After struggling with slow sales in the first quarter, retailers may have a new worry in the second quarter: high inventory levels. In their first-quarter results, many retailers reported big jumps in inventory. Those increases could be followed by big markdowns, if slow-sales trends continue. Already, retail leaders such as
Wal-Mart ( WMT), Target ( TGT) and Kohl's ( KSS) have acknowledged that their inventory levels are higher than they want and they may have to cut prices to move products. But markdown pressure is likely to extend far beyond such retail icons, said Kurt Barnard, president and chief economist of Barnard's Retail Consulting Group. And many retailers are likely to take a hit on their bottom line as a result, he said. "People anticipated better consumer spending patterns than they got. They thought that once the Iraq war ended, things would go back to the way they were three years ago, that there would be a spending spree," Barnard said. "That belief was unfounded." Many retailers struggled in the first quarter. After recording slow sales, companies including PetSmart ( PETM), Talbots ( TLB), BJ's Wholesale Club ( BJ), ( JWN) and Safeway ( SWY) Nordstrom warned that they either wouldn't meet their own prior guidance or analysts' expectations. Faced with a tough sales environment and rising costs, former high-fliers such as Target, Williams-Sonoma ( WSM) and Borders Group ( BGP) failed to better their bottom lines from a year ago. Retailers largely blamed the weather and the war in Iraq for their sales woes. Winter storms forced store closures in February and unseasonably cool weather in April and May has dampened demand for spring and summer clothes, retailers have said. Meanwhile, the war in Iraq distracted shoppers, they've said.
But analysts have largely blamed other, less-temporary factors, ranging from relatively high unemployment to a lack of must-have products. With those factors still hanging out there, consumer spending may not pick up for a while. And that could mean bad news for retailers holding on to lots of inventory. At Wal-Mart, for instance, inventory climbed 13.4% in the quarter over the first quarter a year ago, outpacing the company's sales. Acknowledging that the company's inventory levels could force markdowns and lead to slimmer profit margins in the second quarter, Wal-Mart officials said they were taking steps to bring inventory in line. "It's fair to say this performance is not acceptable," said Tom Schoewe, the company's chief financial officer. But the inventory problems aren't only affecting retail behemoths like Wal-Mart. Instead, they have extended far down the retail chain. At American Eagle Outfitters on a year-over-year basis, inventory increased 28% overall and nearly 14% per square foot in the first quarter. That far outpaced the company's same-store sales, which fell 6.5% in the quarter. Same-store sales measure results at outlets open for more than one year. "We carry too much inventory for what ended up to be a challenging retail environment," said Roger Markfield, American Eagle's president and co-CEO. Although many companies reported big inventory surges in the quarter, some discounted the seriousness of the issue. Overall, inventory at Kohl's jumped nearly 28% in the first quarter on an annual basis. Although inventory per square foot increased just 8% as the company greatly expanded its store base, that rate far outran the company's same-store sales, which declined by 2.4% in the quarter. On a conference call with analysts, Kohl's officials acknowledge that inventory levels were higher than they wanted them to be, but they said they had already begun to clear out inventory through markdowns and were "comfortable" with their inventory mix.