That’s the question retailers are pondering as the holiday season — and the accompanying price promotions — hits full boil. As sale signs scream 40, 50 and even 70 percent off on fall and winter merchandise, retailers face an even tougher quandary: Given the schizophrenic consumer, have they guessed right on inventory levels for spring?
The holiday inventory buys have not been uniform across retail. Some chains are being cautious while others are prepping for sales and market share gains. But, in general, retailers are also trying to push more of the burden off onto vendors, who are increasingly forced to contend with higher cotton costs, supply chain disruptions and global economic woes.
The result is a game of pass-the-parcel between retailers and their suppliers that will play out well into 2012, with whoever ends up holding the package potentially losing big financially. The fallout won’t be truly revealed until vendors and retailers begin reporting year-end results in February.
And even when it’s the retailers who are left with excess inventory to clear — outerwear is a potential trouble spot given the warmer-than-usual weather so far this season — they can be expected to turn to their suppliers for markdown support to help prop up margins.
“If [retailers] are unable to pass the cost on to the consumer, a lot of that cost is going to get pushed back to the apparel vendors,” said Scott Tuhy, debt analyst at Moody’s Investors Service.
Nobody thinks this year could be as bad as 2008, when the industry was caught flatfooted by the financial crisis. But Tuhy said fourth-quarter profit margins are at some risk, particularly in the moderate sphere, where the shopper is strained economically and chains are trying to force through broad-based price increases related to higher costs in the supply chain. November retail apparel prices rose 4.8 percent over a year earlier, the biggest gain for the month since 1987.
Determining how much inventory to stock is essentially a guess at how shoppers will be feeling several months in the future. And right now, retailers — perhaps like consumers — find themselves more than a bit befuddled.
“We see retailers coming into the holiday season being really bloated or being really conservative,” said David Bassuk, managing director and head of AlixPartners’ global retail practice. “The retailers are really all over the place. The apparel specialty stores were way out of whack” at the end of the third quarter.
“We’re facing a time when retailers are struggling to determine how they plan inventories across all of these channels and categories and we’re seeing a situation where they’re mismatched with perceived demand,” Bassuk said.
“The consumer has the power and is now in the driver’s seat,” Bassuk said.
Misjudging the consumer mood can be very costly.
Chico’s FAS Inc. bet big at its flagship division and missed, leaving inventories up 38.2 percent at the end of the third quarter on just a 11.5 percent gain in revenues for the period. “We were really coming off some very, very strong momentum and, honestly, I took a shot,” president and chief executive officer David Dyer told Wall Street analysts. “We went for the inventory. We thought that we could continue that momentum, and it didn’t happen.” Unbowed, Dyer said he was taking the same bet again, this time in the growing White House|Black Market division.
Limited Brands Inc. prefers to aggressively chase inventory and inched ahead with its stock levels up 5.6 percent at the end of the quarter despite a 9.6 percent revenue gain. On the other hand, Lululemon Athletica Inc., tired of chasing goods to keep up with sales, chose to get ahead of the curve with a 76.9 percent rise in inventories on a 31 percent increase in revenues.
Department stores have generally been able to keep inventory more in line with sales growth — although they have occasionally felt pressure on certain categories. Saks Inc., for instance, warned in its third-quarter conference call that sales of women’s designer fashion had been disappointing and that it might have to take more markdowns in the fourth quarter to clear inventories. (For a complete run down of inventory levels at the end of the third quarter, see chart below.)
All of this is playing out in the spotlight of the holiday season, when retailers courted shoppers by extending hours, cutting prices and even opening their doors in the wee hours of Black Friday. But after a first rush of holiday sales optimism after Thanksgiving, retailers have become more cautious as the consumer responds to deals, deals and more deals — and almost nothing else. As holiday shopping ticks down the anxiety is growing — stirring even more uncertainty at retail over just what the consumer mood will be in 2012 and whether retailers struck the right inventory balance when they placed orders this fall.
To help ease their worries, Christian Buss, an analyst with Credit Suisse, said retailers are trying to get vendors to take on as much of the inventory risk as possible.
“It’s better to be a retailer than a vendor right now and it’s better to be a multibrand retailer than a mono-brand retailer,” Buss said. “If vendors are building big inventories and mono-brand retailers are building big inventories and demand were to be light of expectations, than they have markdown risk.”
It’s an environment that plays to the strengths of department stores, which were not long ago seen as the dinosaurs of retailing but now appear to be benefiting from their broad offerings and larger vendor base.
As retailers try to pass inventory risk down to their suppliers, apparel producers are being mindful of how much stock they can handle and how much future business they can expect from their retail clients.
“If the retailers are looking to the vendors to hold more inventory, but are not making commitments, we think that it’s incumbent on the vendors to have a very good handle on what his reorder will be, especially on replenishment,” said Andrew Tananbaum, executive chairman at factor Capital Business Credit. “People who have less visibility of the future needs of the retailers are probably better off maintaining their margins on lower sales.”
EXCLUSIVE: @tomford is opening its first-ever beauty store. The boutique, which opens November 20 in London’s Covent Gardens, was designed with the over-the-top glam Ford is known for. Read the full story on WWD.com, link in bio. #wwdbeauty #wwdnews (📷: Simon Wagner) #TomFordBeauty
New York-based DJ @harleyvnewton threw a party to celebrate the holiday collection of her dress and pajama line @hvn at the Ladurée Beverly Hills. It Girls @katebosworth, @rashidajones and more joined in on the fun, which included cocktails, croque monsieur sandwiches and a photo booth. #wwdfashion (📷: Owen Kolasinski/BFA.com)
For the holidays, @Burberry partnered with 20-year-old artist @blondeymccoy on a series of three outdoor murals in downtown Manhattan. The murals are McCoy’s interpretation of a Christmas eve party, the idea of charity and the spirit of family. His third mural, pictured here, is the most personal. The image depicts McCoy’s grandparents and father in London’s Trafalgar Square in the Seventies. “My work often features lots of sentimental objects.” #wwdeye
For spring 2018, designers applied bold colors and cartoonish motifs on everything from sneakers and belts to key chains. See all the top men’s accessories trends on WWD.com. #wwdtrends (📷: George Chinsee; Prop Styling by @rnasti; Market Editor: @luiscampuzano)
The @dior-sponsored @guggenheim international gala pre-party has a history of drawing cool-girl musical acts to serenade the crowd –– and last night was no exception. @haimtheband performed songs both new and old, and lured a star-studded audience with the likes of Rebecca Hall, Kate Mara, Mamoudou Athie and more. #wwdeye (📷: @lexieblacklock)
In a partnership between the @metopera and the @englishnationalopera, “Marnie” was born. The opera, with costumes sponsored by @mrporterlive, is an adaptation of the 1961 thriller by Winston Graham. Arianne Phillips, who created the costumes, is no rookie: She’s styled Madonna for her tours and created costumes for a myriad of films in the past. Read WWD’s interview with Phillips, where she talks about her inspiration for the opera’s costumes on WWD.com #wwdfashion
@barneysnyc took a different approach to their holiday windows this year. Instead of Christmas decor, Barneys tapped @thehaasbrothers to tell a story of positivity, gratitude and inclusivity via heartwarming silliness and humor. “It’s about kids and it’s about coming together and being family and loving each other,” said Simon Haas. #wwdfashion (📷: @joshuascottphoto)
Beauty influencer @kandeejohnson makes her foray into hair care with a collaboration with @ogx_beauty — making it the first time that OGX has teamed up for a product creation. The collab includes shampoos and conditioners in three scents. At 39 and a mom, Johnson is a different profile than the emerging social media stars, but is considered one of the pioneers of the digital beauty influencer world. Read WWD’s interview with her on wwd.com, including the strangest beauty product she’s ever tried #wwdbeauty