Deborah Weinswig is the founder and CEO of Coresight Research, a global advisory firm specializing in retail and technology. She previously was managing director of Fung Global Retail and Technology, and head of the Global Staples & Consumer Discretionary team at Citi Research. NRF spoke with Weinswig about the impact of the pandemic on inventory.
Coresight has just released its inventory tracker for the first quarter – a time in which much of the world was entering a lockdown. What does the data show?
As retailers have different fiscal year-ends, the quarters under review in this report may not be identical. Most companies in our coverage reported first-quarter results, which ended April 30 and included impacts of the coronavirus. Many retailers closed stores starting in the second half of March and therefore there was little time to make meaningful adjustments to inventory before having to close. The inventory impact from the store closures will likely be more pronounced in the second-quarter report.
In the reported quarter, overall inventory turnover rates remain flat compared with the same quarter last year, which saw inventory accumulation to offset the expected impact of tariffs and support expansion plans.
With nonessential retail in the United States shut down for part of March and the full month of April due to the coronavirus pandemic, we saw sharp differences between the inventory turnover rates of discretionary retailers such as apparel and non-discretionary retailers such as food and drug retailers and mass merchants.
Most apparel specialty retailers reported lower inventory turnover ratios, both compared with the year-ago period and sequentially.
Most food and drug retailers and mass merchants exited the quarter with inventory in good shape. All of the covered department stores that reported first-quarter results witnessed a year-over-year decline in inventory levels at the end of the quarter. Most of the home and home improvement retailers reported an improvement in their inventory turnover ratio compared with the year-ago period.
As stores are reopening, we are seeing a significant return to in-store shopping, as reflected in higher-than-anticipated sales productivity of reopened stores (especially for apparel and department stores). Next quarter, we expect there to be an improvement in the inventory turnover ratios for most covered retailers.
We are seeing a significant return to in-store shopping, as reflected in higher-than-anticipated sales productivity of reopened stores.
What is the broader impact of store closures on excess inventory?
The first quarter remained a mixed quarter from the point of inventory turnovers. With a long period of nonessential store closures, discretionary retailers such as apparel specialty retailers, department stores and our one covered beauty retailer (Ulta Beauty) faced the heat, with inventory turnover ratios declining 10–30 percent year over year.
Essential retailers such as food, drug and mass retailers, on the other hand, saw a surge in sales that was supported by panic buying and stockpiling of food and household essentials – resulting in a 9 percent year-over-year increase in inventory turnover ratios. Home improvement stores were deemed to be essential retailers, explaining the positive 12.5 percent year-over-year growth in their inventory turnover ratios.
In the first quarter, some retailers reduced their merchandise receipts substantially, while some recognized inventory reserve to account for a rise in inventory obsolescence or spoilage due to store closures; this reserve uses the money taken out of earnings for paying cash or non-cash future costs associated with inventory (in accounting terms, an inventory reserve is a contra asset account that writes down the value of the inventory in the balance sheet).
The store closures occurred toward the end of the spring fashion season and continued through the early part of the summer fashion season, creating a timing mismatch for inventory. Retailers had to decide whether to pack the spring collection away for next year, or try to sell it themselves, through off-price or a liquidator. We have seen 30-70 percent and even greater discounts as retailers seek to clear out this inventory and the fall with a clean inventory position.
How do you think retailers will manage their inventory and what suggestions would you offer to maximize profits or blunt losses?
In the first quarter of 2020, most retailers experienced negative impacts of the coronavirus outbreak in their inventory levels. In mid-March, we saw many retailers realigning inventory, before reducing receipts in April and May. To attain sales-to-stock parity, retailers are looking to significantly reduce their inventory levels by the end of the second quarter.
Some retailers, such as Burlington Stores and Ralph Lauren, have invested substantially in inventory reserves to keep their inventories aligned with consumer demand and protect against a future need to make additional markdowns. On the other hand, mass merchandisers such as Walmart and Target are investing to offset out-of-stocks in multiple categories, such as food and general merchandise.
As mentioned above, we have seen many retailers sharply discounting inventory in order to clear it. By doing this, they choose to take the pain from revenue and margin declines in the near term and get it behind them, rather than having to deal with the issue at a later time.