Clothing retailers set for discount battle to clear inventory glut

U.S. clothing retailers are preparing deep sales to clear shelves ahead of the critical holiday season as inflation pushes consumers to cut back on discretionary spending and wait for deals.

Clothing stores are battling a glut in inventory and a split in spending habits, as low-income shoppers put necessities, including groceries and rent, while wealthy consumers replace pandemic leisurewear with bespoke office wear and wardrobes for going out.

“I hesitate to call it a bloodbath, but it’s going to be ugly in terms of the number of discounts and markdowns,” Urban Outfitters Chief Executive Richard Hayne said on the company’s earnings call last month. Retailers are faced with too many products “across the board,” he warned.

Retail sales of clothing and accessories stores have remained largely flat during the last year, according to data from the Census Bureau. That’s despite clothing prices rising 5.1 percent year over year in August, according to data from the US Bureau of Labor Statistics.

But inflation is beginning to weigh on demand, with 85 percent of American adults saying rising prices have changed the way they shop, prompting consumers to seek deals, discounts and coupons or simply buy less. , showed a new report from polling group Morning Consult. .

That’s putting retailers in a tough position. Many have more inventory than they need after supply chain tangles caused last year’s holiday orders to arrive late. Many increased orders this year ahead of their busiest selling season.

“There is too much inventory out there even if you adjust to retailers [that have] received products earlier than normal,” said Jay Sole, retail sales analyst at UBS.

Numerous retailers reported inventory increases for the second quarter, with Foot Locker, Kohl’s and Gap reporting inventories up 52%, 48% and 37%, respectively.

“Retail has historically discounted when inventory was slow,” said Simeon Siegel, managing director of equity research at BMO Capital Markets. “But retail hasn’t had a historical version of 2020, 2021 and 2022.”

Some retailers are choosing to carry more stock after going short last year. Lululemon’s inventory was up 85 percent year over year, but its comparable sales were up 23 percent. Others have to discount aggressively.

Brand Abercrombie Hollister recently ran a website promotion for jeans at $20 a pair. The Gap launched multiple deals on its website, including an additional 50 percent discount on items already on sale.

American Eagle eliminated its excess spring and summer merchandise by resorting to sales that hurt profits by $30 million. “This is clearly an unprecedented time in retail,” CEO Jay Schottenstein said on his latest earnings call.

A stark divide is emerging between discount and luxury brands as the holiday season, which runs from Halloween to New Year’s, approaches.

Low-income shoppers are struggling with inflation, said Burlington Stores Chief Executive Michael O’Sullivan. “The current level of promotional activity will not last forever. But as long as it does, it will create a very significant headwind for us,” he said.

Urban Outfitters, which also counts high-end Anthropologie and Free People among its brands, said customer behavior across its brands has been divided, with “wealth being the differentiator.” Younger, lower-income customers spent “much more cautiously on discretionary items and often waited for promotions before buying,” Hayne said.

That bifurcation is evident as “luxury, in general, is doing very well,” said Jessica Ramirez, a senior research analyst at Jane Hali & Associates. Lower-end brands will see more of a “slide back in consumer purchases,” she said.

Gina Drosos, CEO of jewelry retailer Signet, told the FT that the divide in consumers’ fortunes was clear due to different demand for “value” and luxury goods. “The worst is less than $250, the second worst is less than $500, and the third is less than $1,000,” she told her: “The best is more than $10,000.”

This year’s inventory challenges are likely to weigh on next year’s results, as retailers including Gap, Kohl’s and Lands’ End turn to “pack and store” strategies, betting on staple styles like short-sleeved T-shirts. that can be taken out and sold at a later date.

Lands’ End CEO Jerome Griffith said he might carry over some spring and summer staples, but for more fashion-oriented items “we want to take advantage of the promotional activity that’s out there.”

Apparel stocks have underperformed the broader market. So far this year, shares of American Eagle are down 57 percent, Abercrombie is down nearly 56 percent, Gap is down more than 48 percent, and Urban Outfitters is down more than 26 percent. The S&P 500 is down nearly 19 percent so far in 2022.

This would be a tough year as retailers tried to align inventory with sales growth, UBS’s Sole said. “The situation is that retailers will try to use the rest of 2022 to get in position for a more normal 2023,” he said.

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