Moving the Goods Still Tough for Retailers

The economy may be picking up, but inventory levels could still weigh down retailers' second-quarter results.

Many retailers warned of substantial inventory builds in the first quarter. Although many promised to work through excess inventory, some reports indicate they may be having trouble doing so.

Consumer-products manufacturers such as Nike (NKE) and Unilever (UN) have warned of slow sales. Meanwhile, analysts have noted that many retailers are increasingly turning to promotions to push their products.

"Based on what I'm hearing in the industry from vendors, it sounds like inventory is piling up," said Richard Hastings, a retail analyst with credit agency Bernard Sands. "The logjam is more substantial than some want to admit."

Retailers as a whole have had a relatively tough year to date. Many saw poor spring sales follow a disappointing holiday season. A winter blizzard in February and the Iraq war added to problems caused by a slow economy and rising unemployment.

Although retail sales appear to have picked up in the last two months, many retailers still seem to be working through inventory issues caused by slow sales earlier in the year. At the end of the first quarter, retail chains such as Wal-Mart (WMT), Kohl's (KSS), Target (TGT) and American Eagle Outfitters (AEOS) warned that their inventory was higher than they wanted it to be.

The danger with having high inventory levels is that the merchandise can quickly become dated, forcing retailers to take deep discounts to clear it off their shelves and out of their warehouses. In turn, such discounts can slash retailers' profit margins.

Most retailers won't report their second-quarter earnings until next month, so it's impossible to know for sure how big an inventory problem they currently face. But if some leading vendors are an indication, inventory could pose severe problems for retailers in the second quarter.