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It’s going to be a weird Christmas for Target, Walmart and Amazon

The 'sonic boom of inventory' is an uncool early present

Our biggest retailers have way too much inventory and not enough consumer buzz. That’s a problem heading into the Christmas shopping season. 

Big box behemoths like Best Buy and Bed Bath & Beyond have bloated stockrooms and falling sales. Meanwhile, retailers like Amazon and Dollar General have seen an uptick in inventory value through this summer, according to their latest earnings reports — even as Wall Street begs companies to stop stocking up.

Companies struggled to keep inventory levels on par with unusual consumer spending through 2020 and 2021. But that retail mania finally slumped earlier this year. Retailers were left with what Urban Outfitters CEO Richard Hayne calls “a sonic boom of inventory.”

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On first-quarter earnings calls, these businesses admitted that they had continued to build up their inventories as if the consumer shopping spree of the earlier pandemic  would continue unabated. Recently, the big retailers sought to shed inventory with expensive tactics like canceling orders, slashing prices or taking low-selling goods back to storage. 

However, it’s proved difficult for retailers to totally stop the inventory buildup. Many top retailers reported in their second-quarter earnings that they increased their merchandise inventories compared to the previous three months:

Change in merchandise inventories from Q1 to Q2
Walmart-2.14%
Amazon9.05%
Home Depot3.13%
Walgreens-4.77%
Target1.57%
Lowe’s-4.50%
Best Buy-3.44%
Dollar General13.93%
TJX Companies1.34%
Kohl’s7.98%
Bed Bath & Beyond1.97%
Most first quarters comprised the three months ending the final week of April or first week of May. Most second quarters comprised the three months ending the final week of July. (FreightWaves analysis of company data)

And whether they succeeded to dump inventories from the second quarter or saw stores get even more packed, inventory-bloated retailers are continuing to struggle with middling or negative sales growth: 

Percent change from Q2 2021 to Q2 2022
WalmartInventory25.48%
Sales7.07%
AmazonInventory58.19%
Sales10.19%
Home DepotInventory37.97%
Sales6.50%
WalgreensInventory2.24%
Sales-4.21%
TargetInventory36.07%
Sales3.33%
Lowe’sInventory11.59%
Sales-0.34%
Best BuyInventory-5.83%
Sales-12.10%
Dollar GeneralInventory31.37%
Sales8.96%
TJX CompaniesInventory39.26%
Sales-1.94%
Kohl’sInventory47.60%
Sales-8.52%
Bed Bath & BeyondInventory12.54%
Sales-25.09%
Many retailers saw inventories increase more than sales in the second quarter of 2022, compared to the previous year. Most second quarters comprised the three months ending the final week of July. (FreightWaves analysis of company data)

It’s very hard to get an inventory situation like this under control. Orders from suppliers and distributors are made months in advance. And while some smaller retailers are actually still understocked from the retail craziness of 2020 and 2021, big box stores were able to get their orders in months ago — just in time for consumer demand to soften.

The gosh darn bullwhip is making everything a struggle — including your holiday shopping

On top of that, the bullwhip effect is only hastening the current inventory crisis. Here’s how it works:

Let’s say you are the manager of a metro Indianapolis outlet of Rachel’s Amazing Stuff, a venerated retail conglomerate. You estimate that, in the next month, 10 people will buy a fancy-schmancy air fryer. But just to be safe, you decide to buy 20 air fryers from your distributor. Given the past two years, it’s a fair bet more people will buy more air fryers than you anticipated and, if not, you can stock some away for the impending holiday season. 

So the distributor, Premack’s Crap, gets its order in for the 20 air fryers. The distributor decides to make an order for 40 air fryers for the same reason that the retailer bulked up its order. The distributor’s owner perhaps remembered 2021, when it had to pay for expensive airfreight to source goods. So the distributor is going to make a bulk order early to make sure it can secure everything it might need for the upcoming year.  

Finally, that order for 40 air fryers makes its way to the manufacturer, called MODES Manufacturing LLC. It decides to produce 80 air fryers because, why not? Business is hot, and MODES Manufacturing is flush with cash. That cycle, my friends, is how you end up with 80 air fryers when the demand forecast was for just … 10. (And, by the way, everyone’s stimulus checks ran out, so actually no one is going shopping for air fryers.)

This might help illustrate why at Bed Bath & Beyond right now, you can indeed buy a luxury air fryer for 50% off. (By the way, in the second quarter of 2022, compared to the same period last year, Bed Bath & Beyond had 12.5% more inventory — but sales have declined by 25%, according to its quarterly financial filings.)

This is going to be a weird ‘peak season’ for Target, Walmart, Amazon and the like

To be sure, it is a very challenging time to be planning orders as a retailer. Phil Levy, chief economist at freight forwarder Flexport, pointed to the confusion around mortgage rate hikes as one complicating factor. If we expect mortgage rates to stay consumer friendly, a retailer like Wayfair or Pottery Barn should continue ordering more couches and bed frames to their warehouses. Even the sharpest forecasters, though, aren’t certain of anything. 

Early fall — aka right now — is theoretically “peak season” for major retailers. Containers full of stuff (glorious stuff!) are usually rolling up to the U.S. ports in September and October for you to buy in November and early December. 

Yet it’s not even clear if people will engage in typical peak season activities, Levy said. One indication that retailers are spooked is clear at the ports of Long Beach and Los Angeles, which were overwhelmed these past few years by your exercise bikes, televisions, etc. At a time when they should be seeing steady imports in the run-up to the holiday shopping season, those ports are now seeing some of their lowest weekly maritime import shipments since June 2020. 

The U.S.’ biggest container shipping port is seeing unusually low volumes compared to the past two years. (FreightWaves SONAR)

Collapsing spot rates for truck movements are another indicator of the softening demand for stuff. Excluding the price of diesel, rates are down some 37% from the beginning of the year, according to the FreightWaves National Truckload Index. Deutsche Bank’s Amit Mehrotra wrote in an Aug. 31 note that this freight slowdown is indeed connected to the retailers’ wish to have less stuff in their warehouses. 

Transportation aside … let’s get back to the weird Christmas.

Walmart CFO John David Rainey said on second-quarter earnings calls that the giant is “well-positioned” for the 2022 holiday shopping season. Christina Hennington, chief growth officer at Target, said the company’s hearty growth in toys and entertainment was a promising sign for the holidays. And Urban Outfitters’ Hayne too reported renewed interest in gifts and entertainment — at full price.

It’s a tricky battlefield. Let’s pretend, for a moment, that you’re the owner of Rachel’s Toy Emporium. October and November are your hottest months. Given that you have no idea when your customers are going to buy toys, your options are to bring in the orders on the early side or the late side. 

If you’re too early, Levy said, you need to store your wares for months. And even more frustrating, you’re in the position of having to forecast what you need in stores even more in advance than usual. Because there’s little consensus on what’s happening with the economy, such forecasting is difficult. 

And if you’re too late, Levy said you need to liquidate your inventory or spend extra cash to warehouse it all.

“You can get badly penalized for being wrong in either direction,” Levy said. “If you underestimate demand, you can’t meet those sales. If you overestimate demand and open a factory you never use, you’re in trouble. There’s no safe harbor.”

Not my nicest message to the retailers, but them’s the breaks. Email your thoughts and shopping plans to rpremack@freightwaves.com, and be sure to subscribe to MODES for the latest transportation news.

5 Comments

  1. its not about what political part were under. its the fact that companies *choose* to make a profit during the middle of a war, pandemic, and financial cost of living crisis all in one. They are choosing high prices and profits over consumers, and then they all go, gee, why isnt anyone buying our inventory at twice the cost it used to be?? doesnt anyone have any spending money?? and its like, yeah, they did back when the govt was sending out checks, but not anymore. dumbass corporations dont have a heart, mind or soul to think about their consumers. they will only ever see us as profit to harvest til we are nothing left.

    1. do you understand what free market is? the president has zero dictation over how companies run themselves. its all down to individual, privately owned businesses. fight back against the corporate bull. we are under guise of an oligarchy at this point, qwhere corporate power holds us all at the throats and shakes us for all we are worth. direct your hatred at those hands, bro.

  2. What a great article. So true on all fronts. I am a purchasing manager so I keep an eye and ear on all fronts. I have a question, if you are one of the big retailers, did they not see inflation coming? Many many people did. My other question is , if i am a big retailer, shouldn’t they have know a democratic congress and president was goin to spend money? I mean this is not new. I have no party affiliation to either one. Just curious what you think .

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Rachel Premack

Rachel Premack is the editorial director at FreightWaves. She writes the newsletter MODES. Her reporting on the logistics industry has been featured in the New York Times, the Wall Street Journal, Bloomberg, Vox, and additional digital and print media. She's also spoken about her work on ABC News, NBC News, NPR, and other major outlets. If you’d like to get in touch with Rachel, please email her at rpremack@freightwaves.com or rpremack@protonmail.com.