Though consumers are being hammered by price inflation at gas stations and grocery stores, they may be surprised by what they find at electronics, clothing, furniture and appliance stores. Swamped by excess inventory, many major retailers are offering big-time discounts on a variety of consumer goods.
One such retailer is Target, which has twice cut its profitability outlook in recent weeks. In its June 7 warning, Target projected its second-quarter operating margin would be roughly 2%, well less than half the 5.3% the company projected in May.
At the same time, Target said it was “planning several actions in the second quarter, including additional markdowns, removing excess inventory and canceling orders.”
“We thought it was prudent for us to be decisive, act quickly, get out in front of this, address and optimize our inventory in the second quarter — take those actions necessary to remove the excess inventory and set ourselves up to continue to be guest-relevant with our assortment,” Target CEO Brian Cornell told CNBC.
Last month, inventories at mega-retailers surged 26% over the previous year. Idle product is a double whammy, since it also entails higher storage costs.
Retailers’ sales urgency translates into better deals on items like furniture, home decor, clothes, televisions, computers and kitchen appliances.
WalMart, Best Buy, Gap and Urban Outfitters are among those reportedly cutting prices, but discounts aren’t confined to major chains. Last week, a Fred’s Appliances store in Missoula, Montana was asking just $1,799 for a package of four GE appliances—a refrigerator, range, dishwasher and microwave.
Today’s widespread inventory problems started in 2021, as Bloomberg explains:
Big retailers rushed to build up inventories last year amid soaring consumer demand and transportation bottlenecks—going so far in some cases as to rent their own cargo ships. Now, they’re trying to figure out how to sell all their stuff.
Several factors contributed to today’s retail inventory pile-up:
Longer lead times on product deliveries forced purchasing managers to peer farther into the future when projecting their inventory needs, heightening the risk of the forecasting errors that are now manifesting themselves in retailers’ warehouses.
Shifting consumer needs: As the country moved out of pandemic mode, retailers found customers spent more on office wear and less on casual clothes and home goods.
Lower discretionary income: In an era of $5 gas and $1 avocados, consumers forced to shell out more money to cover basic needs have less money to work with.
That last factor may thwart retailers’ plans for a mass summer inventory clearance. Not only is consumer cashflow under pressure, but Americans’ credit card balances have mushroomed back to a record-high $867 billion. Stir in morale-sapping stock market losses and record-low consumer sentiment, and retailers may be facing a daunting task.