MarketsSep 20, 2022
State of the economy as told by retailers
Inventory Surplus
Victor Lei
Discover
Shoppers get ready; Black Friday is arriving earlier this year. Retailers — eager to clear inventory before the holidays — are about to dump their excess inventory on you in the form of discounts.
Just how much inventory? Foot Locker (NYSE:FL) and Kohl’s (NYSE:KSS) hold 52% and 48% more inventory than last year, respectively.
Retailers are struggling with excess inventory resulting from:
1/ Ordering too many of the wrong items — loading up on COVID items while shoppers were already preparing to return to normal life.
2/ Inflation shifting spending toward necessities and cheaper goods. 85% of consumers say rising prices has changed their shopping habits (Morning Consult).
Urban Outfitters CEO said, “it’s going to be ugly in terms of the amount of discounting and markdowns.” Sounds good for consumers, but retailers are about to watch their profit margins evaporate.
“Luxury, in general, is doing really well,” per senior research analyst of Jane Hali & Associates (FT).
In August, luxury fashion platform Farfetch (NYSE:FTCH) reported strong earnings and narrowing losses. Still, the market hasn’t shown much mercy to these luxury stocks, with, and down 25%, 35% and 72% this year, respectively.
The S&P Retail Select Industry Index is down 30% in 2022 — underperforming the S&P 500. But apparel stocks have fallen even harder, with brands like American Eagle and Abercrombie & Fitch losing over half their value.
Still, the sentiment isn’t showing in the data yet. U.S. retail sales have largely remained flat this year, rising 0.3% in August, with 8 of 13 retail categories growing.
The one retail stock that’s still outperforming the S&P 500 — Lululemon (NASDAQ:LULU). Lulu is holding 85% more inventory, but they’re still seeing strong sales even in this market.
