Sales Are Going Out of Style at These Retailers
Date: Thursday, June 18, 2020
Source: The Wall Street Journal
Some retailers are putting aside large portions of inventory to avoid selling into an aggressively promotional sale environment
Apparel companies have had it with sales.
A number of clothing retailers have said they would pack away a substantial share of inventory for later seasons—or even next year—instead of subjecting their items to what they think will be a cutthroat season of post-pandemic markdowns. That option carries its own risks, but seems like the better choice.
In a way, the pandemic has created a situation that is uniquely suited for the margin and brand-protecting move. Widespread store closures meant a lot of season-appropriate inventory was shielded from customers’ eyes. It is also a defensive move that is in part informed by the 2008 recession.
“There’s a memory of the five years of promotional warfare that was triggered when companies started offering products like a fire sale,” said Simeon Siegel, an analyst with BMO Research. “There were multiple years of lingering effects from the perpetual sales, including brand dilution.”
While Lululemon didn’t explicitly mention a “pack-and-hold” strategy, it said that its inventory rose 41% last quarter compared with a year earlier. Yet the company was so confident about selling the excess inventory later at full price that it didn’t mention any write-downs or inventory reserves.
The so-called packaway option works best for retailers with more timeless styles. The strategy wasn’t mentioned in the latest earnings calls of fast-fashion retailers such as Inditex, which owns Zara, or H&M, which both moved quickly to reduce inventory levels. Meanwhile, luxury brands such as LVMH, Burberry and Kering, which already have lower inventory turnover compared with other clothing retailers, have said they would just lengthen their seasons to sell as much as possible.
What seems surprising is that some companies are looking to delay the launch of some items not just by a season, but by a year. Gap Inc., Calvin Klein’s parent company PVH Corp. and Carter’s Inc., which owns children’s apparel brands including OshKosh B’gosh, were among the companies that said they would hold inventory that long. PVH specifically said it would hold roughly 16% of inventory for later, while Carter’s said it is putting aside 19%. Ralph Lauren said it would postpone some inventory to future seasons and increased inventory reserves by $160 million, or 22% of its stockpile.
Packing away comes with risks. Fashion trends are notoriously fickle and even the most basic of items could look quaint a season later. Still, for clothing retailers that are able to carry out this strategy, it seems like the marginally better choice. Large sales and markdowns are constant threats anyway: Either they display all the clothes and sacrifice margins now, which seems almost certain, or they delay that potential risk until later, when it is more likely that business will be back to normal.
For the rest of the industry, it will be a worthwhile experiment to watch: Can customers tell if the new full-priced clothes in front of them are actually from the previous year? If they can’t, then apparel companies will know they have another tool up their sleeves to manage margins going forward.