Retailer inventories are at record highs, which could be bad news for the economy – The Washington Post | Directory Mayhem

Dell has too many computers. Nike swims in summer clothes. And The 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 spate of unsold merchandise that’s hurting profits, derailing vacation plans and threatening to dampen overall U.S. economic growth.

In response, many of the country’s biggest retailers are starting holiday sales earlier than ever, hoping to clear their inventory enough to accommodate a new round of winter orders, according to company filings and earnings calls.

Target started its winter sale spree last week with $6 hoodies and half TVs. Amazon is hosting an unusual second Prime Day sale next week, less than three months after the last. And dozens of other brands, including J. Crew and Nine West, are offering whopping flat-rate discounts online and in stores.

“There’s an increasing smell of desperation in the air because retailers are burdened with a ton of excess,” said Elaine Kwon, managing partner at Kwontified, a retail consulting firm and former executive at Amazon Fashion. “Some brands that claim they never discount will start discounting, especially outerwear, winter clothing, cold-weather items, inventory from last winter — they’re desperately trying to get rid of that before their new stuff arrives.”

Target and Walmart’s vacation plans? Discount early and discount often.

High inventories have plagued businesses all year and played a big part in the recent contraction in the US economy. But mountains of goods have only grown. U.S. retailers sat on a record $732 billion in inventory in July — up 21 percent from a year earlier, according to Census Bureau data.

And the timing couldn’t be worse as Americans’ appetites for clothing, furniture, electronics and other goods have cooled in part due to rising inflation but also changing pandemic patterns related to services like restaurants and travel. Monthly household spending on goods has slowed recently.

With inflation doggedly approaching 40-year highs, many are finding that even the biggest discounts don’t translate into sales. are Americans They spend more of their budget on essentials like gas and groceries and leave less on non-essentials.

As inflation falters shoppers, some retailers are doing better than others

“There is a strong imbalance. Consumer spending is slowing, but orders are still piling up,” said Gregory Daco, chief economist at EY-Parthenon, the strategy consulting arm of Ernst & Young. “Retail inventories are piling up above desirable levels. It is a very difficult rebalancing exercise for retailers to undertake and it will have an outsized impact on the economy.”

Consumer spending accounts for about 70 percent of the economy. Stocks of products consumers buy explain how the economy is growing or not growing. Although inventory numbers fueled economic growth for much of the past year, that changed in the most recent quarter. Between April and June, a heap of goods pushed overall economic growth down 1.9 percent. Economists expect this trend to continue in the next gross domestic product report, which is expected later this month.

“We’ve seen in the last few reports that inventories were a key swing factor — it was a massive drag on GDP growth in the second quarter and that’s likely to continue,” said Daco, who expects a recession next six months. “If anything, this destocking — the destocking cycle that retailers are entering — will exacerbate the downturn.”

The US economy contracted again in the second quarter, reviving fears of a recession

Meanwhile, additional goods pose new challenges for trade, including lack of storage space and lack of money. Concerns about lower earnings have also led to dramatic stock market sell-offs.

Target’s shares are down more than 34 percent so far this year, mostly due to concerns about inventory levels. Nike’s shares fell nearly 13 percent in one day in late September after the retail giant said it had to “aggressively” devalue products on its website and outlet stores.

“Because we’ve had delayed products for the spring, summer, and fall seasons … we effectively have a couple of seasons that are hitting the market at the same time,” said Matt Friend, Nike’s chief financial officer, on a earnings call last week. “We decided to take that inventory and liquidate it more aggressively.”

Not even the country’s largest online retailer is immune to inventory problems. An Amazon warehouse near Nashville was overwhelmed by last winter’s puffy jackets and summer cans of bug spray, according to an Amazon worker who spoke on condition of anonymity for fear of losing his job. (Amazon founder Jeff Bezos owns the Washington Post.)

“Our facilities are overflowing with excess inventory,” the employee said. “We were prepared for a whole new system where everyone would be constantly ordering from Amazon, and that just wasn’t 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.

Target cuts prices as pandemic-era inventory piles up

Meanwhile, department store chain Kohl’s has 48 percent more inventory than it did a year ago, in part because it held back $82 million worth of pajamas, fleece and other winter items that arrived late for last year’s holiday season. It is planned to bring these products to the shelves in the fall.

“We’re actively working to reduce inventories,” Jill Timm, the company’s chief financial officer, said in an earnings call in August. “We were aggressive in both clearance and promotions.”

Sweeping rebates could help ease some of the pain of inflation. Overall prices are up 8.3 percent year over year, according to the Bureau of Labor Statistics, a notch down from summer highs but still well above historical norms.

There are already signs that prices are easing in some parts of the economy. Household appliances, bedroom furniture, jewellery, televisions and smartphones were cheaper in August than in July.

“Prices will go down,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “To some extent, we’re already seeing it: disinflation, if not deflation, in some areas where companies just need to deleverage.”

Charlie Reid, owner of Charlie’s Computers & Emporium in Las Vegas, is discounting dozens of laptops by 30 percent or more. He has nearly triple the number of refurbished PCs than he hoped.

Sales have been buoyant throughout much of the pandemic as people bought laptops for remote work and school supplies. But as life has returned to normal, demand has fallen, he said.

“As far as basic, basic laptops go — HPs, Dells — there just doesn’t seem to be much interest left,” he said. “Towards the beginning of the year they started piling up in our back room. People seemed to lose interest.”

The US economy is stumbling into the final stages of 2022 and is facing new pressures

After more than two years of completely unpredictable manufacturing and transport-related fluctuations, even devaluing items has become a difficult calculation for retailers. There is a sense that the supply chain is just one Covid-related shutdown or geopolitical catastrophe away from another round of shortages and delays. Some retailers are reluctant to sell discounted products now, only to later have to replace them with higher-priced merchandise.

“More than in the past, traders are holding inventory while waiting for things,” said Brian Ehrig, partner at consulting firm Kearney. “There’s 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 materialize.”

In Abilene, Texas, executives at Andrews Furniture are canceling orders for sofas, beds and dressers now that buyers are pulling out. According to Scott Andrews, an executive at the company, the company has about 20 percent more inventory — mostly upholstered chairs and other living room furniture — in its warehouse than usual.

“At the beginning of the pandemic we saw where buying habits were going and tried to gauge that, but now we have too much,” he said. “People change their habits. They go on vacation instead of buying another sofa. I’m constantly looking at our stock levels and trying to figure out how to process these additional items.”

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