Unusual Christmas shopping expected for Target, Walmart

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Our biggest retailers have way too much inventory and not enough consumer buzz. This is a problem before the Christmas shopping season.

Mass retail giants like Best Buy and Bed Bath & Beyond have bloated inventory and falling sales. Meanwhile, retailers like Amazon and Dollar General have seen an increase in inventory values ​​this summer, according to their latest earnings reports – even as Wall Street begs companies to stop stocking up.

Companies have struggled to keep inventory levels on par with unusual consumer spending through 2020 and 2021. But that retail mania finally came crashing down earlier this year. Retailers have been left with what Urban Outfitters CEO Richard Hayne calls “a sonic inventory boom.”

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During first-quarter earnings calls, these companies admitted they had continued to build inventory as if the consumer shopping frenzy of the previous pandemic was continuing unabated. Recently, major retailers have sought to shed inventory with costly tactics such as canceling orders, reducing prices, or restocking low-selling products.

However, it has proven difficult for retailers to stop stockpiling entirely. Many large retailers indicated in their second quarter results that they increase their stocks of goods compared to the previous three months:

Change in merchandise inventories from Q1 to Q2
walmart -2.14%
Amazon 9.05%
Home deposit 3.13%
Walgreens -4.77%
Target 1.57%
Lowe’s -4.50%
best buy -3.44%
General dollar 13.93%
TJX Companies 1.34%
Kohls 7.98%
Bed bath and beyond 1.97%
Most first quarters comprised the three months ending the last week of April or the first week of May. Most second quarters comprised the three months ending the last week of July. (FreightWaves analysis of company data)

And whether they managed to clear second quarter inventory or saw stores get even fuller, retailers with bloated inventory continue to struggle with average or negative sales growth:

Percentage change from Q2 2021 to Q2 2022
walmart Inventory 25.48%
Sales 7.07%
Amazon Inventory 58.19%
Sales 10.19%
Home deposit Inventory 37.97%
Sales 6.50%
Walgreens Inventory 2.24%
Sales -4.21%
Target Inventory 36.07%
Sales 3.33%
Lowe’s Inventory 11.59%
Sales -0.34%
best buy Inventory -5.83%
Sales -12.10%
General dollar Inventory 31.37%
Sales 8.96%
TJX Companies Inventory 39.26%
Sales -1.94%
Kohls Inventory 47.60%
Sales -8.52%
Bed bath and beyond Inventory 12.54%
Sales -25.09%
Many retailers saw inventory rise more than sales in the second quarter of 2022, compared to a year earlier. Most second quarters comprised the three months ending the last week of July. (FreightWaves analysis of company data)

It is very difficult to control such an inventory situation. Orders from suppliers and distributors are made months in advance. And while some smaller retailers are actually still Undersupplied by the retail madness of 2020 and 2021, big box stores may have received their orders months ago – just in time for consumer demand to soften.

Moreover, the bullwhip effect is only accelerating the current stock crisis. Here’s how it works:

Let’s say you’re the manager of a metro Indianapolis outlet of Rachel’s Amazing Stuff, a revered retail conglomerate. You estimate that next month 10 people will buy a fancy air fryer. But just to be sure, you decide to buy 20 air fryers from your distributor. Given the past two years, it’s a safe bet that more people will be buying more air fryers than expected, and if not, you can stock up on some for the upcoming holiday season.

So the distributor, Premack’s Crap, places its order for all 20 air fryers. The distributor decides to place an order for 40 air fryers for the same reason the retailer increased its order. The vending machine owner may have remembered 2021 when he had to pay expensive air freight to stock up on goods. So the distributor will make a bulk order early to make sure he can secure everything he might need for the coming year.

Finally, this order for 40 air fryers arrives at the manufacturer, called MODES Manufacturing LLC. She decides to produce 80 oil-free fryers because why not? Business is booming and MODES Manufacturing is full of cash. This cycle, my friends, is how you end up with 80 air fryers when the demand forecast was only… 10. (And, by the way, everyone’s stimulus checks have run out, so in fact no one is going to buy air fryers.)

This might help illustrate why at Bed Bath & Beyond right now, you can indeed pick up a deluxe air fryer for 50% off. (Incidentally, in the second quarter of 2022, compared to the same period last year, Bed Bath & Beyond had 12.5% ​​more inventory – but sales were down 25%, according to its financial documents. quarterly.)

It’s going to be a weird “peak season” for Target, Walmart, Amazon and more

Admittedly, this is a very difficult time to plan orders as a retailer. Phil Levy, chief economist at freight forwarder Flexport, pointed to confusion surrounding mortgage rate hikes as a complicating factor. If we expect mortgage rates to remain favorable to consumers, a retailer like Wayfair or Pottery Barn should continue to order more sofas and bed frames from their warehouses. Even the sharpest forecasters, however, aren’t sure.

Early fall – which is right now – is theoretically “peak season” for major retailers. Containers full of stuff (glorious stuff!) usually arrive at US ports in September and October for you to buy in November and early December.

Yet it’s not even clear if people will participate in typical peak season activities, Levy said. One indication that retailers are spooked is clear in the ports of Long Beach and Los Angeles, which have been overwhelmed in recent years with your exercise bikes, TVs, and more. At a time when they should see steady imports heading into the holiday shopping season, these ports are now seeing some of their weakest weekly sea shipments since June 2020.

The largest container shipping port in the United States is seeing unusually low volumes compared to the past two years. (SONAR FreightWaves)

The collapse of spot rates for truck movements is another indicator of weakening product demand. Excluding diesel prices, fares are down about 37% since the start of the year, according to the FreightWaves National Truckload Index. Deutsche Bank’s Amit Mehrotra wrote in an Aug. 31 note that this freight slowdown is indeed linked to retailers’ desire to have less stuff in their warehouses.

Transport aside… back to the nightmare before Christmas.

Walmart chief financial officer John David Rainey said during second-quarter earnings calls that the giant was “well positioned” for the 2022 holiday shopping season. Christina Hennington, director of growth at Target, said that the company’s vigorous growth in toys and entertainment was a promising sign for the holidays. And Urban Outfitters’ Hayne also reported a renewed interest in gifts and entertainment – at full price.

It’s a tricky battlefield. Let’s imagine, for a moment, that you are the owner of Rachel’s Toy Emporium. October and November are your hottest months. Since you don’t know when your customers are going to buy toys, your options are to place orders early or late.

If you’re too early, Levy said, you have to store your goods for months. And even more frustratingly, you’re in the position of having to plan what you need in store even further in advance than usual. Because there is little consensus on what is happening with the economy, such a forecast is difficult.

And if you get there too late, Levy said, you need to liquidate your inventory or spend extra money to stock everything.

“You can be severely penalized for getting it wrong either way,” Levy said. “If you underestimate the demand, you can’t meet those sales. If you overestimate demand and open a plant you never use, you’re in trouble. There is no safe port.

Not my prettiest message to retailers, but those are the breaks. Email your thoughts and buying plans to [email protected]and make sure to subscribe to MODES for the latest transportation news.

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