Inflation gives retail stocks headaches

Rising levels of inflation could be a global concern, but a slowdown in consumer spending is forcing retailers to make deep price cuts on existing inventory. And while that’s good news for the average consumer, there’s no doubt that unexpected price cuts will negatively impact the bottom line.

CNN reported that Walmart told investors in its latest earnings call that it needed to apply deep cost reductions to general merchandise such as clothing and big-ticket items, with the company citing food inflation as one of the reasons why existing stocks were not sold. Walmart is well known for its competitive grocery prices, and changes in consumer spending are, according to the news source, likely to reflect customer priorities.

The key takeaway is that Walmart is certainly not alone in having to make tough pricing choices. And there is a consensus among analysts that overly optimistic sourcing strategies in the retail industry have led to a predictable level of overstocking. Additionally, the continued disruption of parts of the supply chain means that physical products in store may not be what the customer wants to buy.

Junk inventory = price discounts
According to Yahoo FinanceTarget is also looking to trim what a recent note from a Bank of America analyst called “bloated stocks.”

Total retail inventory in May was worth $705 billion, according to the analyst’s note, while acknowledging that some retailers bought too much during the post-pandemic spending boom. Add to that supply chain delays and seasonal shopping habits, and retailers are left with a double whammy of unwanted inventory and limited consumer demand.

“Big box retailers stocked a large amount of items such as household items, electronics and big ticket items, expecting continued resilience in demand,” BOA analysts said. “However, consumers have turned quickly to spending on services this year and high inflation is also keeping some consumers at bay.”

Unsold inventory gives retailers a supply headacheUnsold inventory gives retailers a supply headache.

This unsold inventory could also have an impact on the manufacturing industry. And while the overstocking problem in the retail sector may be a short-term problem, there is a risk of falling orders. In this spirit, Reuters quoted the concerns of Wall Street analysts who believe that Q2 2022 would be “the last three months of a good period that began during the pandemic as consumers used stimulus checks to buy products”. In fact, manufacturing activity slowed to a two-year low in June, the news source said.

Simply put, rising prices for physical goods are part of the reason inflation continues to rise, while the discretionary nature of consumer spending means retailers need to rethink their priorities. Doug McMillon, CEO of Walmart tell investors in the earnings call, the company expected customer spending on general merchandise to slow for the rest of the year, an admission that fits perfectly with how BOA analysts view the current state of the retail business.

“There is a mismatch between supply and demand in stocks,” they concluded. “In other words, stock inventory is not what consumers are trying to buy.”