Retailers have gone from having too little inventory to too much — that’s bad for profits, but good for consumers
Wedding tuxes and golf clubs… Americans are stocking up ahead of the first summer with (mostly) no Covid restrictions. Yesterday, shares of Nordstrom and Dick’s Sporting Goods jumped 10%+ as IRL and outdoor events pushed their sales above pre-pandemic levels. But both Nordie and Dick’s also reported higher inventories, a theme in recent retail earnings:
- Stuffed stockrooms: Shares of Walmart and Target tanked last week, partly because of their bloated inventories. Walmart's inventory was up 33% and Target’s was up 43% from a year earlier.
New luggage > 100-piece puzzles… When the first wave of the pandemic caused a collapse in demand for discretionary goods (think: TVs, appliances), retailers stopped taking new orders and factories halted production. But as demand quickly snapped back, stores rushed to stock up on those items.
- Problem 1: The global supply chain wasn't ready, which caused shipments to miss their window altogether (think: snowblower deliveries in April).
- Problem 2: Now stores are stocked to the brim, just as inflation-weary shoppers are shifting their spending habits toward lower-cost (and lower-margin) essentials like groceries.
It’s the “bullwhip effect” in action... aka: when distortions in demand cause companies to order too much too late. While retailers risk losing billions of dollars in sales from sitting on excess supply, widespread markdowns could cool inflation by making goods more affordable for price-sensitive shoppers. Now all eyes turn to Costco's earnings today: the wholesaler keeps inventories slim on purpose, so any mention of a glut in supply could signal a wider problem for the retail industry.