May 20, 2016 / 11:16 AM / 3 years ago

Unsold U.S. retail inventory a challenge after dismal earnings season

CHICAGO (Reuters) - A pile-up of unsold inventory across U.S. retail chains is likely to squeeze profits further as stores struggle to make up for a weak first quarter marred by weak sales and share declines.

Moving the stale stock of mostly clothes, accessories and electronics is likely to lead to bigger discounts and steeper markdowns, which in turn would reduce chances for a swift profit rebound.

Tepid consumer demand for small discretionary purchases is likely to compound the problem, analysts said.

Disappointing sales by some of the biggest retailers including Target Corp (TGT.N), Macy’s Inc (M.N), JC Penney (JCP.N) and Kohl’s Corp (KSS.N) are likely to lead to even more promotions and discounts to woo customers

Target’s shares fell to a 52-week low on Wednesday after its sales missed estimates.

Macy’s stock fell as much as 15 percent on Wednesday after it reported a drop in sales and cut guidance.

Target Chief Executive Brian Cornell, speaking after the company released its earnings, cautioned investors about the impact of the stock build-up.

“Many of our competitors are sitting on meaningful excess inventory, which we expect will extend the very intense promotional environment into the months ahead,” he said.

According to a report by analytics firm Dynamic Action, retailers sold 4 percent fewer items at full price in the first quarter than a year ago, while the percentage of promotional products ordered online jumped 63 percent.

Such orders reached a record high in March, when they soared 86 percent from a year ago, the report said.

The jostling to sell excess inventory over the next three months could hit sales growth, said Brian Yarbrough, an analyst with financial services firm Edward Jones.

“Right now retailers have started cutting back on deliveries for the third and fourth quarter,” he said, referring to new inventory orders. That could leave them understocked for the end of the year, when most retailers make as much as 40 percent of their annual sales, he said. Some retailers might be able to avoid slashing prices.

The world’s largest retailer, Wal-Mart Stores Inc (WMT.N), bucked the trend and posted surprisingly higher sales on Thursday as lower-income consumers spent more. That should mean Wal-Mart sold much of the stock earmarked for the quarter, easing the pressure to offer steep promotions and discounts, analysts said.

A man in short sleeves carries shopping bags near Herald Square during unseasonably warm weather in the Manhattan borough of New York December 27, 2015. REUTERS/Pearl Gabel

Other bright spots included home improvement chains like Home Depot (HD.N) and Lowe’s Companies Inc (LOW.N), which have benefited from a housing recovery; and off-price apparel retailers like TJX Cos (TJX.N), which offer low-priced branded apparel and accessories.

“Real disposable income growth has remained weak and that has contributed to the growth and outperformance of off-price chains and the continued slowdown for department stores,” said Craig Johnson, president at retail consultancy Customer Growth Partners.

Off-price chains such as Ross Stores Inc (ROST.O) and Burlington Coat Factory had been a negligible force in the industry until a few years ago. But as consumers try to get more bang for their buck, chains that offer quality branded goods at lower prices have become increasingly popular.

Reporting by Nandita Bose in Chicago; Editing by Jo Winterbottom and Richard Chang

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