Retail markdowns could be coming as companies tackle excess inventory

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A buildup of inventory across major retailers is cultivating a climate of markdowns, according to a new report. 

It started happening at a time when "consumers began curtailing spending and shifting away from discretionary categories," according to a research note from the Telsey Advisory Group.  

American consumers have been struggling to keep up with the surging prices of everyday goods such as food, household items and even gas. Even if it moderates, inflation will likely remain high well into 2023, economists say, leaving many Americans burdened by price increases that have outpaced pay raises. 

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The good news is that companies are starting to throw out promotions in order to combat the excess inventory that they have accumulated, according to the Telsey Advisory Group. 

A Walmart store on May 18, 2021 in Hallandale Beach, Florida.  (Photo by Joe Raedle/Getty Images / Getty Images)

"Inventory levels are high as companies chased as much merchandise as possible to support demand, which has now slowed. Ultimately, markdowns and promotions are starting to pick up," the Telsey Advisory Group said in the research note. 

For instance, Target Chief Growth Officer Christina Hennington announced during its first-quarter earnings call earlier this month that the company faced "softer-than-expected sales in several categories, resulting in too much inventory in those areas." 

The problem was that the "mix of actual demand materialized differently than we had anticipated," Hennington told analysts. 

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While supplies grew, consumer demand "shifted away from bigger, bulkier products like furniture, TVs and more," Hennington said. 

Meanwhile, its competitor and the largest retailer in the nation, Walmart, is facing a similar issue. 

A Target employee pulls red shopping carts into the Santa Fe, New Mexico store.  (iStock / iStock)

"As it relates to Walmart U.S. general merchandise sales, we knew that we were up against stimulus dollars from last year, but the rate of inflation in food pulled more dollars away from GM [general merchandise] than we expected as customers needed to pay for the inflation in food," Walmart U.S. CEO Doug McMillon said during an earnings call earlier this month. 

Ticker Security Last Change Change %
WMT WALMART INC. 127.51 +2.06 +1.64%
TGT TARGET CORP. 160.91 +4.39 +2.80%
M MACY’S INC. 23.81 +0.48 +2.06%

McMillon said the company likes the fact that its inventory is up "because so much of it is needed to be in stock on our side counters." On the other hand, "a 32% increase is higher than we want," McMillon added. 

McMillion noted that the company will "work through most or all of the excess inventory over the next couple of quarters." 

Shoppers walk to the Macy’s store in the Downtown Crossing district, Wednesday, Nov. 17, 2021, in Boston.  (AP Photo/Charles Krupa) / AP Newsroom)

In fact, the company already started "being aggressive with rollbacks in apparel" during the first three months of the year. 

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"Even with reduced prices, the apparel margin can still be helpful to our overall mix," McMillon said. 

Macy's Chief Financial Officer Adrian Mitchell also noted on a recent earnings call that the company is focused on markdowns within the second fiscal quarter "to clear some of the excess inventory on those decelerating categories."

Mitchell also noted that there is "the possibility of an elevated promotional environment given the high inventory levels we see in the industry."

The Associated Press contributed to this report. 

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