Dive Brief:
- Last year’s third quarter was the first time since the pandemic that sales growth in retail and apparel outpaced inventory, according to a Jan. 17 research note by Telsey Advisory Group analysts.
- The spread between inventory growth and sales growth hit negative 730 basis points in Q3. That compares to a positive spread of 3,320 basis points when inventories were peaking in Q3 2022, according to the analysts.
- Inventories across retail sectors were down 7.8% year over year in Q3 overall, compared to 38.2% growth in the same period the year prior. The analysts said they expect “most retailers to continue to control inventory” in 2024.
Dive Insight:
It took roughly a year and a half for retailers to fully unwind inventory positions that became suddenly mountainous in spring 2022, when inflation and global turbulence began to sap consumer demand.
Not every sector within the retail and apparel world shared the same narrative, as the Telsey Advisory Group’s number crunching shows.
For instance, the inventory-to-sales growth ratio for specialty apparel turned negative in Q1 of 2023, indicating sales growth started to outpace inventory then. The same is true for the off-price sector, where sales have been buoyed partly by opportunistic acquisitions of high-quality inventory that others in the retail world were trying to jettison in their efforts to get lean.
Meanwhile, the spread between inventory and sales growth remained positive for food brands and sporting goods, according to the Telsey analysts, meaning in those sectors inventory growth still outstripped sales in Q3.
Many of those who have been able to shrink inventory have seen their margins and profits increase in a sluggish sales environment. Very often, leaner levels mean cleaner sales floors, faster turnover, less discounting, more in-season merchandise on shelves, fewer storage costs and smoother operations.
Abercrombie & Fitch, for example, had shrunk inventories more than 30% YoY by Q2 last year while boosting its operating margin by nearly 10%. Gap Inc. and American Eagle made similar, though not quite as significant, headway, according to a Supply Chain Dive analysis. More recently, Target was able to wring out more profits from fewer sales in Q3, which the mass retailer attributed to tight inventory and expense control.
For softline categories like apparel, the Telsey analysts described the second half of 2022 as an “inflection point” on inventory. Levels since then have gone through a continuous process of normalization.
“Improving supply chain trends and leaner positions have helped facilitate a return to a more normalized planning/ordering/buying timeline with greater predictability and the ability to once again read, react, and chase trends,” the analysts said. “Retailers continue to walk the line between reducing inventories and managing promotions.”
