Pre-holiday inventory levels vary widely among retailers

Heading into the holiday season retailers from dollar stores to mass and specialty stores are carrying more inventory as consumer spending has shifted to other economic sectors like travel and tourism.

Dollar General just ousted CEO Jeff Owen amid a $95 million staggering hit to net income expected from markdowns and inventory clearances. As of Aug. 4, Dollar General’s merchandise inventories totaled $7.5 billion, up 8.6% from a year ago. The operating margin was down 2.62% from a year ago to 7.07%. The retailer’s inventory turnover ratio which is a measure of sales velocity was a low 0.91, down 7.3% from a year ago.

“Vasos sees the primary execution issue across stores today tied to a lack of consistent in-stocks leaving sales on the table,” noted Matthew Boss, an analyst at J.P. Morgan.

Vasos said he plans to monitor in-store inventory levels in real-time as opposed to once a year. That could lead to immediate differences in on-shelf availability and would change the company’s planning and accounting processes.

Mass retailer Target also had inventory challenges in 2022 and the buildup lingered into this year. While recent earnings for Target beat expectations, sales fell short. Target forecast comp sales to fall between 4% and 6% for the full year while earnings are expected between $7-to-$8 per share. The company said in August its inventory levels were down 17% at the end of the quarter compared to the prior year. The retailer said it tweaked its inventory mix carrying 25% less inventory in discretionary categories like apparel and home decor this year, compared to last year.

At the end of July, Target’s inventory totaled $12.7 billion, down 17.3% from the year-ago period. The retailer improved its operating margin by 3.66% to 4.9%. The inventory turnover ratio was 1.41 up 6.2% from the prior-year period. With the holiday sales season already underway, Target Chief Merchandising Officer Jill Sando said affordability is top of mind for many shoppers this time of year.

Walmart executives have said the Bentonville-based retailer is in “really good shape with inventory” heading into the holiday. Walmart’s total inventory was $56.7 billion as of July 31, down 5.23% from the same time last year. The operating margin was stable at 4.56% and the inventory turnover ratio was a high 2.14, up sharply year over year.

“I was recently walking with merchants and we were going through the holiday assortment. And there are places where our buyers, because of their experience and the data they have, have decided to go big. We’ll buy an item heavy and be aggressive and bullish. And there are other places where we’re just letting the replenishment model work. I think we are appropriately aggressive in the seasonal categories,” McMillon said Sept. 12 during the Goldman Sachs Global Retailing Conference.

When asked about consumers being more cautious about spending, McMillon said consumers seem to have the money to buy the things they really want or take the trips they want. He said Walmart is happy with the price gaps it has with competitors and it’s a metric that is checked weekly by market.

Kohl’s had its issues with inventory excesses to start this year, but clearance and wholesale trades reduced it by late July. As of July 29, inventory was $3.5 billion, down 13.9% from the same period last year. The operating margin receded to 4.43% and the inventory turnover ratio improved to 0.64, still low by industry standards.

“We’re becoming more responsive to customer’s demands, operating with additional open-to-buy to chase trends and minimize risk, maintaining better in-stock levels in core basics, and improving inventory flow from our distribution centers to the selling floor,” Kohl’s CEO Tom Kingsbury said in late August.

Specialty retailers that focus on at-leisure are not in as good of shape heading into the holiday season. Lululemon Athletica reported July 30 that inventory levels totaled $1.7 billion, up 13.6% year over year. The operating margin was solid at 21.69%, but the inventory turnover ratio decreased to 0.56.

Meghan Frank, chief financial officer at Lululemon, said the company has opportunity for improvement.

“The team has done a nice job in navigating what was a really dynamic supply chain and positioning inventory so that we were able to capitalize on the demand upside that we saw and experienced,” Frank said in the Aug. 21, earnings call.