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By Siddharth Cavale and Arriana McLymore
NEW YORK, May 27 (Reuters) – Major U.S. retailers who have recently struggled to replenish shelves amid product shortages revealed this week that their stores are now full of too much merchandise and some even they’re all doing what was unthinkable just a few months ago – discounting unsold merchandise.
It is a sign of possible problems for retailers amid rising inflation and higher gas prices. With the rapidly changing tastes of shoppers, many retailers now face a surplus of merchandise, which increases costs.
Costco Wholesale Corp said its inventories rose 26% in its third fiscal quarter ended May 8, which included “a few hundred million dollars” of additional holiday merchandise and was “a little heavy.” in small appliances and household items.
At Gap Inc, a 34% increase in inventories was caused by poor sales to the Old Navy and longer commodity transit times, Chief Financial Officer Katrina O’Connell said Thursday.
Similarly, Macy’s CEO Jeff Gennette cited an “imbalance” in inventory this week. “Supply chain restrictions eased,” he said, receiving goods from abroad sooner than “we expected,” he said. Meanwhile, shoppers changed their buying patterns, buying fewer household items while buying clothes for the occasion and other merchandise.
Average retail inventories in the U.S. are growing at a faster pace than sales growth, according to Citi research on first-quarter results for 18 retailers as of May 22nd. At 11 out of 18, inventories increased 10 percentage points more than sales. , according to Citi analyst Paul Lejuez. This is the largest gap since before the onset of the coronavirus pandemic, which illustrates a trend that began in March 2022.
During the supply chain crisis, major retailers continued to buy, charging a number of goods and increasing commodity investments so that they had enough goods in stock for cash buyers due to stimulus checks.
But retailers’ moves were counterproductive, according to executives and analysts. With rising inflation and rising fuel prices, shoppers fell sharply, buying fewer clothes, TVs and high-end appliances.
This scenario is pushing retailers like Walmart and Macy’s to eliminate excess inventory by discounting more items and offering deeper promotions, a move that could erode margins. Walmart CEO Doug McMillon said in his earnings call that he had begun lowering “aggressive” prices to boost sales of some higher-margin goods, including clothing.
Of course, retailers are still struggling with the high costs of procuring goods and hiring workers, which could limit the breadth and depth of the promotions they offer, said Jason Benowitz, senior portfolio manager at The Roosevelt Investment Group.
“You’ll see some discount and it will be more than last year, but it will eventually be slowed down by the still high cost of inventory supply and labor,” said Benowitz, whose company has shares in Amazon. com Inc, Ross Stores and Autozone. Inc.
EXCESS OF GOODS
As inflation has pushed up prices from everything from TVs to toothpaste, some lower-income consumers have reduced their spending, according to Walmart and Target.
Higher-income shoppers have shown resilience, picking up clothes, suits and footwear and spending more on services, economic data and results from retailers that cater to the wealthiest households.
Maintaining excess merchandise is costly as storage costs increase. Walmart stores and distribution centers had 32% more merchandise, Target had 43% more merchandise compared to a year earlier, and Best Buy had 9% more merchandise in the first quarter, retailers said. Macy’s said its earnings call inventories increased 17% over the same period in 2021.
Macy’s chief financial officer Adrian Mitchell said on Thursday that the rapid abandonment of consumers of the “pandemic categories” and the receipt of items earlier than expected, due to a sluggish supply chain, gave instead of higher inventories. He predicted that Macy’s second-quarter gross margins would reach 2019 levels.
Some predict that many retailers this year will start discounting more to eliminate unsold merchandise. Macy’s chief financial officer warned of “a high promotional environment,” for example.
Data from research firm StyleSage showed that mid-range department stores, such as Macy’s and Kohl’s, increased price promotions in mid-May, implementing them in 57% of items.
In the clothing category, retailers set discounts on 36% of items in mid-May, compared to 32% for the whole of April, according to StyleSage. The average discount, however, remained stable at 12% since January.
According to research by Jane Hali & Associates, Kohl’s offered eight promotions in the second week of May, up from three in the previous year.
Similarly, Walmart offered up to a 65% discount on top-rated items and up to a 25% discount on tech and home items during the week of May 9th. At the same time last year, offers of technology products were only 10% and offers. Household products were only in selected items.
(Report by Siddharth Cavale and Arriana McLymore in New York Edition by Vanessa O’Connell and Nick Zieminski)