Ongoing Port Congestion May Create Opportunistic 'Inventory Bubbles' For Off-Price Retail

This is an excerpt from Monday's (6/7) Point of Sale retail supply chain newsletter sponsored by ArcBest.

Off-price retailers typically weather economic downturns with relative ease. In good economies, loyal shoppers of off-pricers like T.J. Maxx, Ross Stores and Burlington have the wherewithal to visit more often in search of hidden gems; in weak times, shoppers flock to the low prices. The same applies to the supply chain. When times are poor, a glut of unsold merchandise from department stores and brands ends up in off-pricers' supply chains. 

But what happens when up-market apparel retailers don't have the inventory? Back when demand for apparel fell off a cliff in the early days of the pandemic, many retailers pared back orders for the back half of the year and ran very lean. This was not a change created by the pandemic; analysts were suggesting tighter apparel inventory management long before COVID. But the pandemic gave retailers and brands the opportunity to test new sourcing strategies, inventory placement and control. All the while, strong demand for other goods and a difficult transportation environment slowed the flow of goods into the country. Holiday season 2020 saw many prominent apparel retailers and brands selling less product but making more money, namely due to scarce inventory positions and fewer promotions. 

For much of last year, several of the major off-price chains were left to flounder after having mostly or entirely rejected e-commerce. But now, Americans are vaccinated and foot traffic is rebounding rapidly. And the tight inventory control and fewer markdowns at department stores and other retailers present a new edge, and potentially a new challenge, to the off-pricers. 

Even after the pandemic is behind us, an extended period of economic uncertainty is inevitable. The ability to provide a value-oriented apparel option will be in high demand, and the price gap between the off-pricers and everyone else has expanded. "At present, off-price has a further advantage as discounting in mainstream retail is much reduced which is exacerbating the price gap between off-price and mainstream," GlobalData Managing Director Neil Saunders told RetailDive. 

But will they have anything to sell? Companies like TJX and Ross have long benefited from a pipeline of unsold merchandise from department stores, and any inventory misstep means more designer and brand-name goods for their racks. But those missteps have been far less frequent over the past year as retailers have homed in on the one thing they can control: inventory. 

Retailers' inventory-to-sales ratio at its lowest point in FRED data base dating back to 1992.
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Macy's executives have called the company's inventory "squeaky clean" for the past several months. At the end of the first quarter, Macy's inventory was down 23.1% compared to Q1 2019. Indeed, this is a much-needed change at Macy's, which has grappled with poor inventory management and far too many markdowns for more than a decade, but it's far from alone. Dillard's inventory as of May 2021 is down 40.4% vs. May 2019. Both companies have seen margins expand substantially due to better inventory management and fewer promotions, despite higher transportation and logistics costs. 

While the flow of product from traditional retailers may dwindle, the pandemic accelerated another viable source: returns. Everyone knows returns plague online retailers, especially apparel, where bracket ordering is common. By some estimates, more than 30% of online apparel orders are returned. For online apparel retailers, accepting and repackaging returns is a time-consuming and involved process, and few have their own discount outlets (or, in some cases, any stores at all). Digitally native apparel brands that continue to struggle with high rates of returns in e-commerce offer an increasingly attractive source of merchandise for off-price retailers. 

What are the best off-pricers saying? All three of the most prominent value apparel retailers have been very positive about inventory prospects this year. TJX CFO Scott Goldenberg said during the company's Q1 call that store levels "are where we want them to be" with inventory actually up 3% over this time last year. He went as far as to say that merchandise availability is "excellent". 

CEO Michael O'Sullivan echoed that sentiment in Burlington's first-quarter call, saying, "The buying environment in the first quarter was very favorable, and we were able to find great merchandise values to flow to stores and to fuel our ahead-of-plan sales trend." Unlike TJX, Burlington has sought to lean its in-store inventory for years. O'Sullivan said Burlington's in-store inventories were down 19% on a comp store basis, but this was "deliberate and consistent" with the company's strategy moving forward. 

In its first-quarter call, Ross Stores CEO Barbara Rentler said, "In terms of availability in quality and quantity, we're still seeing pretty great supply opportunities in the marketplace," but she did point to West Coast port congestion as a challenge that has slowed some receipts coming into the country. That said, she added that at some point, she believes the congestion will present a major opportunity for Ross and its competitors. Rentler said we haven't seen it yet but that at some point, there will be "a bubble of inventory" when "things start to self-correct." 

FreightWaves' maritime editor extraordinaire, Greg Miller, told me, "Sure, at some point someday, it's possible or maybe even likely that there will be an inventory bubble because importers are just bringing in anything they possibly can." However, he cautioned it's hard to imagine it happening anytime soon given the extremely low inventory-to-sale ratios, unless something suddenly undercuts U.S. consumer demand. And many apparel retailers are having a hard time getting anything into the country. Just ask Foot Locker. 

Henry Byers, FreightWaves' maritime expert, said he completely agrees with Rentler, especially given how congested the largest and more importantly the fastest transit ports are on the trans-Pacific. "Yantian to Long Beach/Los Angeles is the largest import lane for U.S. containerized imports, and it is going to be about 50x worse than any other point in the history of the trade lane." He continued, "If your product isn't in the U.S. and on the shelves for the spring/summer season by now, you have largely missed the boat." Similarly, if your product isn't in the U.S. by the end of October, you've hurt your ability to maximize holiday sales. When the ports are as backed up as they are right now, chassis, drayage capacity, drayage delays picking up and returning containers, etc. can add weeks to your transit times if you are moving major volumes. 

Final thoughts. Off-price retailers have a strong setup from a demand perspective over the next several years. The country is in rebound mode, and it will be very bumpy on the ride up with much economic uncertainty. Value-oriented retail will continue to dominate the consumer landscape, and off-price apparel retailers are positioned well to capture sales from department store closures and price-sensitive shoppers. 

Although off-price retailers' executives are optimistic about their inventory prospects, if full-price retailers keep the lean inventory strategies that powered them through the pandemic, inventory won't be as plentiful as it once was. Fortunately, other sources of inventory, primarily from higher e-commerce returns, are becoming increasingly viable. 

The potential for an inventory bubble is becoming more likely with each day of port congestion. Trips that once took three to four weeks are often taking three to four months, and shipments will undoubtedly miss their season for some retailers. The question remains when the congestion will abate (certainly not anytime soon) and how shippers are adjusting their ordering to account for the disruptions.
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Image by Julius Silver from Pixabay