Heavy Inventories Threaten to Squeeze Clothing Stores

Heavy Inventories Threaten to Squeeze Clothing Stores

Retailers’ Weak Thanksgiving Showing Could Force Tough Markdowns

SUZANNE KAPNER

Dec. 3, 2013 9:58 p.m. ET

It isn’t just Americans who need to go on a diet after Thanksgiving. Apparel retailers need to slim down, too. Chains including Abercrombie & Fitch Co. ANF +5.79% , Chico’s FAS Inc., Gap Inc.GPS -1.13% and Victoria’s Secret came into the fourth quarter with heavy inventory loads. The concern now is the retail industry’s weak showing over Thanksgiving weekend will force them to take bigger markdowns that could hurt their fourth-quarter profits.Simeon Siegel, an analyst with Nomura Equity Research, looked at the inventory carried by those and other specialty-apparel retailers at the end of the third quarter and compared it with his projections for the chains’ fourth quarter sales. He found that in most cases inventory growth far outpaced sales growth. Normally, the two should be growing about the same.

“The ratios are the worst we have seen in quite a while,” Mr. Siegel said.

The companies each acknowledged that their inventories were rising and said the levels were appropriate.

Yet with holiday sales getting off to a slow start, positions that seemed appropriate several weeks ago may turn out to be too high. A survey commissioned by the National Retail Federation concluded that sales over Thanksgiving weekend fell to $57.4 billion from $59.1 billion a year ago—the first drop in at least seven years.

Fewer shoppers said they had bought clothing or visited apparel stores, according to the NRF survey, which polled nearly 4,500 consumers.

Marshal Cohen, the chief industry analyst for the NPD Group, said he spotted signs throughout the weekend that stores were overstocked, including goods stacked high up on shelves and ample merchandise in storerooms.

“When the most common sizes of popular items don’t sell out, that’s a problem,” Mr. Cohen said.

Craig Johnson, the founder of Customer Growth Partners, a retail consulting firm, estimates that growth in fourth-quarter sales will undershoot growth in inventories by about five percentage points.

Retailers constantly have to balance the risks of running lean inventories and missing sales with overbuying and having to liquidate. Retailers that opted to run a little heavy may now regret it, Mr. Johnson said.

“The worry now is about demand falling, not going through the roof,” Mr. Johnson said.

Abercrombie ended the third quarter with inventory up 22% from a year earlier. Yet Mr. Siegel of Nomura predicts the retailer’s sales will fall 14% in the fourth quarter.

Abercrombie declined to comment on Mr. Siegel’s projections. The company acknowledged on a recent conference call with analysts that it expects to end the year with higher inventory, but said the increase will come from new spring goods rather than unsold fall merchandise.

Chico’s third-quarter inventory grew 14%, easily outstripping the 1% drop Mr. Siegel expects in fourth-quarter sales. A Chico’s spokesman said a calendar shift and new store openings accounted for the swelling inventory. This year’s third quarter ended a week later than last year’s, meaning inventories were measured closer to the holidays and were bigger as a result.

Mr. Siegel expects Gap’s sales to decline 4% in the fourth quarter, even though it finished the third quarter with inventory up 9%. Gap said that on a per store basis, inventory was up only 4% at the end of the third quarter and that its online sales were seeing “double-digit” growth.

Inventory rose 14% at L Brands Inc., LB +0.21% parent of Victoria’s Secret, at the end of the third quarter, but Mr. Siegel expects fourth quarter sales to rise just 2%. An L Brands spokeswoman pointed to the company’s third-quarter conference call with analysts, during which executives explained that the increase in goods was due to the rollout of new bra styles and the restocking of some basics.

Gap and L Brands have had strong years, with their shares up more than 30%. But apparel sales have been suffering as shoppers direct their attention elsewhere. Many consumers, when they are spending at all, are plowing money into their homes and buying new cars.

Another problem for specialty retailers is the lack of a hot fashion trend, Mr. Siegel said. Skinny jeans, colored jeans and peasant skirts have driven sales in recent years. This year, some of the hottest trends aren’t in apparel, but rather in footwear, where ankle boots are reigning supreme.

Also working against apparel retailers is a shift toward bringing the coming season’s goods into stores earlier in an effort to capture more sales. It used to be the spring goods would hit stores in early January, but now they are arriving as soon as Dec. 21, Customer Growth’s Mr. Johnson said. That means new goods will collide with old fall and winter merchandise still hanging on the racks.

“Retailers are saying, ‘If I have the product first, maybe I’ll sell more,'” Mr. Siegel said