Retailers Do More With Less Inventory

With a new level of discipline tied to the times, retailers are hoping to eke out more profit with a lot less inventory.

Inventory levels at many chains are down 15 percent or more from a year ago, but instead of simply going on the defensive against stock gluts and consequent markdowns, stores quickly are learning to make their existing inventories more productive, bringing merchandise into stores closer to when it’s needed and being more selective in what they buy and replenish based on actual sales results.

While adapted to stave off the worst sales downturn of their lifetimes, these new mandates are expected to serve retail executives well once spending begins to recover.

“What you want to do is make sure inventories are in line with the consumption trend,” said Stephen I. Sadove, chairman and chief executive officer of Saks Inc.

That’s a challenge for Saks, where same-store sales fell 26.6 percent in May following declines of 32 and 23.6 percent in April and March, respectively.

Receipts at Saks for the fall season will be down around 20 percent, a number that is “about the rate of consumption,” he said. “We will be in a much leaner position, so we’re expecting relatively large declines in inventories versus last year.”

Sadove said the cuts will be “across the board” and will include both basics and fashion. “The art of this is a quest for balance,” he said. “You can’t cut drastically into one or the other.”

Rick Darling, president of LF USA, noted many stores reacted quickly to the slowdown in consumer spending even before the second half of last year.

“Certain retailers in early 2008, at the first signs of consumer weakness, reacted earlier than others by bringing their levels of inventory down,” he said. “Between the fourth quarter of 2008 and the first quarter of 2009, the average reduction in inventory levels was between 15 and 18 percent.

“We’re also seeing a recognition among retailers that they can run the stores with less inventory and still be profitable. It’s an adjustment in the thought processes.…That’s the benefit of going through this tough business cycle. That’s a good thing in the long term. There’s a desire to run the stores on less inventory and turn it faster,” Darling said.

There’s also a sense that inventory levels are beginning to stabilize at retail. Stores seem to be on track with getting their stock levels in line with their sales.

Inventory-to-sales ratios compiled by the U.S. Census Bureau provide a clear indication of just how hard certain retailers have worked to keep their inventories in line with falling sales. In April, the last month for which figures are available, the ratio for all retailers grew to 1.54, up from 1.49 a year earlier. For clothing and accessories stores, the increase is nearly identical — 2.59 versus 2.55 last year — but, for department stores, the ratio dropped to 2.09 in April from 2.15 in the prior year.

During that April-to-April period, retail sales dropped 11.3 percent overall while those at apparel and department stores fell 7.5 and 6.2 percent, respectively. Overall inventories are down 8.5 percent during that stretch, while those at apparel and department stores declined 6 and 8.9 percent, respectively.

Many retailers seem resigned to the idea that the shipment faucet has been shut so firmly that they might even have to begin chasing merchandise. Terry Lundgren, chairman, president and ceo of Macy’s Inc., hinted at that possibility in an interview early this year.

“We will get our inventories down very tight,” he said. “We’ve all been scrambling to reduce orders. We will get to the point where we will be scrambling to increase orders. Inventories will be lean and that’s a good way to make money, a good way to raise margins and a good way to improve sell-throughs.”