Inventory in 2022: Normal is still nowhere in sight

If you know anyone who works in demand forecasting or inventory management for a retailer, they could maybe use a hug.

These were always difficult jobs, based in no small part on the vagaries of consumers tastes, trends and various intersecting markets and economies. The pandemic era has thrown several new layers of difficulty in planning and purchasing inventory. From panic buying to supply shortfalls to historical inflation spikes, the intensity in which the environment can change is matched only by the speed of that change.

Target’s shocker earlier in June highlighted how quickly the world changes. Just weeks after cutting its profit expectations for the second quarter, the retailer cut them again, dramatically. Just as importantly, the retailer signaled it was moving to clear inventory through markdowns and other measures. , and would be canceling orders.

It was a sign of the speed and severity of consumer changes and cost inflation. It also portended rocky days ahead for the industry as it prepares for the all-important holiday season. Retailers, brands, wholesalers and other industry players are trying to match inventory with consumer demand — whatever that will be for the season.

“They’re guessing. They’re all guessing. And any one of them that tells you they’re not guessing, they’re lying, because they don’t know,” John McQuiston, managing director and global head of originations, receivables and trade finance with Wells Fargo, said in an interview on retailers’ inventory plans. “The demand levels are entirely unpredictable. Consumer behavior is unpredictable.… This is a bit of a crystal ball Christmas.”

‘Rapid revisions’ at Target

While some analysts called out Target for the planning miss, the announcement was schematically of several things going on in this particular moment in retail.

Baked into Target’s description of what it was doing and why was a kind of whiplash. Customers changed their purchasing behaviors much more quickly than the company anticipated, whether through bad luck, poor planning or some combination of the two.

From Target’s past earnings call, as well as those of Walmart and other retailers, it’s clear that consumers are reacting to price inflation, particularly in food and fuel, the latter of which has skyrocketed since Russia (a major oil producer) invaded Ukraine and has exacerbated already elevated supply chain costs.

“They’re guessing. They’re all guessing. And any one of them that tells you they’re not guessing, they’re lying, because they don’t know.”

John McQuiston

Managing Director & Global Head of Originations, Receivables & Trade Finance, Wells Fargo

Target’s post-earnings announcement was a sign of just how quickly consumers were changing. The retailer said at the time that it was making “rapid revisions to sales forecasts, promotional plans and cost expectations by category.” Specifically, the company cut its forecasts for discretionary categories — calling out home goods by name — while expecting strength in food, household essentials and beauty.

Following Target’s announcement, Bill Kirk, managing director with MKM Partners, said in a research note that the analyst team observed “strong discounting” in a store visit to Target in discretionary sections of the store.

And while Target said it is clearing inventory to help foster top-line growth — by pivoting to better-selling (if lower-margin) products — the move is not without risks beyond the profit hit.

“We worry that large discounts could damage Target’s brand image: 1) part of the apparel department looked like a Ross … store; 2) the electronics department looked like Black Friday; and 3) outdoor goods looked like it was Winter,” Kirk said in the note. “We worry that even after inventory clears, some impact could remain.”

Mismatches in supply and demand, and sales and inventory levels, extend far beyond Target and cover many if not most discretionary categories. As one example, HSBC analysts said in a mid-June note they were “[b]racing for another lap of complexity ”in the sporting goods sector.

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