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Retailers are heading into their most crucial sales period of the year with a very different inventory strategy than they undertook in 2022.

Warehouses are no longer stuffed with merchandise and store shelves aren’t spilling over with discounted goods in hopes of luring wary consumers into last-minute sales. Instead, merchants from big-box retailers like Walmart and Target to more specialized sellers like Best Buy and Dick’s Sporting Goods have pared back their inventories while trying to focus their supply chains more tightly on products that shoppers want.

Forecasting shopper demand has been one of the biggest challenges for retailers mapping out their supply chains during the pandemic, as volatile shifts in buying patterns had consumers switching their spending rapidly from items such as home decor to office apparel and then towards travel.

Many retailers have spent much of the year working through the stockpiles from last year and now say they have cleaned up their distribution centers and their balance sheets.

Minneapolis-based Target cut its inventory 14% for the quarter ended Oct. 28 compared with the same quarter last year, as its comparable-store sales fell 4.9%. The retailer, one of several that chartered ships in 2021 to get around port bottlenecks, ended up overstocked last year with goods such as comfortable clothes and small appliances that were popular during the pandemic but fell out of fashion as consumers returned to offices and restaurants.

“As we built our plans for this holiday season, we maintained our cautious inventory positioning and markdown sense of categories,” said Chief Executive Brian Cornell on an earnings call Nov. 15. “This provides our team the necessary flexibility to quickly adjust to volatile trends, something that has served us well all year. But I want to be crystal clear, that does not mean we’re backing off on newness.”

Supply-chain flexibility has become crucial after forecasting tools were fractured during the pandemic. Some retailers bulked up orders with their vendors to avoid product shortages amid ongoing supply-chain disruptions, employing a “just-in-case” inventory management strategy that left many companies saddled with goods.

David Bassuk, the global leader of the retail practice at consulting firm AlixPartners, said consumer buying patterns are changing more rapidly today than before the pandemic, leaving many retailers unsure of how to best manage their goods.

For this holiday season, “there’s real risk to the inventory being in the wrong categories and in the wrong places,” Bassuk said. “The fact that inventories are slightly down or slightly better than last year is not an indicator that it’s smooth sledding ahead.”

Lauren Hobart, CEO of Dick’s Sporting Goods, said the athletic-goods seller was aggressive in clearing out unwanted inventory in the third quarter to make room for new merchandise. The company’s comparable store sales rose 1.7% for the quarter while inventory was down 2%.

“What is driving our top line sales is our ability to keep our inventory fresh and clean,” Hobart said on a call with investors Nov. 21. “It’s important to bring it in when it’s hot.”

Holiday retail sales in the U.S. are expected to grow at a slower rate this year. The National Retail Federation predicted sales will rise between 3% and 4% over 2022 to between $957.3 billion and $966.6 billion. Last year, holiday sales grew 5.3% to $936.3 billion.

U.S. retail sales have been uneven over the past year as consumers cope with high inflation and spend more on services rather than goods. Retail spending fell 0.1% in October from the month before, the first decline since March following a 0.9% increase in September, according to the Commerce Department.

Electronics seller Best Buy said it trimmed inventory about 4% in the third quarter from last year after adjusting for some orders that arrived late. The company said it expects the items it has in stock will better match what consumers are after. CEO Corie Barry said the company has more video-game inventory available this year, for example.

“We will continue to manage inventory strategically to maximize our ability to flex with customer demand,” Barry said on an earnings call Nov. 21.

Gap said it pared inventory 22% year-over-year in the third quarter as comparable sales fell 2%. The San Francisco-based fashion retailer said taking a disciplined approach to inventory has helped it avoid markdowns while allowing the company to respond to shopper demand more quickly.

For example, “the color red is trending currently,” said CEO Richard Dickson on a Nov. 16 call. “We’re starting to react and respond in real time to make sure that we edit our assortment, both presentation-wise and merchandising, to feature where we do have the color red.”

Vivek Astvansh, a marketing professor at McGill University, said merchants this year face a dilemma around “how much inventory to stock, while ensuring that the assortment is broad enough to cater to varied consumer tastes and preferences.”

The overall ratio of inventories to sales for retailers, excluding motor vehicle and parts dealers, is tight by historical standards. The measure, which tracks how much companies have in stock compared with what they sell, fell to 1.18 in September from 1.21 a year earlier, according to the Census Bureau.

At department store chain Macy’s, tighter inventories helped fuel improved gross margin even though sales declined last quarter. Macy’s inventory was down 6% in the third quarter compared with a year earlier and down 17% compared with 2019. Tony Spring, president and CEO-elect, said the retailer is focusing on “variety versus redundancy.”

“The customer today does not want an endless aisle. They want the best aisle,” Spring said on an earnings call Nov. 16.

Source: The Wall Street Journal November 28, 2023 | By Liz Young