In a promising development for the retail sector, the third quarter of the year saw sales growth surpassing inventory levels for the first time since the onset of the pandemic, as reported by analysts at Telsey Advisory Group. Retailers grappled with an inventory glut that emerged in spring 2022 due to factors like inflation and global uncertainties dampening consumer demand. It took approximately a year and a half for retailers to effectively manage and reduce their bloated inventory positions.
However, the inventory-to-sales growth ratio varies across different segments of the retail and apparel industry. In Q1 of 2023, specialty apparel and the off-price sector experienced a reversal, with sales growth outpacing inventory levels. The off-price sector’s success can be attributed in part to opportunistic acquisitions of high-quality inventory that other retailers were shedding in their efforts to streamline operations.
Conversely, the food brands and sporting goods sectors continued to witness inventory growth outpacing sales in Q3, maintaining a positive spread between the two metrics.
Retailers that successfully reduced their inventory levels have reaped benefits such as improved profit margins in a subdued sales environment. Leaner inventories have translated into cleaner sales floors, quicker inventory turnover, reduced discounting, increased availability of in-season merchandise, lower storage costs, and smoother overall operations.
For instance, Abercrombie & Fitch achieved over a 30% year-over-year reduction in inventories by Q2 of the previous year, leading to a nearly 10% boost in its operating margin. Similar but slightly less significant progress was made by Gap Inc. and American Eagle, according to an analysis by Supply Chain Dive. Target also reported increased profits despite lower sales in Q3, attributing its success to tight inventory management and expense control.
In the realm of softline categories like apparel, the Telsey analysts characterized the second half of 2022 as an “inflection point” in inventory management. Since then, inventory levels have undergone a continuous process of normalization.
“Improvements in supply chain trends and leaner inventory positions have facilitated a return to a more normalized planning, ordering, and buying timeline, offering greater predictability and the ability to once again respond to and capitalize on trends,” noted the analysts. “Retailers continue to strike a balance between reducing inventories and managing promotions.”
