What Merchandise Availability Says About Retail and the Consumer
There’s no shortage of merchandise availability according to off-price CEOs.
And one merchandising trend in particular stood out during their recent earnings calls: off-price executives aren’t afraid of pulling back on orders to see if—and how—consumer shopping behavior shifts. This allows them to effectively chase sales. Once they can gauge the consumer mindset, they go back to the market and buy what they think will sell.
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The TJX Cos. Inc. CEO Ernie Herrman told investors that he’s still seeing tremendous off-price buying opportunities. And while the company has pulled back on early buys to take advantage of oversupply opportunities, he said TJX might pull back even more on expectations of “in-season” closeouts over the next six to 12 months.
“The flexibility of our close-to-need opportunistic buying allows our merchants to quickly react to the hottest trends in the marketplace and adapt to changing consumer preferences,” he said. “The flexibility of our supply chain and store formats allows us to ship to our stores multiple times a week.”
Buying much closer to need could foster more full-price selling, but off-price executives said they’re quick to cut prices to clear out the goods faster. The strategy works for two reasons. First, there’s enough capacity upstream to put new orders into production fast. That’s partly due to improved supply chains, as well as retailers ordering less in general. And second, vendors often have goods on hand that they are willing to sell due to retailers canceling orders.
Ross Stores Inc. CEO Barbara Rentler said merchants have been “chasing the business, buying closeout, really looking for compelling values and bargains and that’s across all areas in the company [and] because of the amount of availability of the market we’ve been able to do that.” One concern cited by group president and chief operating officer Michael Hartshorn was that the fourth quarter “could be a very promotional holiday season.“
So what does that say about how the department store channel competitors are planning their inventory levels? And what does that mean for retail and the consumer?
Department stores
Executives at department stores are shifting gears and putting on their best “reacting” face as they work on being more lean-and-mean.
“Today, we are reading and reacting to shifting consumer preferences in real time. We have remixed category and brand-level receipts, pulled back on what’s not working, and chased into areas of strength,” Macy’s Inc. chairman Jeff Gennette told investors. “As we look to the remainder of the year, we are confident in the thoughtful and strategic promotional calendar and offerings we have planned and our ability to pivot to the right inventory at the right time and right value.”
Gennette also said a “new discipline” over the past year-and-a-half is that “we always have receipts that can chase into signals that are positive.” Equally important on a weekly basis is the ability to cut back “on signals that we expected that didn’t materialize.” He added that working with vendors and buying more at net cost instead of buying into markdown allowances gives Macy’s the flexibility to respond to customer shopping patterns in real time.
Meanwhile at Nordstrom, “We continue to manage with leaner inventories, improved sell-through and faster turns across most of our categories, resulting in gross margins that are on par with last year’s Q2, which was the highest margin quarter of 2022,” CEO Erik Nordstrom told investors.
As for Nordstrom’s off-price banner Nordstrom Rack, he said the shift in assortment mix to brands customers want has resulted in improved “high sell-through and faster inventory turns.”
Pete Nordstrom, president and chief brand officer, told investors that the company is “maintaining reserves against our buy plans, which enables us to respond in-season to trends and customer demand.”
Consumers
Signs of pressure on consumers remain unabated. While there have been indications that inflation had eased slightly over the summer, food prices remain high and that doesn’t help discretionary spending on apparel and accessories.
Cracks in the picture of a “healthy consumer” were evident in a number of the second-quarter retail earnings’ reports. Dillard’s Inc. CEO William T. Dillard, II, said in a statement, “The cautious consumer we noted in the first quarter continued in the first few weeks of the second, leading to a sales decline of 3 percent.” Dillard’s net income for the period ended July 29 fell 19.5 percent to $131.5 million, on a 3 percent decline in net sales to $1.57 billion.
“In addition to the headwinds discussed on prior earnings calls, the expiration of student loan forgiveness beginning in October, higher interest rate levels, and lower new job creation are all new pressures on the consumer,” Adrian Mitchell, Macy’s chief operating officer and CFO, told investors. “As such, we believe it is prudent to maintain our cautious view on the consumer and their capacity to spend on the discretionary categories we sell.” He said the quarter also saw higher bad debt assumptions and write-offs due to rising delinquencies, adding that credit card revenues are an indication of some of the pressures faced by its shoppers, Mitchell added.
And Cathy Smith, Nordstrom’s chief financial officer, noted on her company’s call that while the retailer has a higher quality credit consumer who is more resilient, the company has seen “delinquencies slowly rising” throughout the course of the year.” She said Nordstrom is watching that closely because the trend could be a precursor for higher credit losses down the road.
For now, Burlington Stores CEO Michael O’Sullivan said he hasn’t yet seen an influx of trade-down activity from higher-income customers.
On Tuesday, The Conference Board said that its Consumer Confidence Index fell in August to 106.1, from a downwardly revised 114 in July. Both components of the Index fell, with the present situation index at 144.8 from 153.0 last month and the expectations index slipping to 80.2 from 88 in July.
“Write-in responses showed that consumers were once again preoccupied with rising prices in general, and for groceries and gasoline in particular,” Dana Peterson, The Conference Board’s chief economist, said. She noted the pullback was evident across all age groups, most notable among consumers with household incomes of $100,000 or more and those earning less than $50,000.
For consumers, one’s willingness to spend is closely tied to having a job. Economists at Wells Fargo Securities have long noted the potential for a slowdown in hiring, a factor that could curtail the level of spending that has thus far delayed the start of a dreaded recession. And now that slowdown might be on the horizon.
On Wednesday, ADP Research Institute’s latest ADP National Employment Report found that private employers in the U.S. added just 177,000 jobs in August. That’s well below the revised 371,000 jobs added in July. Recent interest rate hikes by the Federal Reserve can make it harder for companies to obtain financing. And higher expenses plus recession fears could result in employers putting the brakes on hiring. That in turn could see consumers finally put the kibosh on their spending.
