Retailers Restocking Inventory Face a Potential Postholiday Hangover

Date: Friday, December 10, 2021
Source: The Wall Street Journal

Businesses that have been ordering goods earlier and in larger volumes to guard against shortages are on a knife’s edge, balancing between the possibility of lost sales and the risk of getting stuck with excess or outdated inventory.

Sparkledots Wholesale Children’s Clothing tripled its holiday-season orders because of uncertainty over whether the goods would arrive on time, Chief Executive Ginny Pasqualone said. The Ridgefield, Conn.-based business, whose legal name is VBP Enterprises LLC, imports items from China to supply retail clients in the Southwestern U.S. and has spent five times more on freight this year than in 2020.

“We’d much rather have too much inventory than not enough,” said Ms. Pasqualone. “But then that eats up your margins as well.”

The stakes for retailers during the critical fourth quarter, when sales and profits traditionally peak, are high this year because of supply-chain volatility, transport bottlenecks and the uncertain impact of the Omicron variant of Covid-19 on shopper behavior.

“If you go over budget, people will be mad at you, but you’ll still have a job come Monday,” said Ted Stank, supply chain professor at the University of Tennessee’s Haslam College of Business. “And so the tendency is to make sure that we don’t stock out.”

U.S. consumer demand has been strong this year, and has been picking up steam heading into the holidays. Sales at online and physical stores rose 14% during the Thanksgiving weekend compared with last year, according to data released by Mastercard SpendingPulse.

Broad measures show retailer stocks remained severely depleted heading into the fourth quarter. U.S. retailers held $602.7 billion in inventories in September, according to U.S. Commerce Department figures, compared with the $664.4 billion they held in September 2019, before the pandemic upended supply chains.

But record backups of container ships in the U.S. and logjams at other distribution chokepoints suggest big volumes of goods are still tied up in supply chains. That leaves many businesses in limbo as Christmas approaches and facing a possible flood of out-of-season merchandise in the New Year.

Deep-pocketed companies such as Walmart Inc., Target Inc. and Home Depot Inc. say their inventories are in good shape after loading up early on products and even chartering ships to ensure items arrive in time for the holiday peak.

Merchants with smaller shipping budgets or less clout with suppliers have been hedging their bets, with some ordering double or even triple their usual volumes in case some orders don’t show up on time, or at all.

The risks of overbuying are higher for retailers that sell a narrow range of products or goods that age quickly, such as fast fashion or Christmas sweaters, than they would be for general merchandisers whose array of merchandise provides a natural hedge.

Even bigger operators like apparel retailer Gap Inc. are feeling the heat after coronavirus-related factory closures in Vietnam slowed orders in the third quarter, raising the potential for late-arriving orders. “If we think that things are going to be too late for the holiday season, we won’t put them in stores or online and have them generate markdowns,” Gap Chief Financial Officer Katrina O’Connell said in a Nov. 23 earnings call.

In surveys by Morgan Stanley, more than 50% of companies including retailers said in each of the first three quarters this year that they planned to increase inventories. In the quarterly surveys in years before the pandemic, about 20% of shippers on average planned to increase inventories.

Retailers and suppliers typically plan their inventories months in advance, making it tough to respond to gyrations in consumer demand or the prolonged supply-chain volatility due to Covid-19.

“If you’re a midsize retailer, you have to decide what demand will be in Christmas in about May,” said Chris Caplice, executive director of Massachusetts Institute of Technology’s Center for Transportation & Logistics. “Forecasting for demand is just kind of out the window during the pandemic.”

This year, boutique owner Jodi Springer doubled the holiday inventory orders for Sassy Southern Designs, her women’s clothing and home décor store in Lawrenceburg, Tenn., because of high demand and shipping bottlenecks. Now she is worried some Christmas-themed items will arrive late, forcing her to hold on to the merchandise until next year.

“That’s just not feasible, I need that cash flow now,” Ms. Spring said. “So I’m just hoping and praying over here that things arrive.”

Merchants that end up with more product than planned often rent out extra warehouse space until they can liquidate the inventory. Such short-term arrangements tend to be more expensive than standard leases, and the value of the inventory can drop quickly, said Erik Trum, retail practice lead at Atlanta-based consulting firm Insight Sourcing Group LLC.

Mr. Trum said retailers should already be planning for January’s leftovers. Merchants looking to maintain more control over their brand can cut some losses by unloading extra inventory through pop-up or flash sales targeting certain customers, he said, or selling through their own outlet stores.

Many items will likely end up at discount chains like T.J. Maxx or Marshalls, both owned by TJX Cos. Liquidation typically yields pennies on the dollar. Persistent shipping bottlenecks may leave some retailers working to redirect entire late-arriving containers to discounters before the merchandise gets deeper into the company’s own supply chain, Mr. Trum said.

Not all retailers expect to discount heavily on outdated inventories.

Retailer Lands’ End Inc. said its supply-chain expenses are rising as it steps up efforts to get goods in stock. But seasonal items such as outerwear and boots may sell for closer to full price in January than they would normally, Lands’ End Chief Executive Jerome Griffith said during the company’s  Dec. 2 earnings call, if customers couldn’t get their hands on the gear earlier in the season.


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