Inventory issues are a boon for this slice of the retail industry

With nothing more than a quick glance at industry headlines, it would be easy to conclude that most retailers are in trouble. Target In last month’s first-quarter earnings report, shareholders warned that “additional markdowns, removal of excess inventory and cancellation of orders” would reduce second-quarter profit margin rates to around 2%.

walmartThe assessment of its inventory levels in the first quarter was a little more optimistic, but only a little. CEO Doug McMillion explained on May’s quarterly conference call, “We appreciate that our inventory is up,” but added, “A 32% increase is more than we want. We will process most or all of the excess inventory over the next two quarters.”

Translation: also look for markdowns to reduce Walmart’s margins.

However, it’s not just the two largest general merchandise retailers that are facing the problem. FactSet data indicates that inventory levels at U.S. wholesalers and retailers have collectively soared into record territories this year, with chain stores buying too aggressively as they emerge from the pandemic in a bid to be prepared. for the revival of consumerism. Target and Walmart’s discounts are mirrored by most of its rivals.

It’s not all bad news, however. Overstock, second-chance retailers like Ollie’s Bargain Outlet (OLLI -1.75%), Burlington Stores (BURL 3.57%), Large lots (BIG 1.03%)and TJ Maxx’s parent TJX Companies (TJX 3.57%) actually benefit from an inventory problem that is proving to be more of a problem than most retailers are currently letting on. And they should continue to enjoy it for some time. Three key dynamics point to this conclusion.

1. Retailers are sitting on too many bad things

Walmart and Target are probably underestimating their current inventory situation.

This is only anecdotal, but it says a lot about how desperate retailers are to reduce their current stock levels. A handful of retailers have reportedly already had clearance specialists take the merchandise as soon as it arrives at a port, without the chain of stores even taking physical possession of it.

Meanwhile, some retailers are increasingly choosing to refund customer returns without actually requiring a return of the merchandise. With the cost of processing returned goods typically being around 15%-30% of the value of the returned item in a normal environment, exorbitant shipping costs and inventory accumulation have made this the lowest cost and most less complicated.

2. An upsurge in store closures

It’s curious. While the pandemic initially caused some already struggling stores to close, it actually slowed the overall rate of store closures. Coresight Research says the United States saw 5,083 (net) new store openings last year, following 5,079 closings in 2020. This is only a fraction of the 9,032 closings in 2019, however, giving a glimmer of light. hope that the industry was ultimately right. cut.

However, the shutdown break is simply rooted in wishful thinking after the COVID-19 funk. It’s like that UBS see it anyway. The banking and brokerage research arm predicts that between 40,000 and 50,000 stores located in the United States will close over the next five years. If and when they do, that inventory will have to be disposed of one way or another. And it’ll likely be at a fraction of its retail value for outfits like Ollie’s and discount clothing retailers like TJ Maxx.

3. Economic uncertainty drives consumers to seek value

Finally, while it remains to be seen whether the current wave of economic weakness will turn into a full-blown recession, it doesn’t have to earn the label to become a problem for consumers. People are feeling the price pinch right now and are already looking for bargains as a result. This momentum will only inflate as silver tightens.

We are already seeing hints to that end as well.

While the Census Bureau’s June retail sales tally shows a 1% increase over May figures and a steep 8.1% increase over June spending last year, a closer look Bureau data indicates that for the second time in three months, spending in the “general merchandise” category actually fell. And even then, retail spending growth has not kept up with last month’s 1.3% inflation rate or the 9.1% year-over-year price increase.

Notably, sales of clothing and home improvement items fell from May levels, while sales of electronics and appliances fell 9.1% year-over-year. The sudden slowdown in these categories is consistent with reports that retailers are now particularly overloaded with these products. Target CEO Brian Cornell even specifically mentioned excess inventory of televisions and kitchen appliances during May’s first-quarter earnings conference call.

In that vein, a recent survey by First Insight points to a dramatic de-prioritization of home decor spending, following a spending spree during the pandemic, with 31% of consumers saying they intend to spend less on clothes then that prices go down. uncomfortably high. Findings from First Insight also indicate that 42% of consumers are now specifically looking for deals, including clearance products.

Connect the dots

Admittedly, the idea is more abstract than not. There’s no way to know the kinds of deals companies like TJX Companies and Big Lots are finding amid the industry’s inventory glut. There’s also no way to accurately predict how much inventory will become available as store closures intensify and order cancellations push manufacturers to shed already-made goods. The future of the economy is equally uncertain.

It is undeniable, however, that something is going on here that is too important to ignore. It all plays into the hands of second-chance retailers TJX, Burlington, Big Lots and Ollie’s, though – and that’s a very good thing for their shareholders.