Kohl’s, Dillard’s, Nordstrom Prove Cutting Inventory Can Boost Working Capital, But For How Long?
The female inventory manager shows information on digital tablets to an employee holding a box … [+]
For three weeks to the end of the year, retailers and brands are focused on their bottom line, and it’s about finding working capital to survive. Reducing inventory – possibly by half – can bring retailers closer. However, determining which items to cut is a breeze when done blindly or worse. It uses historical data that does not reflect the fluidity of currently changing consumer preferences.
To top it off, January returns will also be hot and high, especially as online sales (which have skyrocketed during the pandemic) tend to have higher returns than in-store purchases. According to one estimate, projections for vacation purchases made online in the U.S. will soar to $ 234.9 billion this year, which also predicts up to $ 70.5 billion could be returned.
Reducing inventory to recapture capital is a strategy retailers and brands have pursued throughout the year, but it’s clear they are still relying on previous purchases for guidance.
I read about it recently Dillards (NYSE: DDS). Despite the pandemic that hit its department store counterparts, the company improved year-over-year profitability in the second quarter of the fiscal year that ended August 1, and posted a surprising quarterly profit in the third quarter. Dillard’s is no stranger to inventory glut. They saw what was happening early and took aggressive inventory release measures that allowed them to end the period with inventories down more than 14% year over year. While the chain’s retail sales fell 35 percent year over year in the second quarter of the fiscal year, the retail gross margin rose to 31.1 percent from 28.7 percent in the prior-year period. Combined with strong cost reductions, this paved the way for an improvement in the company’s adjusted pre-tax loss by $ 24 million year over year. Dillard’s continued to clean up its inventory, ending the period with inventories down 20 percent year over year. This enabled him to increase his gross margin in retail in the third quarter of the fiscal year from 34.5 percent in the previous year to 36.6 percent.
Kohl’s appears to be making smart inventory cuts that cater to current consumer needs – active wear and beauty. Recently, CNBC reported that the company’s shares rose more than 5 percent after executive director Michelle Gass outlined the retailer’s plans to expand into active clothing and personal care in 2021. Kohl’s significantly reduced its inventory levels last quarter, moving it into a position where it will be less reliant on discounts during the holiday season. Kohl’s strategy for 2021 is to reduce the amount of more elegant goods in stores and focus more on adding active and comfortable clothing. While this strategy seems sensible at the moment, I’m curious to see at what point it may adapt to the mid-to-late 2021 consumer who may get back to work and become more social if they keep their fingers crossed for mass vaccinations.
According to this Wall Street Journal article, Todd Kahn, Brand President and CEO of Coach, used to make 1,000 models of handbags per season, now they produce just 500, with an emphasis on the best-selling colors – black, brown, and off-white.
Using past buying habits can give you leeway, but it won’t go far enough when we look to a year like 2021 where consumer preferences will flow more than ever. A managing director of consulting firm AlixPartners LLP stated in the Wall Street Journal story: “It’s a bad approach to just make decisions.” Instead, the piece says: Retailers need to figure out what consumers want from them and then stand up for it.
It reminds me of the famous quote often attributed to John Wanamaker about marketing investments: “Half the money I spend on advertising is wasted; The problem is, I don’t know which half. “… How stupid in this day and age of data that according to the NRF 50% of products also fail. So which one do you drop
A new report from Mazars discussed how the luxury model will be reborn as the industry adapts to the changing expectations of new customer cohorts. According to the report, the luxury sector has long viewed in-person sales as central. Today, however, the play notes that that is changing and that the global luxury sector is re-adjusting to the expectations and demands of customers who may never set foot in their businesses, as well as wealthy Millennials and Gen Zers and wealthy customers in China . These customers expect experiences that allow them to browse and purchase both online and in-store, for instant and accurate information about a product’s sustainability and authenticity, and for post-purchase care. This has sparked a full digital transformation in the luxury industry, and these retailers and brands are more focused than ever on customers to build loyalty, create experiences and drive repeat sales, the report said.
The reality is that retailers and brands shouldn’t just burn and burn, they should find a way to search their inventory to get consumers what they want, in order to squeeze every dollar out of it to survive.
I recently attended the WWD Virtual Apparel and Retail Summit, where I shared with Jonathan Duskin, CEO of Macellum Capital Management. We discussed how companies need to reduce risks. Move quickly. Exam. Expect. Then act. And that approach needs to have the right data to support decisions. The fact that only a fraction of retailers and brands have invested in technology that, in my humble opinion, enable them to anticipate consumer buying behavior is difficult to fathom right now – especially as innovation in the industry has accelerated.
Our recent survey further demonstrated this ubiquitous separation.
For the next year, it is likely that we will see more of this in the first six months (i.e. bankruptcies, closings, liquidations) and likely longer as we wait for vaccinations to reach critical mass. CEOs and business decision-makers need to stop being tactical about how they run their business and use anything other than history or gut instinct to effectively improve margins. Harnessing the consumer’s voice through technology is the missing link enabling retailers and brands to ensure their inventory matches what consumers want to buy and create experiences that generate much-needed recurring revenue.