inventory retail stores stockroom inventories

Retailers are tightening up — and at just the right time.

In a trend driven out of both need and desire, stores of all shapes and sizes seem to have found inventory religion.

A WWD spot check of 10 major retailers found year-over-year inventories were down 1.2 percent at the end of the second quarter, on average, as sales for the three months fell a lesser 0.7 percent.

The stockroom cuts, which are significant, come just as hints of optimism surface, with companies from Urban Outfitters Inc. to Macy’s Inc. pointing to signs that apparel is finally finding its footing.

If fashion is indeed on the way back after a long drought (there are still plenty of skeptics), having less inventory on hand will help stores sell more at full price and fatten fall profits.

That would be a welcome respite after a long stretch when optimistic plans, unseasonable weather, lackluster fashions and apathetic consumers left retailers with goods overflowing from their warehouses.

That excess inventory led to wild price promotions that have whittled away at stores’ credibility with consumers.

“We should see some markdown pressure go away,” said John Kernan, analyst at Cowen and Co. “People want to turn [inventory] faster, they want less inventory, whether it’s the brick-and-mortar channel or the vendors. They can be much more on trend and chase what’s working, versus stacking inventory. It’s retail inventory 101, trying to sell more with less inventory.”

Kernan said retailers were caught with too much inventory as they sought to get the balance right with their omnichannel brick-and-click position, as vendors built out their own stores and shoppers got burnt out.

“It’s almost the over-commercialization of everything now; it’s just constant, in your face, 24/7 retail and interaction with all these different brands and channels, whether its social media or e-mail,” he said. “I think the consumer got overloaded and the supply of product didn’t slow down fast enough.”

It’s an easy line to describe but hard to walk, particularly for the large publicly traded retailers that are under constant pressure from investors to maximize sales and profits.

Paul Erickson, senior vice president of client services at consultancy RMSA Retail Solutions, said women’s apparel has a shelf life of about eight to 10 weeks, meaning that stores ideally should sell through their full stock about five times a year — about what the fast-fashion chains do.

“That would be an absolute minimum amount of turn to really have a healthy store with a good strong inventory that’s going to drive business,” Erickson said. “Once merchandise becomes older than three months, it is absolutely tying up your money.”

Erickson, who works with independent retailers, advises them to not buy more than a 10-week supply of goods and to clear out slow-moving merchandise quickly.

“Once they recognize a mistake, where merchandise is not going to sell, don’t wait four, five months to do it,” he said. “Take it out and kill it, mark it half off.”

Jill Standish, senior managing director of retail at Accenture, which recently invested in analytics firm DynamicAction, said retailers are starting to become more data savvy as they manage inventory.

DynamicAction, which helps retailers in 120 countries optimize their businesses, found that the value of inventory its clients held fell on an average of 5 percent from January through July.

But there are risks in cutting back. Standish said out of stock products were up 8.5 percent over the same period.

“It’s not just inventory levels,” she said. “Is it the right inventory? The key is, as these retailers are going into the holiday season…are they starting to look at where they’re putting that inventory and allowing for flexibility of fulfillment.”

The trick, she said, is having a way to be able to track inventory so it can be put to the best use, either going to store shoppers or being used to fulfill online orders.

As retail executives met with analysts last week to go over results, inventories came up repeatedly — a timely topic especially since cargo shipments at the port peak in August.

“We’re trying to strike the right balance of being tight and lean on inventory but not cutting off the opportunity to positive comp, mostly using better average unit retail, said Sabrina Simmons, Gap Inc.’s chief financial officer.

The company — which logged a 2.7 percent drop in inventory at the end of the second quarter, as sales fell a lesser 1.2 percent — was aggressive in its efforts to clear summer merchandise ahead of fall.

Although inventories are in constant flux as retailers zero in on just the right mix, the cutbacks sweeping through stockrooms also speak to broader changes across the industry.

Edward Record, chief financial officer of J.C. Penney Co. Inc., which drove sales gains with smaller inventories last quarter, said the company is focusing on smaller buys.

“The old days of buying the whole spring set at one shot, or the whole fall delivery comes in September, those days have gone, probably never to return,” Record said. “As we define our new process with product development, I think looking at writing orders in smaller chunks and smaller delivers will help with churn, will help what we might describe about having smaller order quantities and being more right….That is when we get into trouble with private brands is when you’re backed up on something that you don’t want. So, as we move into the future, we’ll be taking things in a more kind of paced way.”

Retailers are also relying more on technology to manage the back of house issues like inventory, freeing employees to focus on the customer-facing part of the business.

Brett Biggs, chief financial officer of Wal-Mart, noted, “By cleaning up our store back rooms, leveraging technology and changing certain processes, we’re improving product availability and enabling associates to be on the sales floor serving customers in a more effective way.”

And that’s what the inventory question boils down to — efficiency. Since inventory is the biggest single expense for retailers, everyone’s trying to get more bang for their buck and drive sales to the max while cutting back the store room.

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