Supply Chain Shakeup   //   September 29, 2023

Apparel retailers are entering the holiday shopping season with leaner inventory

Apparel retailers are approaching one of the busiest shopping seasons of the year with much slimmer inventory.

Abercrombie & Fitch said in its recent earnings report in late August that it had cut down its inventory by around 30% year-over-year. G-III Apparel Group, which owns brands like DKNY and Karl Lagerfeld, said it dropped inventories by 23% year-over-year. Guess, meanwhile, said that it plans to reduce inventory by 10% this year.

Because of supply chain disruption caused by the pandemic and raw material sourcing issues, among others, retailers had been bulking up their inventory supply to avoid going out of stock and missing out on sales during the holidays in 2020 and 2021. Then, for much last year and this year, apparel retailers have been left with too much product due to supply chain lags and a drastic decline in consumer demand. In turn, they’ve been trying to reduce inventory ever since. Analysts expect that the apparel category is aiming for fewer discounts this year and expecting slower holiday sales.

As shipping times improve, there are several benefits to keeping a lean inventory. By holding less inventory, retailers are able to get better margins and reduce the need to roll out steep markdowns. 

“Even when they mark down, there’s not a guarantee that they’re going to sell,” Sky Canaves, senior analyst at Insider Intelligence said. “If consumers know that a brand is constantly having sales and constantly having markdowns are going to become conditioned to wait for products to go on sale or not want to not be willing to pay full price.” She added that retailers are willing to trade off the risk of losing sales from being out of stock in order to protect their margins.

But for apparel retailers like Abercrombie and Kohl’s, having less stock on hand could also help them quickly respond to emerging trends and source in-demand products. Kohl’s shrunk its inventory by 14% in its recent quarter and said it is “optimizing our apparel assortment to reflect our customers’ interest.” Meanwhile, Abercrombie executives on recent earnings calls have touted the sourcing team’s ability to follow demand signals.

“We’ve got a very strong sourcing and supply team where they’re very agile,” CEO Fran Horowitz said in a call with investors and analysts. “They work with the teams every week, respond to the business and can chase into what’s working.”  

Apparel sales were relatively slow throughout the year, and this trend could persist even during retail’s biggest sales period of the year, said Kirthi Kalyanam, professor and executive director of the Retail Management Institute at the Leavey School of Business at Santa Clara University. Data from Insider Intelligence indicates apparel and accessories category’s U.S. retail sales are expected to grow by 3.2% year-over-year this holiday, which is below the average overall retail sales growth of 4.5% projected for this period.

“There was some concern that apparel sales might continue to be soft in [the fourth quarter]. And if that’s the case, going in with a leaner inventory is a smart strategy,” Kalyanam said. “We just don’t know where the consumer is, and you can see that even the Federal Reserve doesn’t quite know where the economy is.”

Similarly, G-III Apparel Group has said that it “tempered” its buying this year. By the end of the third and fourth quarter, the company said it expects to have lower inventory levels compared to the previous year. 

Last year, G-III had immensely struggled to manage its inventory. In the third quarter of the prior year, the company’s inventory grew to $901 million compared to $449 million in 2021. Its net income dropped to $61 million from $106 million that quarter.  

“We’re not aggressive on inventory ownership,” Morris Goldfarb, CEO of the G-III Apparel Group, said in an earnings call earlier this month. “We kind of learned our lesson. We weren’t able to manage as well as I would have liked the logistics crisis that occurred, and money is more expensive today than it was yesterday.”

Other apparel retailers crushed by excess inventory and lower consumer demand had to drastically markdown several products last holiday. Levi’s listed over 800 items on sale across different categories, and Nike had almost 11,000 products marked 40% off.

While retailers remain confident, the supply chain system is still unpredictable, said Kassi Socha, director analyst at research firm Gartner. Shipping delays could cause retailers to sell out of products and lose potential customers. Retailers might also not be able to react to trends as quickly as they thought.

“With the supply chain there’s always risks of a curveball, things like a boat getting stuck in a main shipping canal, main airports going into lockdown or weather affecting the ability to move inventory from one place to another,” Socha said. “But I think over the last few years, we’ve had so many disruptions that retailers can feel confident that they’ve at least learned how to respond to disruptions.”