Retailers Wrestle With Inflation And Inventory Challenges

It’s been said “there is no ‘i’ in team” — but for the nation’s retailers and the legion of small and medium-sized businesses that support and supply them, there are two giant “i-words” complicating the comeback: inflation and inventory.

In the past two weeks alone, retail CFO references to shipping, freight costs and supply chain concerns have been on the rise, while at the same time, the latest government data showed an 18 percent annual jump in sales, but almost no increase in the amount of goods being held in warehouses.  

The result was a slump in the inventory-to-sales ratio to just 1.23, marking the lowest level in at least a decade, the Commerce Department report showed — as well as an acceleration of a downtrend that began 15 months ago.  

For retail executives tasked with finding ways to keep shelves stocked at the very time when consumers are coming out in droves to shop, the current environment is proving to be increasingly challenging.

“The go-forward sales trend remains very difficult to predict,” Burlington CEO Michael O’Sullivan told investors last week. “Expense headwinds in supply chain and freight have continued to deteriorate, and these are likely to weigh on our operating margin throughout the balance of the year.”

Not Just Apparel

Kevin Wampler, CFO of the discount retailer Dollar Tree, expressed a similar sentiment within an otherwise solid set of Q1 results last week. “With regards to freight, the market conditions have continued to deteriorate since our update in March, and we are now expecting costs to be significantly higher than projected, led by import freight due to the continued disruption in the global supply chain from equipment shortages and capacity issues,” Wampler told investors. “These additional costs will have the biggest effects on Q2 and Q3.”

This red flag followed similar cost pressure warnings from a range of consumer-facing businesses that started to pick up in April — including high-end digital mattress retailer Sleep Number, which forecast $25 million of new cost pressures this quarter due to higher-than-expected commodity, labor and logistical costs.  

Numerous other consumer product companies, including Procter & Gamble and Coca Cola, have also recently touched on the reality of price increases and the causes behind them. P&G Chief Financial Officer Andre Schulten told analysts in April that rising commodity costs will see prices going up, especially for categories such as diapers and feminine hygiene products.

“We will offset a portion of this impact with price increases,” Schulten said. “Our baby care, feminine care and adult incontinence businesses have announced price increases in the United States that would go into effect in mid-September. The exact timing and amount of increases vary by brand and sub-brand in the range of mid to high single-digits.”

A Slow-Moving Barge

To be sure, the pricing and inventory problem has not happened overnight, although the weeklong shutdown of the Suez Canal in March as well as the port delays in Los Angeles have drawn more mainstream attention to the situation.

Six weeks ago, ING Chief International Economist James Knightley told CNBC that the Institute for Supply Management’s survey data showed that 40 percent of manufacturers were reporting that their customer inventories were “too low.” 

Last week, The Wall Street Journal reported that retailers ranging from Dick’s Sporting Goods to Best Buy were struggling to balance tight supply in the face of rising demand for everything from kayaks to flat-screen TVs. “It’s hit almost every aspect of the business, so we’re chasing all the time. We’re chasing everything. But we’ve gotten really good at it,” Lauren Hobart, recently promoted CEO at Dick’s, told the Journal.

Although we’ve just marked the unofficial kickoff of summer, retailers and logistics firms are fully engrossed in Christmas and the holiday shopping rush, trying to find ways to alleviate problems before it’s too late.

“For every 110 televisions a retailer might have in stock, they’re selling 100 of them [each month]. That leaves very little room to have a safety stock,” Noah Hoffman, vice president of North American surface transportation for CH Robinson, told the Financial Times, noting the rise in retailers bringing forward holiday orders from June to April to beat the bottleneck.