Dive Brief:

• Foot Locker reported a 20.4% year-over-year jump in inventory following weeks of closed stores, executives said on a Friday earnings call. "A sound result when compared to the 43.4% decrease in total sales," CFO Lauren Peters said.
• "We have been working very closely with our vendor partners to align on the best path forward between supply and demand," CEO Dick Johnson said Friday. "This has included canceling or delaying orders, adjusting future orders and securing their assistance to help clear the channel."
• As of Friday, Foot Locker had opened 1,400 stores, about 45% of its locations, with limited hours and social-distancing protocols, after closing them all in March. But stores will not fully relieve the company of what Johnson called a "glut of inventory."

Dive Insight:

When Foot Locker executives gathered for a call with analysts in February, they still hoped the coronavirus would not turn into a "protracted situation." At that point, Foot Locker executives were pleased with their inventory management work in 2019, stating that with inventory down 4.8% year over year at the end of the fourth quarter, and saying the company was in "good shape." Today, the inventory management game is very different.

Excess inventory is a major problem for virtually every apparel or footwear retailer, after an 89% year-over-year drop in demand for clothing and accessories in April. But completely stopping the influx of goods is not an option, because the merchandise driving Foot Locker's online sales are new sneaker releases — which the company calls "high heat product."

New sneaker releases are driving a marked increase in e-commerce volume for the retailer. During the first quarter, Foot Locker processed 200,000 e-commerce orders in one day, Johnson said. "To put that into perspective, it was not that long ago when processing 25,000 orders through our [direct-to-consumer] channels was considered a peak," the CEO said.

Still, e-commerce will not make up for the lost sales from stores, and carefully tuning inventories to slowly returning demand will require supplier collaboration. Working with vendors to adjust and delay orders is a strategy in use by fashion-sourcing organizations across the industry. McKinsey found 45% of such organizations are working with suppliers to cut costs, while 11% of North American sourcing organizations have canceled more than half of upcoming orders due to COVID-19. Johnson said that vendors are invested in working with brands to find a way through the crisis.

"They’ve got the same concern: That we get through — the industry gets through this inventory and we’re positioned strongly and well for the start of 2021, as an industry," said Johnson. Having a healthier state of inventory at the start of next year is part of the scenario in which stores continue to open and stay that way. "We have done multiple scenarios of modeling and will react accordingly as we read the market," said Peters.

Analysts are skeptical about inventory clearing through promotions, as Foot Locker plans to do. Moody's analysts named markdowns caused by excess inventory as a threat to precious liquidity in the next two quarters, as sales crawl back and vendor bills come due, according to a recent research note. Packing away season-less or basic inventory for several quarters to avoid steep discounts may be a better long-term move than aggressive markdowns, according to Moody's. The firm considers Foot Locker's liquidity profile "very good," as of Thursday.