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Retailers keep an eye on fatter inventories

Mushrooming inventories have retailers walking a tightrope as they simultaneously guard against heavy markdown exposure while moving to take advantage of sharp buys at wholesale.

Whether stung by the slowdown in sales or by plan, the development is in sharp contrast to the situation last year when inventories trended thinner as merchants continued trying to eke their numbers out of a slowing economy. And that does offer a somewhat broader context for the building stock positions today, even as retailers ride the sales roller coaster.

No matter the rationale, there is still a lot of merchandise in the backrooms and on the shelves, ranging from JCPenney's 6.9 percent "slightly above plan" increment, to Linens 'n Things 24.8 percent rise, to Williams-Sonoma's attention-grabbing 47 percent rise.

Even Wal-Mart, with a 13.4 percent increase last quarter, will concentrate on bringing that down in the short-term future.

That focus creates additional tension for vendors seeking to move their products also. But retailers feel the pressure to get rid of the goods.

"It appears that retailers have stepped up discounting in the face of the inventory buildup," stated Michael Niemira, senior retail analyst, Bank of Tokyo-Mitsubishi, in a report from the National Retail Federation. "Retailers trying to sell spring and summer merchandise have been hoping the weather will cooperate."

The National Retail Federation's operations index, the average of employment and inventories, rose to its highest level ever in May, at 48.4 percent versus 43.1 percent in April. As a result, the survey's pricing index, which tracks industry discounting power, decreased to 20.3 percent in May from 25.0 percent the previous month.

But, for home retailers, bigger inventories are of less concern. "It's not like apparel, which is seasonal and they have to clear it out," Joan Storms, Wedbush Morgan Securities, said of the home retailing industry overall.

Niemira said that though it is of interest right now, "I don't think inventories are exceedingly high. Retailers have taken steps to reduce by marking down. Over the next few weeks they will right themselves." There will be more "righting" for some than for others.

At Pier 1 Imports, inventories now are "right on plan," said Cary Turner, evp and cfo. "We have fresh merchandise and we really don't have as much exposure as apparel."

For Pier 1's last reported quarter, inventories expanded 21 percent, but Turner explained that last year's period was probably under-inventoried, and the stores' square footage has grown seven percent from that period. Turner continued, "we manage our inventories prudently. When we have a slowdown in business, we push out purchases or reduce orders." It will report on its first quarter on June 17.

Wal-Mart is one retailer that will scale back on some of its ordering, after disappointing first quarter sales resulted in a 13.4 percent increase of inventories.

"It's clear our sales increases were less than planned, which led us to undesirable inventory levels," president and ceo Lee Scott said during its first quarter conference call. "We have some work to do in the coming quarter to bring our inventories down to the appropriate levels."

The higher inventories for the retailer also created some markdown exposure, but Scott said that has already been factored into its earnings forecasts.

JCPenney also went into the second quarter with inventories "slightly higher than planned," with the department store and catalog segment up 6.9 percent at the end of the first quarter. Vanessa Castagna, evp and ceo, JCPenney stores, catalog and Internet, pointed out during its first-quarter call that, last year, it entered the second quarter with comp store inventories down six percent. That resulted in low inventory levels throughout the second quarter last year.

This year, however, "we are better positioned to take advantage of seasonal and basic opportunities," Castagna said. Merchandise content and in-stock positions have improved over last year, she added, and the merchandise receipt plan has not changed.

At T.J. Maxx and Marshall's parent company TJX, net inventories mushroomed 16 percent in its first quarter, the result of lower-than-expected sales and exceptional opportunistic buys. However, Ted English, president and ceo, also said during its first-quarter conference call that they were part of the business plan and had contributed to above-average margins. It also has enabled TJX to obtain more in-season merchandise than usual.

"Business has been tough out there, and vendors have released inventories earlier than they would have [typically]," he said, adding that total commitments were in-line and its open to buy was in great shape.

Howard Tubin, an analyst for Cathay Financial, New York, who covers TJX, has seen inventories up across the board. He pointed out, however, that though TJX's inventories are up, it's because it saw more compelling buys this year, while last year it had more future commitments instead.

Kohl's addressed its bigger inventories for its first quarter ended May 3, during its recent conference call. Because of the late start to Spring weather, "our inventory levels are still higher than we would like them to be," said Kevin Mansell, president. But, the "vast majority" of the inventory overall was in forward apparel categories, and he was "comfortable with the mix of inventories," which include continued support of key merchandise areas in basics and the Get It! program. Kohl's also continually takes markdowns each month, but clearance is a small part of the overall inventory level, he said.

Williams-Sonoma saw its inventories jump significantly for the first quarter, with an increase of 47.5 percent. However, Storms pointed out that the company had valid reasons for such an increase, including very low inventories last year, as well as its aggressive plan "to increase the in-stock to improve its fulfillment rate."

Bloated retail inventories
(last reported qtr.)

Source: numbers from latest company filings
Wal-Mart +13.4
Sears +9.2
Target +8.3
J.C. Penny +6.9
LNT +24.8
Kohl's +27.6
TJX +16
Pier 1 +21
Williams-Sonoma +47.5
Cost Plus +27.2


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