Retail winners and losers emerge amid back-to-school, inventory sell-off

justin sullivan

The retail sector is active with the back-to-school season in full swing and major chains are facing a battle to eliminate inventory with markdown strategies. A more cost-conscious consumer and persistent inventory issues drive sustained discounts for return to school shoppers and stratification of retailer performance through the fall.

Despite a shift to virtual learning in the wake of the pandemic, back-to-school and back-to-university spending has increased over the past two years. While total projected back-to-school spending declined by more than $3 billion between 2017 and 2019, it has rebounded to increase by more than $10 billion since that 2019 low. according to the National Trade Federation. According to the same report, spending on returning to college has increased even more.

Overall spending appears to have held up through the summer, according to the National Retail Federation.

“Retail sales increased in July, supported by lower gas pump prices and moderately weaker inflation,” CEO Matthew Shay noted recently. working hard to absorb the impact of rising costs.”

The NRF observed that school supplies are among the most protected segments of retail as consumers shift their consumption habits. Thus, demand remained intact throughout the summer since the back-to-school sales began in July and, according to forecasts, will continue until the fall. For example, the management teams of Foot Locker (FL), Target (TGT), Ross Stores (ROST), The Gap (GPS) and Best Buy (BBY) have each commented on a back-to-school period that lasts longer and is likely to continue to strengthen through September and the end of the third quarter.

“It follows a trend that was really more relevant before the pandemic, which was that people were buying later and later,” said Corie Barry, CEO of Best Buy (BBY), speaking of a longer shopping season. “You probably have parents and kids really trying to figure out; how do I prepare for a year that starts at least a lot more in person and especially at the college level a lot more on campus.

Stock clearance was a major challenge for retailers this summer and required significant promotional activity. “Beyond our assortment of value-priced proprietary brands and top national brands, we’re offering a one-time offer of 20% off Target Circle for students to prep and prep those dorms,” ​​said Brian Cornell, CEO of Target (TGT ). during an earnings call in mid-August, talking about the sustained discount. Cornell said the retailer has extended its teacher readiness event to nearly eight weeks of discounts on supplies and more.

Similarly, Walmart (New York Stock Exchange: WMT) said the back-to-school product discounts are expected to persist through the end of the current month.

“We are taking additional pricing action in the third quarter to improve inventory levels in the second half of the year, and have incorporated more conservative category mix assumptions into our guidance,” said CFO John David Rainey told analysts in August, adding that this applies to merchandise beyond back-to-school items.

In addition, Kohl’s (KSS) and off-price retailers with inventory levels above the historical average like Burlington Stores (BURL), TJX Companies (TJX) and Nordstrom (JWN) are forced to continue heavy discount activity. . Even for those without inventory issues, the downward pressure on prices from major players is rippling through the entire retail space. “We are happy with our inventory in terms of quality and newness and believe this sets us up for a strong back-to-school season, but we need to compete in a more promotional environment,” Foot Locker (FL) CFO Andrew Page said in a statement. august. “Therefore, we factor in more pressure.” He estimated that margins were expected to decline by 320 to 330 basis points in the third quarter due to promotional pressure.

All things are not equal this summer in retail, with some retailers’ ability to manage inventory and inflation issues creating some separation in terms of execution. For example, Dillard’s (DDS) proved able to promote stronger than expected sales in August, while Nordstrom (JWN), The Gap (GPS) and other mall-related retailers were not in able to achieve the goal. Kohl’s (KSS) has been an example in this regard, with company executives and analysts pointing to some disappointment in back-to-school sales and declining margins that the beleaguered retailer can ill afford. “We’re seeing strength in categories like backpacks, kids’ shoes and younger kids’ sizes,” CEO Michelle Gass told analysts in August.

“I would say that we haven’t yet seen the recovery of our business in areas such as denim, children’s uniforms or sizes for older children. Again, a bit of mixed results here, in line with our expectations. But I think most importantly, we’re doing a lot to deliver that valuable message during back to school.”

KSS management lowered year-end margin expectations as promotions are expected to displace remaining inventory as the back-to-school shopping window closes. Slowing sales appeared to vindicate Gordon Haskett analyst Chuck Grom’s bearish expectations ahead of earnings. Grom had pointed out that inventory management issues also indicated that the company was stockpiling inventory that consumers simply didn’t like. On this front, Kohl was certainly not alone. Urban Outfitters (URBN), which saw its own day’s profits drop amid pressure on margins, admitted some of its back-to-school stock didn’t match consumer tastes.

“For Urban, the downfall of their home-based business has been focused on textile products and again, the back-to-school bedding category,” CEO Richard Hayne told analysts in late August. “I would say the problem we had there was, again, leaning a little too much on the old and not focusing enough on the new and not buying enough new style and better,” he added.

Learn more about Macy’s annual outlook.