Retail CFOs face forecasting challenges as inventory hurdles persist
CFOs at major retailers are struggling to forecast quarterly sales as their businesses grapple with ongoing shipping delays and deal with a pullback in consumer demand for once-popular pandemic items such as clothing casual wear and homeware.
After struggling with shortages at the start of the pandemic, businesses have been building up inventory as a buffer to meet strong demand as the economy rebounds. Some large retailers, however, misjudged the rate at which consumers would change their buying habits. Longer delivery times from suppliers, which forced companies to order several months earlier than usual, also made it harder for retailers to control their inventory within a quarter.
CFOs are responding by taking measures like discounts to eliminate excess inventory — which is eating away at their companies’ margins — and relying more on predictive analytics to manage inventory.
and Macy’s Inc.
are among retailers who have recently reported being burdened with excess inventory. Minneapolis-based Target said Tuesday its profits will plummet this year as it cancels orders with suppliers and offers discounts to weed out unwanted merchandise.
“We didn’t anticipate the brutality of consumer behavior change,” said Jonathan Ramsden, chief financial officer of Columbus-based Big Lots. Inc.,
which has seen excess inventory drag down the company’s latest results. Net sales fell 15% in the quarter ended April 30 from a year ago, while inventory rose 49%. The company posted a net loss of about $11 million, compared with a profit of $94.6 million a year earlier.
Department store chain Macy’s Inc. said it anticipates falling demand for some products that were popular at the start of the pandemic, such as casual clothing and home items. “The change has happened at a faster rate than expected,” a company spokeswoman said. Macy’s also received more inventory than it expected as some of the constraints its supply chain began to ease, the company said.
The retailer uses predictive analytics to forecast demand and potential inventory disruptions to buy the right items and allocate them among its locations, chief financial officer Adrian Mitchell said on a May 26 earnings call. “We know that our ability to maintain margin depends on our understanding of customer demand within and across categories,” he said.
Last year, about 30% of the company’s orders did not turn up. The percentage of missing orders has since declined to around 20%, Macy’s said, leading to excess inventory in its fulfillment centers.
Macy’s had just under $5 billion in inventory on its balance sheet as of April 30, up 17% from a year earlier. The company plans to use markdowns in the coming months to eliminate excess inventory, but expects to maintain profit margins in line with 2019 levels. Macy’s earned $286 million in the quarter, down from $103 million a year earlier.
During the first quarter, S&P 500 companies had about $1.1 trillion in inventory on their balance sheets, up 16% from a year earlier and 25% from the first quarter of 2020, according to S&P Global Market Intelligence, a data provider. . The dataset included 496 companies for the first quarter of 2022, as companies still release their quarterly results.
After ordering too much garden equipment and outdoor furniture, Big Lots is canceling orders from suppliers and using promotions to eliminate excess inventory, Ramsden said. The company, which ousted its merchandising director last month, is also looking to buy a new merchandise planning system to improve its visibility into the business, he said.
One of the factors leading to higher inventory levels at retail businesses, in particular, has been the longer lead times required by manufacturers, according to UBS Group analyst Jay Sole. HER
, a financial services company. It takes companies about two to three months longer than before the pandemic to bring goods from foreign manufacturers into the country, Sole said. Retailers are ordering earlier than in the past, making them vulnerable to rapid shifts in consumer preferences, especially for fashion, Sole said.
Inventory management is often the responsibility of line managers such as operations or merchandising managers. But CFOs also play a role because inventory levels affect bottom lines and tie up funds that could be used to invest elsewhere in the business.
Joann based in Hudson, Ohio Inc.,
which sells fabrics and craft supplies, said it was looking for ways to improve the speed at which it turns inventory into sales, Chief Financial Officer Matt Susz said. The company had inventory of $674.5 million on its balance sheet as of April 30, up 25% from a year earlier. The higher inventory levels were due in part to the company’s efforts to order fall inventory early to ensure it arrives on time. The company accounts for inventory delivered by ocean freight once it hits the water.
Joann plans to open a new fulfillment center outside of Columbus this year that will focus in part on fulfilling online orders, which are currently fulfilled by stores, allowing the company to consolidate and reduce overall inventory levels, Susz said. Joann in the three months ended April 30 reported a net loss of $31.6 million, compared with a profit of $15.2 million a year earlier, citing weaker-than-expected demand for its products.
As shortages plagued supply chains throughout 2020, businesses have since faced mismatches between consumer demand and available supply, according to business advisory firm Josh Nelson. Hackett Group Inc.
which supports companies in optimizing their supply chains.
Not all retailers carry more product than they need. Sporting & Outdoors Retailer Academy Sports & Outdoors Inc.
avoided having excess inventory, in part thanks to its use of machine learning to predict sales, said chief financial officer Michael Mullican.
“Because the tools are relatively new, they learn at a faster rate,” Mullican said. The Katy, Texas-based company’s units of inventory are down 8% from 2019. “Our sell curve is predictable enough to allow us to outpace the inventory build others may have.” -be seen,” he said. Still, the company has lower levels of cleats than it would like due to a global shortage, according to its chief financial officer.
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