shorts.

After battling product shortages for much of the pandemic, retailers across the country are now facing the opposite problem: an unprecedented glut of unsold merchandise that’s squeezing profits, derailing holiday plans and threatening to dampen growth. broader US economic growth.

In response, many of the nation’s biggest retailers are kicking off holiday sales earlier than ever, hoping to clean up their warehouses enough to accommodate a new round of winter orders, according to filings by the companies and results calls.

Target kicked off its winter sales spree last week with $6 hoodies and half-price TVs. Amazon is holding an unusual second Prime Day sale next week, less than three months after the last one. And dozens of other brands, including J. Crew and Nine West, are offering deep discounts on blankets online and in-store.

“There’s a growing smell of desperation in the air because retailers are grappling with a ton of excess,” said Elaine Kwon, managing partner of Kwontified, a retail consultancy and former chief executive. ‘Amazon Fashion. “Some brands that claim to never discount will start discounting, especially outerwear, winter wear, cold weather items, last winter’s inventory – they’re desperately trying to s get rid of them before their new business arrives.”

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High inventories have plagued businesses all year, playing a significant role in the recent contraction of the US economy. But the piles of goods only grew. U.S. retailers had record inventory of $732 billion in July, a 21% increase from a year ago, according to Census Bureau data.

And the timing couldn’t be worse, as Americans’ appetite for clothes, furniture, electronics and other goods has cooled partly due to soaring inflation, but also due from changing pandemic trends to services like restaurants and travel. Monthly household spending on goods has slowed lately.

With inflation stubbornly near 40-year highs, many are finding that even the deepest discounts don’t translate into sales. americans are spending more of their budget on essentials like gas and groceries, leaving less for non-essentials.

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“There is a serious imbalance. Consumer spending is slowing but orders are still piling up,” said Gregory Daco, chief economist at Ernst & Young’s strategy consulting arm, EY-Parthenon. “Retailer inventories are piling up beyond desirable levels. It’s a very difficult rebalancing exercise that retailers have to go through, and it’s going to have an outsized impact on the economy.

Consumer spending accounts for about 70% of the economy. Inventories products that consumers buy help explain how the economy is or is not growing. While inventory numbers have helped drive economic growth for much of the past year, that changed in the last quarter. A pile of goods weighed on the overall economic growth of 1.9% between April and June. Economists expect that trend to continue in the next gross domestic product report, due later this month.

“We’ve seen in the latest reports that inventories have been a key tipping factor – in the second quarter it dampened GDP growth significantly, and that’s likely to continue,” said Daco, who expects a recession in the over the next six months. “If anything, this unloading of inventory — the destocking cycle that retailers are getting into — is going to exacerbate the downturn.”

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Meanwhile, the extra merchandise is creating new challenges for retailers, including a lack of storage space and a shortage of cash. Worries over shrinking profits also led to a sell-off in the stock market.

Target shares have fallen more than 34% so far this year, largely due to inventory issues. Shares of Nike, meanwhile, fell nearly 13% in a day at the end of September after the retail giant said it should “aggressively” mark down products on its website and in its stores. factory.

“Because we had late product for the spring, summer and fall seasons…we effectively have a couple of seasons hitting the market at the same time,” Nike chief financial officer Matt Friend said during an interview. an earnings call last week. “We decided to take this inventory and liquidate it more aggressively.”

Even the nation’s largest online retailer has not been immune to inventory issues. An Amazon warehouse near Nashville was overwhelmed by last winter’s puffy jackets and summer bug spray, according to an Amazon employee who spoke on condition of anonymity for fear of losing his job . (Amazon founder Jeff Bezos owns The Washington Post.)

“Our facilities have been overloaded with excess inventory,” the employee said. “We were prepared for a whole new system where everyone was going to be ordering from Amazon all the time, and that just hasn’t happened. There are so many leftovers – so many big, bulky jackets taking up space – that people just don’t buy.

Amazon did not respond to a request for comment.

Target slashes prices as pandemic-era inventory piles up

Meanwhile, department store chain Kohl’s has 48% more inventory than a year ago, in part because it saved $82 million worth of pajamas, fleeces and other winter items that arrived in late for last year’s holiday season. He plans to put these products on the shelves this fall.

“We are actively working to reduce inventory,” Jill Timm, the company’s chief financial officer, said on an earnings call in August. “We have been aggressive on clearance as well as promotions.”

Big discounts could help ease some of the pain of inflation. Overall prices were up 8.3% from a year ago, a notch below summer highs but still well above historical norms, according to the Bureau of Labor Statistics.

There are already signs of falling prices in some sectors of the economy. Appliances, bedroom furniture, jewelry, televisions and smart phones were all cheaper in August than they were in July.

“Prices will come down,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “We’re already seeing it to some degree: disinflation, even outright deflation, in some areas where companies just have to reduce inventory.”

Charlie Reid, owner of Charlie’s Computers & Emporium in Las Vegas, discounts dozens of laptops by 30% or more. He nearly tripled the stock of refurbished PCs he had hoped for.

Sales have been buoyant through much of the pandemic as people picked up laptops for remote work and school needs. But as life returned to normal, demand plummeted, he said.

“When it comes to basic laptops for basic needs – HP, Dell – there doesn’t seem to be much interest anymore,” he said. “Around the start of the year, they just started piling up in our back room. People seemed to lose interest.

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Even item markdowns have become a difficult calculation for retailers, after more than two years of wildly unpredictable fluctuations in manufacturing and transportation. There is a sense that the supply chain is only one covid-related shutdown or geopolitical catastrophe away from another round of shortages and delays. Some retailers are hesitant to sell discounted products now, only to have to replace them with more expensive products later.

“More than in the past, retailers are holding onto inventory while they wait,” said Brian Ehrig, partner at consultancy Kearney. “There are still real concerns about the geopolitical risks that still exist, so companies are taking a more conservative approach and thinking hard about what scenarios might unfold.”

In Abilene, Texas, executives at Andrews Furniture are canceling orders for sofas, beds and dressers now that buyers are pulling out. The company has about 20% more inventory – mostly upholstered chairs and other living room furniture – in its warehouse than usual, according to Scott Andrews, a company executive.

“Early on in the pandemic, we saw where shopping habits were going and tried to estimate that, but now we have too many,” he said. “People are changing their habits. They go on vacation instead of buying another sofa. I constantly watch our stock levels, trying to figure out how to handle these extra items.

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