Apparel retailers brace for discount battle to eliminate inventory glut

U.S. clothing retailers are preparing heavy markdowns to clear shelves ahead of the critical holiday season, as inflation pushes consumers to cut discretionary spending and wait for deals.

Clothing stores are battling a glut of inventory and a split in consumer habits as low-income shoppers prioritize necessities including food and rent, while affluent shoppers replace pandemic leisure wear with outfits desks and cabinets made to measure for going out.

“I’m hesitant to call it a bloodbath, but it’s going to be lousy in terms of discounts and markdowns,” Urban Outfitters chief executive Richard Hayne said during the company’s earnings call on Tuesday. last month. Retailers are faced with too many products “in all areas”, he warned.

Retail sales at clothing and accessories stores remained mostly flat for the past year, according to Census Bureau data. That’s even though apparel prices rose 5.1% year-on-year in August, according to data from the U.S. Bureau of Labor Statistics.

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

This puts retailers in a difficult position. Many have more stock than they need after supply chain issues led to the late arrival of goods ordered for the holidays last year. Many have increased their orders this year ahead of their busiest selling season.

“There is too much inventory even if you adapt to retailers [that have] received goods earlier than normal,” said UBS analyst Jay Sole.

Many retailers reported increased inventory in the second quarter: Foot Locker, Kohl’s and Gap reported inventory up 52%, 48% and 37%, respectively.

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

Some retailers are choosing to carry more stock after being left short last year. Lululemon’s inventory was up 85% year-over-year, but comparable sales were up 23%. Others must discount aggressively.

The Abercrombie Hollister brand recently launched a promotion on its website for jeans at $20 a pair. Gap posted several offers on its website, including an additional 50% off items already on sale.

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

As the holiday season approaches, which runs from Halloween to New Years, a divide is growing between discount brands and luxury brands.

Low-income shoppers are struggling with inflation, said Burlington Stores general manager Michael O’Sullivan. “The current level of promotional activity will not last forever. But during that time 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 split, with “crowdiness being the differentiator.” Younger, lower-income customers spent “much more cautiously on discretionary items and often waited for promotions before buying,” Hayne said.

This bifurcation is obvious because “luxury, in general, is doing very well,” said Jessica Ramírez, senior research analyst at Jane Hali & Associates. Lower-end brands will see more of a “retreat in consumer purchases,” she said.

Gina Drosos, CEO of jewelery retailer Signet, told the FT that the distribution of consumer fortunes was clear due to the different demand for ‘value’ and luxury goods. “Worst is under $250, second worst is under $500, and third worst is under $1,000,” she said, “Best is over $10,000.”

This year’s inventory issues already look likely to affect next year’s results as retailers such as Gap, Kohl’s and Lands’ End shift to ‘pack and hold’ strategies – betting on styles of basics like short-sleeved t-shirts that can be brought back and sold at later dates.

Lands’ End CEO Jerome Griffith said he might postpone some basic spring and summer items, but for more fashion-oriented items, “we want to take advantage of the promotional activity there- down”.

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

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