By  on June 16, 2008

Stringent inventory control may be the mantra for most apparel retailers, but there is still plenty of fat to trim.

Of 28 specialty retailers tracked by WWD, 15 registered decreases in inventory levels during the first quarter, while 13 actually increased their levels from the first quarter in 2007.

However, according to research conducted by the Telsey Advisory Group, six of the companies — Chico's FAS, Gymboree, Hot Topic, Tween Brands, TJX Cos. and Urban Outfitters — were up when measured by total stock, but down when the figures were measured on a per-square-foot basis.

While many retailers still have a long way to go in their inventory management strategies, total inventory increases are in part due to the opening of new stores and growth in direct sales.

At the Piper Jaffray Consumer Conference held in New York last week, Chico's said it had been working over the past six months to try to manage inventory investments and lower them to be more in line with current trends. Yet first-quarter inventories rose 14 percent from a year ago. On a square-foot basis they were down 4 percent.

"While [the total] number does include new store growth, with comps trending down significantly and inventories down on a per-square-foot basis only modestly, it seems clear that more cuts are needed," said Thomas Filandro, retail analyst at Susquehanna Financial Group.

"Many retailers will acknowledge they have excess amounts for the first half and will have it lower for the third and fourth quarters," said Mark Montagna, retail analyst at C.L. King & Associates. "By the end of the fourth quarter levels may not come down too dramatically since many flushed out clearance at the end of January 2008."

Even with major inventory cuts, some retailers are in despair as they watch merchandise sit on the shelves, victims of a lack of fashion newness that has reinforced consumers' reluctance to spend given the weak economy.

Despite its 4.6 percent decrease in inventory during the quarter, American Eagle Outfitters Inc. has still had to resort to aggressive markdowns in order to clear merchandise, said Christine Chen, retail analyst at Needham & Co. LLC.Gap Inc. lowered inventories 13.8 percent during the first quarter, improving margins in the process, but contributing to a quarterly comparable-store sales dip of 11 percent. In May, the company's U.S. Gap stores were down 7 percent on a comp basis, Banana Republic slid 5 percent and Old Navy, hardest hit in recent months, was down 25 percent.

Overall, long-term inventory controls are positive, helping retailers to limit their margin vulnerability from clearance selling and build efficiencies that wouldn't be in place if the economy hadn't soured, but they do not help the business bring the consumer back to the mall, Filandro said.

But while consumers may not be taking notice, investors are rewarding retailers that are cutting inventories and penalizing those that are bringing in more product, Chen said.

Inventory reductions will become even more important during the back-to-school season, said Eric Beder, retail analyst at Brean Murray Carret & Co. "With initial fall shipments in less than six weeks, the level of newness will continue to slacken, while the need for price cuts to clear out goods will increase," he said. "We believe most of our universe has continued to aggressively reduce inventory exposure over the past few weeks. These efforts will accelerate even more as June deepens."

This could ease the demand for end-of-season deep discounting. Beder expects clearance levels to be less than last year even with rising unemployment and gas prices.

Analysts predict retailers will continue to cut inventory levels, not only during the second half of the year, but into 2009.

"[Chief executive officers] have no idea what the second half will bring and have no confidence that the consumer will return," Filandro said.

But how does this position stores for a turnaround? Once the consumer starts shopping again, retailers do run the risk of not having enough inventory on hand and could limit their upside sales potential, disappointing Wall Street.

But this scarcity could create demand and more full-price selling and help retailers zero in on the styles that are needed at the stores, said Dana Telsey, president of Telsey Advisory Group.

"Shoppers are more willing to pay for an item at full price if they think it won't still be there the next week," Chen said.Retailers will need to ensure systems are in place to have a fast enough turnaround if this happens. But missing out on sales due to insufficient inventory is hardly a high priority at the moment, as stores struggle with the toughest economic conditions in decades.

"Unless there is a dramatic change in fashion, which is unlikely, retailers can ramp up rather quickly if they see the costumer start to return," Filandro said. "The best situation a retailer can be in at this point is the consumer coming back and not having enough product to suit the demand."

First-Quarter Inventories
Retailers20082007Percent Change
Abercrombie & Fitch347,628,000401,753,000-13.5
American Eagle262,201,000274,846,000-4.6
Ann Taylor252,235,000281,314,000-10.3
Charlotte Russe46,600,00039,500,00 +18
Charming Shoppes371,097,000 469,508,000 -21
Chico’s161,260,000141,473,000 +14
Children’s Place179,065,000159,570,000+12.2
Coldwater Creek126,600,000140,000,000-9.6
Gap 1,555,000,0001,814,000,000-13.8
Hot Topic77,329,00075,062,000+2.9
J. Crew174,493,000144,759,000+20.5
Limited Brands1,224,000,0001,816,000,000-33
New York & Company119,685,000124,351,000-3.8
Pacific Sunwear167,508,000210,200,000-25.5
Ross Stores1,028,600,0001,101,500,000-6.6
Talbots 319,336,000351,528,000-9.2
Tween Brands94,057,00091,878,000+2.4
Wet Seal34,355,00035,486,000-3.1
Urban Outfitters191,287,000168,131,000 +14
Zumiez58,654,00050,285,000 +16.7

SOURCE: Company reports. All figures but percentages are in dollars.

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