Holiday hangovers: Can retailers clear out their inventory piles as the season ramps up?

Holiday hangovers: Can retailers clear out their inventory piles as the season ramps up?

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In late September, Nike joined the cadre of companies to announce something along the lines of “decisive action” on inventory

That was the phrase used — twice — by Nike Chief Financial Officer Matthew Friend on a call with analysts, one that mentioned the word “inventory” 48 times

Friend echoed other executives in deploying that phrase. Target chief Brian Cornell, for example, mentioned “bold decisive actions” and a “decisive path” in an August analyst call (in which the word “inventory” was featured even more, at 73 times). 

Both executives were talking about markdowns and other measures to rid their operations of product that customers weren’t buying, at least not at the levels or prices their companies expected.

By the second quarter of 2022, retail inventories were up 31% over Q2 last year, according to S&P Capital IQ and FTI Consulting analysis. FTI Consulting’s Global Co-Leader of Corporate Finance and Restructuring, Michael Eisenband, wrote recently that the inventory overhang was potentially “the most troubling sign that the tide may be turning against the retail sector.”

Because of its timing, Nike’s announcement brought a new wave of jitters through an industry that was been jostled around since the early months of the year, with demand for discretionary goods sagging in an era of spiking prices for gas, food and housing

“Nike was pretty ugly,” Michael Baker, senior research analyst with D.A. Davidson, said in an interview. “That was even worse than we thought.”

The aim of those major players, and many others, has been to free up space in stores and warehouses and purge themselves of seasonal or outdated items. That, in turn, is so retailers can reset for the holidays, with products people will buy.

The big question hanging over the season is whether companies will succeed in their efforts. Are inventories at that Goldilocks just right levels, or will the inventory hangover last through the holidays and beyond? And if the latter, just how bad will it be?

“Retailers are over-inventoried, and they’re very concerned. They placed too many orders when there were supply chain challenges. So now they’re sitting on a glut of inventory as they enter this holiday season, and they know the economy is turning,” Alexa Driansky, a director in AlixPartners retail practice, said in an interview. “I think the year ahead is going to be a bloodbath.”

‘We’re still in the throes of it’

In retail, inventory has hit “record” and “peak” levels, according to an early October note from Cowen analysts. Driving the dollar value of that inventory is both unit increases and costs for acquiring the inventory. 

The analysts added that, because of inventory levels, “gross margin expectations into 2023 are too high as markdown allowances rise, storage costs rise and higher cost inventory flows onto income statements and [foreign exchange] transactional pressure is rising.”


“I think the year ahead is going to be a bloodbath.”

Alexa Driansky

Director, AlixPartners Retail Practice


D.A. Davidson’s Baker wrote in September that retailers were “drowning in inventory,” with levels up 22% from last year and hitting a 10-year high. What’s more is the gap between inventory growth and sales growth has become a chasm over recent quarters. At the time of the note, Baker wrote that margins should be near their “trough.”

Since then, Nike reported, giving the market yet another gut punch. The sports gear giant said that inventory grew 65% in the quarter ending Aug. 31 while gross margin fell by 220 basis points on markdowns, supply chain costs and unfavorable currency exchange rates.

Less than a month later, Adidas followed suit, cutting its guidance (again) for sales and margins for the year while citing, in part, “a significant inventory build-up as a result of lower consumer demand in major Western markets since the beginning of September.” The extra inventory, the company added, would likely necessitate markdowns through the rest of the year. 

Hasbro was another to suffer. It reported in October a 31% hit to operating profit in its consumer products unit as inventory buildup led the toymaker to take on extra costs and markdowns. 

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