Clothing Companies Want to Hold On to Unsold Inventory
Date: Friday, June 26, 2020
Source: The Wall Street Journal
Companies don’t want to sell last season’s clothing at a loss, and are holding over inventory or selling some through outlet stores
Retailers stuck with excess inventory due to virus-related lockdowns are taking steps to avoid selling the aging clothes, shoes and accessories on their shelves at a loss.
Clothing companies, including Columbia Sportswear Co., Ralph Lauren Corp. and Urban Outfitters Inc., in recent weeks have disclosed millions of dollars in what is often referred to as inventory obsolescence charges. Accounting rules require that companies take these charges when they expect to sell an item for less than what they paid for it.
The charges, while expected, dragged down the earnings of a sector that already was facing pressure. Finance chiefs looking to minimize the unwanted write-downs have activated contingency plans for selling out-of-season clothing at the highest-possible price, including selling through outlet stores and holding excess inventory until they can sell it at a later date.
“If we’re talking about retailers, it’s not so much that it’s excess inventory, but it’s all inventory,” said Zivia Wilson Sweeney, an associate professor of clinical accounting at the University of Southern California. “What are we ultimately going to do to convert that inventory back into cash?”
Inventories rose at retailers after local lockdown orders aimed at stemming the spread of the coronavirus closed stores. A ratio of end-of-month inventory values to sales compiled by the Federal Reserve Bank of St. Louis jumped to 1.68 as of April 1 from 1.53 a month earlier, according to the latest data available.
Portland, Ore.-based Columbia Sportswear was already carrying more inventory than it wanted when the pandemic unfolded earlier this year. A warmer-than-expected winter season left the company with additional cold-weather clothing, said Jim Swanson, Columbia’s chief financial officer. The problem was more acute because in recent years a strong economy had pushed the company to purchase more to meet consumer demand, he said.
“With those solid years, we leaned into our inventory purchases more aggressively than we ordinarily would,” Mr. Swanson said.
Store closures due to local lockdown orders compounded the problem. Columbia—which owns brands such as Sorel and Mountain Hardwear, in addition to its namesake—sells directly to consumers and to wholesale customers, some of which began canceling orders. Inventories as of March 31 rose 11% from a year earlier to $577.1 million.
Columbia plans to hold on to some of its excess clothing to sell next year, but its primary plan to clear its shelves is by selling through its outlet stores. The company has expanded its outlet network in recent years and currently operates 122 outlet stores in the U.S.
In normal times, most clothing sold in Columbia’s outlets is made specifically for the off-price channel. This year, however, the company expects more than half of the inventory at some of its outlets to consist of excess clothing from its full-priced stores or items not sold into wholesale channels.
Clothing in Columbia’s outlet stores, while sold at a discount, generates a profit, Mr. Swanson said. Clothing that the company can’t sell through its outlets is typically sold through value chains such as T.J. Maxx and Marshalls, and sometimes at a loss, he said.
Most consumers still haven’t seen all of this year’s spring and summer inventory, and the additional time will allow designers to build a new clothing line around the older clothing, Ms. Nielsen said. “We don’t need to monetize this inventory today for cash,” she said.
Given that most retailers are facing the same issues with inventory, CFOs should avoid sugarcoating the problems and instead highlight the strategic moves they are making to get around them, said Thomas Ruchti, an assistant accounting professor at Carnegie Mellon University.
“A way to look good in this time as a CFO is just to be very honest,” he said.