Miscalculations during the pandemic have led to excess inventory
The big challenge is whether to hold on to those items in stock or sell them at a discount.
It could be a respite for consumers amid strong inflation
Large retailers such as Target and Walmart could be forced to launch massive discounts, due to “stockpiling excess inventory” and miscalculations on “order ahead” during the worst of the pandemic.
According to a report by Brian Cheung for Yahoo Finance, many companies in the industry were actively working to expand their inventory during 2021, “as factories closed and material shortages resulted in empty shelves”.
One strategy they used to avoid these problems, which also included supply chain instability, was to expedite orders when available and ask for more quantities in advance before the 2022 season started.
The good news, if there is one at this time of crisis, will be for end consumers. Excess inventory may lead to some discount deals among retailers, American Apparel & Footwear Association President Stephen Lamar told Yahoo Finance Live on Wednesday.
Target and Walmart: the worst numbers in 35 years
Target’s profit unexpectedly fell 52% in its first quarter, below Wall Street forecasts. The company blamed these “increased expenses” caused by the continuous supply interruptions, as well as the rise in food and fuel prices.
As a result, Target shares fell 25% on Wednesday, their worst day since 1987. This came 24 hours after shares in rival Walmart also posted their worst day in 35 years.
Walmart was another of the big retailers that detected low profits and a weak outlook due to rising shipping and labor costs. The company fell another 7% on the same Wednesday.
Inflation starts to hold back consumers
Everything gets worse with rising inflation: consumers’ pockets can’t take it and many decide to put a stop to non-essential purchases.
In the midst of the inflationary panorama and the prolongation of the war between Russia and Ukraine, the stock market suffered its biggest drop in two years. And this is where the big retailers acknowledge that raising prices hurt their profits.
“To be fair, forecasting inventory (or anything at all) in the midst of a global pandemic is an enormously difficult task. Add a war in Eastern Europe and that task becomes worse,” wrote Brian Cheung.
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These large companies will now have to deal with the dramatic turn that the economy has taken and with that accumulated reserve of products that they would have to reduce in order to move forward.
“We ended up having too much inventory across various categories,” Target CEO Brian Cornell told investors on Wednesday.
We are talking about kitchen appliances, televisions and outdoor furniture, which keep back rooms and warehouses unusable. These now-crowded spaces would, under normal circumstances, be used to transport food or personal care items.
There’s just no room, and the big challenge now is whether to hold on to these items in stock or sell them at a discount. “We chose the latter, which led to incremental downgrades that lowered our gross margin,” Cornell said, adding that those were “difficult decisions.”
Meanwhile, Walmart has said it needs another couple of rooms to “work and sell” excess inventory.
The market crash
Other retail stocks, including Dollar Tree, Dollar General, Dick’s Sporting Goods and Costco, fell sharply on Wednesday despite no earnings reports of their own. This means that there is a real fear on the part of investors about trends that could affect their results in the coming years.
While, the richest get their money out of stocks and hoard cash in an attempt to reduce your exposure to risk. A recent Bank of America survey cited by CBS News found that the amount of investments they hold in cash is the highest since the 9/11 terrorist attack.