Wal-Mart wrestles down inventory ahead of holiday push

Consumers wanting more choices and Wal-Mart’s shop local agenda have helped to push total inventories 5.5% higher over the past year. But word on the street is that the retailer is culling inventory and canceling orders at the last minute in the third quarter to make room for all-important holiday rush.

The categories seeing the biggest cull rate include food, consumables, health and wellness and home. The aggressiveness with which Wal-Mart has cut inventory over the past 60 days has been greater than anything seen out of the retailer in recent years, according to analysts with Cleveland Research Company.

Wal-Mart did not return a request for comment on the inventory reduction efforts.

“We believe Wal-Mart has been more focused on driving profit so far in the third quarter as sales do not appear to have improved meaningfully versus the prior quarter. The most visible change has been a much more aggressive stance from Wal-Mart in managing down inventory levels by the start of the fourth quarter,” according to a Sept. 18 research note from Cleveland Research analysts.

The analysts said inventory growth has outpaced sales growth by a wide margin so far this year.

Inventory levels have risen for four quarters amid sluggish same-store sales, a formula that is not sustainable, according to Leon Nicholas, senior analyst at Kantar Retail.

At the end of June. Wal-Mart had $42.793 billion in unsold inventory, up 5.5% with negative same-store sales growth. Year-over-year inventory levels were 4.4% higher at the end of the first quarter, down from the 7.45% jump at the end of fiscal 2013, according to company filings with the Securities and Exchange Commission.

“I am also hearing Wal-Mart has been holding off on new promotional item orders, and instead using replenishment stocks to clear out more inventory. Suppliers tell me that orders have been canceled as Wal-Mart tries to clear out the excess products,” Nicholas said Thursday in a phone interview.

He said the danger in cutting back is the risk of higher out-of-stocks, especially if the inventory reduction control is not applied very carefully.

Cleveland analysts said they will continue to monitor sales trends through the balance of the quarter, which ends Oct. 31 as they also have some concern that aggressive inventory cuts could hurt sales due to higher out-of-stocks and fewer promotional displays. Cleveland said the inventory excess is partly linked to the retailer’s attempt to drive more sales through added promotions in past quarters, but consumers have been somewhat cautious and competitive pressure have been also be high.

Nicholas said as the retailer worked to provide a wider range of products the number of total SKUs (stock keeping units) has risen dramatically, which has also caused more out-of-stock headaches for the company, at the same time inventory levels are very high.

“It’s a paradox, but Wal-Mart knows it has to clear out space this quarter as the holiday season is quickly approaching,” he said.

Cleveland said research suggests that Wal-Mart does not plan to rotate holiday displays through the season as it has in the past, choosing instead to stick with the same items on display, which may simplify operations and ordering.

“Additionally, we believe one of the key issues leading to heavy inventory is the lack of labor in the stores to get the inventory out of the back rooms and onto the sales floor,” the Cleveland analysts noted.

The new SPARC initiative with suppliers should help some, but the impact is not likely to be felt for another quarter or two.

PRICING UP & DOWN
Research shows that Wal-Mart appears to selectively take prices up on certain items and categories in an effort to help drive higher third quarter sales. In a period of zero inflation, prices have risen modestly in food and consumables over the past two months, according to two different pricing studies, one by Cleveland and the other by Raymond James & Associates.

The food/consumables portion of the business, which is 55% of sales with slightly negative comps, appears to be experiencing offsetting trends. There is slight moderation in center-of-store food sales being offset by modest acceleration in consumables categories, according to Cleveland.

At the same time prices are edging up in food, analysts report Wal-Mart had to take big markdowns in August to move through all of the seasonal women’s apparel that it carried into the third quarter. The retailer took the markdowns in order to set up for the back-to-school season, analysts said.

Bill Simon CEO of Walmart U.S. said last week that the retailer is sticking with its low price strategy and he predicted stronger sales in the back half of this year. He said the retailer rolled back prices on beer and other adult beverages and not only saw improved sales, but also picked up market share in the process.

The retailer’s same-store sales guidance is between zero and 2% growth for the third quarter which ends Oct. 31.