Retailers' stockpiles mean deep holiday discounts starting now
Dell has too many computers. Nike is swimming in summer clothes. And Gap is flooded with basics like T-shirts and shorts.
After struggling with product shortages for much of the pandemic, the country's retailers are now facing the opposite problem: an unprecedented glut of unsold merchandise that's cutting into profits, derailing holiday plans and threatening to drag down broader U.S. economic growth.
In response, many of the country's largest retailers are kicking off holiday sales earlier than ever, in hopes of clearing their warehouses enough to accommodate a new round of winter orders, according to company filings and earnings calls.
Target began its winter selling frenzy last week with $6 hoodies and half-off TVs. Amazon is hosting an unusual second Prime Day sale next week, less than three months after its last one. And dozens of other brands, including J. Crew and Nine West, are offering steep blanket discounts online and in stores.
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"There is an increasing smell of desperation in the air because retailers are saddled with a ton of excess," said Elaine Kwon, managing partner at Kwontified, a retail consulting firm, and a former manager at Amazon Fashion. "Some brands that claim they never discount are going to start discounting, especially outerwear, winter wear, cold weather items, inventory from last winter - they're desperately trying to get rid of that before their new stuff comes in."
High inventories have been plaguing companies all year, playing a big role in the recent contraction in the U.S. economy. But merchandise pileups have only grown. U.S. retailers have been sitting on a record $732 billion of inventory as of July - a 21 percent increase from a year ago, according to Census Bureau data.
And the timing couldn't be worse, as Americans' appetite for clothing, furniture, electronics and other goods has cooled off in part due to surging inflation but also because of changing pandemic patterns toward services like restaurants and travel. Monthly household spending on goods has slowed lately.
With inflation stubbornly near 40-year highs, many are finding that even the deepest discounts aren't translating into sales. Americans are spending more of their budgets on essentials like gas and groceries, leaving less for nonessential items.
"There is a severe imbalance. Consumer spending is slowing but orders are still piling in," said Gregory Daco, chief economist at Ernst & Young's strategy consulting arm, EY-Parthenon. "Retail inventories are accumulating beyond levels that are desirable. It's a very difficult rebalancing exercise that retailers are having to do, and it's going to have an outsize impact on the economy."
Consumer spending makes up about 70 percent of the economy. Inventories of products that consumers buy help explain how the economy is or isn't growing. Although inventory figures helped boost economic growth for much of the past year, that changed in the most recent quarter. A pileup of merchandise dragged down total economic growth by 1.9 percent between April and June. Economists expect that trend to continue in the next gross domestic product report, expected out later this month.
"We've seen in the last few reports that inventory has been a key swing factor - in the second quarter, it was a massive drag on GDP growth, and that's likely to continue," said Daco, who expects a recession within the next six months. "If anything, this inventory offloading - the destocking cycle that retailers are going into - will exacerbate the downturn."
In the meantime, extra goods are creating new challenges for retailers, including a lack of storage space and a shortage of cash. Concerns over diminished profits have also led to dramatic sell-offs in the stock market.
Shares of Target's stock have fallen more than 34 percent so far this year, largely related to inventory concerns. Nike shares, meanwhile, fell nearly 13 percent in one day in late September after the retail giant said it would have to "aggressively" mark down products on its website and in its outlet stores.
"Because we had late product arriving for the spring, summer and fall seasons . . . we effectively have a few seasons landing in the marketplace at the same time," Matt Friend, Nike's chief financial officer, said in an earnings call last week. "We've decided to take that inventory and more aggressively liquidate it."
Not even the country's largest online retailer has been immune from inventory woes. An Amazon warehouse near Nashville has been overwhelmed by last winter's puffy jackets and summer cans of bug spray, according to an Amazon employee who spoke on the condition of anonymity for fear of losing his job. (Amazon founder Jeff Bezos owns The Washington Post.)
"Our facilities have been overstuffed with excess inventory," the employee said. "We were prepared for a whole new system where everybody was going to order from Amazon all the time, and that just hasn't been the case. There's so much leftover stuff - so many big bulky jackets taking up space - that people just didn't buy."
Amazon did not respond to a request for comment.
Meanwhile, department store chain Kohl's has 48 percent more inventory than it did a year ago, in part because it has been holding on to $82 million worth of pajamas, fleece and other winter items that arrived late for last year's holiday season. It plans to put those products out on shelves this fall.
"We're actively working down inventory," Jill Timm, the company's chief financial officer, said in an August earnings call. "We've been aggressive on clearance as well as promotions."
Wide-ranging discounts could help ease some of the pain of inflation. Overall prices have risen 8.3 percent from a year ago, a notch down from the summer's highs but still far higher than historic norms, according to the Bureau of Labor Statistics.
There are already signs that prices are easing in some parts of the economy. Appliances, bedroom furniture, jewelry, TVs and smartphones were all cheaper in August than they were in July.
"Prices will get lower," said Liz Ann Sonders, chief investment strategist at Charles Schwab. "We're already seeing it to some degree: disinflation, if not outright deflation, in some areas where companies just have to work down their inventories."
Charlie Reid, owner of Charlie's Computers & Emporium in Las Vegas, is marking down dozens of laptops by 30 percent or more. He has nearly triple the stock of refurbished PCs than he'd hoped for.
Sales were brisk for much of the pandemic, as people scooped up laptops for remote work and schooling needs. But as life has returned to normal, demand has dropped, he said.
"As far as basic laptops for basic needs - HPs, Dells - there just doesn't seem to be much interest anymore," he said. "Toward the beginning of the year, they just started to pile up in our backroom. People seemed to lose interest."
Even marking down items has become a fraught calculation for retailers, after more than two years of wildly unpredictable manufacturing- and transportation-related swings. There is a sense that the supply chain is just one covid-related shutdown or geopolitical disaster away from another round of shortages and delays. Some retailers are hesitant to sell products at a discount now, only to have to replace them with higher-priced goods later.
"More so than in the past, retailers are holding onto inventory while they wait things out," said Brian Ehrig, a partner at the consulting firm Kearney. "There is still real concern about geopolitical risks that are still out there, so companies are taking a more conservative approach and thinking hard about scenarios that could play out."
In Abilene, Tex., executives at Andrews Furniture are canceling orders for sofas, beds and dressers now that shoppers are pulling back. The company has about 20 percent more inventory - mainly upholstered chairs and other living room furniture - in its warehouse than usual, according to Scott Andrews, an executive at the company.
"Early in the pandemic we saw where buying habits were going and tried to estimate off that, but now we have too much," he said. "People are changing their habits. They're going on vacation instead of buying another sofa. I'm constantly looking at our inventory levels, trying to figure out how to work through these extra items."
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