US retail inventories

Going into the end of year holiday shopping season, inventories of US merchants–especially of apparel–seem to be unusually (i.e., too) high.  I don;t think this is the case across the board.  It appears to be especially true of department stores, however.

I think this oversupply is partly caused by a reaction to last year’s troubles at the West Coast ports, meaning that merchants made their buying decisions early, to avoid running out of stock if labor problems resurfaced.

But I also think a couple of mindset issues are at work, as well.

–the recent strategic shift Wal-Mart announced to emphasize the internet suggests to me that throughout established retail, high level, long time executives who made their careers controlling the logistics of servicing physical stores have been in denial about online.

–in a housing upswing, the typical pattern around the world is that people who are establishing new households, either by renting or by buying, find the money to pay the rent/mortgage, paint, decorate, furnish…by shifting spending away from other, less immediately pressing, items.  Like apparel, for example.

The only time I can recall this reallocation not occurring is in the US, during the period from the mid-1990s to the crash in 2008.  That’s when homeowners were financing consumption by borrowing against the equity in their houses.

That’s no longer the case.  We’re back in a more normal environment, where a dollar spent on furniture or hoe improvements means a dollar less to be spent on clothes or toys (except for Star Wars, of course).

My thoughts:

It’s easier to adjust from having made the second mindset mistake than the first.  Revenues may not show who has made either; profits (or a lack of them) will.

The idea that as investors in retail we have to play the housing cycle as a key determinant of profit growth is another aspect of the Millennials vs. Boomers phenomenon in the economy.

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