Inventories Jump, Putting Pressure on Profits as Businesses Face Steep Discounts to Clear Glut

Customers shop at a Target store in San Rafael, Calif., on June 8, 2022. Justin Sullivan/Getty Images

Economic indicators for June showed that U.S. retail inventories are rising and businesses have been facing financial pressure to clear out a glut of excess merchandise, according to a June 28 report from the U.S. Census Bureau.

Wholesale inventories in May went up by 2 percent from April to $880.6 billion, with a 25 percent year-over-year increase from May 2021.

Retail inventories in May increased 1.1 percent over April to $705.3 billion, with a 17.3 percent year-over-year increase.

The U.S. international trade deficit dropped to $104.3 billion in May, down by $2.4 billion from $106.7 billion in April.

U.S. goods exports for May were at $176.6 billion, $2 billion more than in April, while imports of goods to the United States fell to $280.9 billion, about $400 million less than in April.

Many retailers over the past two years had been stocking up amid supply chain challenges resulting from the pandemic-induced shutdown.

The conflict in Ukraine and the CCP (Chinese Community Party) virus lockdowns in China have caused a slowdown in recent months for manufactured items and increased price pressures throughout the global supply chain.

Major retailers like Walmart Inc., Costco Wholesale Corp., and Target Corp. were reporting a higher than expected inventory since the end of the first quarter.

Meanwhile, Walmart told its shareholders in May that it had reported an unexpected a 32 percent glut in inventory for the first quarter, which contributed to the steep stock decline.

Costco similarly admitted that its inventories were up 26 percent from the previous year, while Target saw its inventories were up 43 percent, with only a 4 percent gain in revenue in the last quarter.

Restocking After Shortages

A major portion of the glut came from the massive drive to replenish goods after supply-chain disruptions in 2021 led to an increase in out-of-stock items.

Retailers were also eager to restock their inventories after nearly two years of depleted stocks during the pandemic, when demand exceeded supply on regular store items like appliances and necessities such as toilet paper.

Much of the stock ordered for the holiday season at the end of 2021 did not actually arrive until the first quarter of 2022, leading to the glut, said Forbes.

When those orders finally arrived, retailers found that their consumer base had already moved on with their buying patterns, shifting from retail items popular during the fourth quarter toward entertainment and dining.

Many retailers were also stuck with increases in storage costs by the end of the first quarter of 2022.

Even worse, rising gas and food prices also started to take a toll on consumer consumption.

“It’s probably another couple quarters until we manage the inventory down to where we want it,” said John Furner, chief of Walmart’s U.S. operations, at the retailer’s annual employee meeting in early June.

The Arkansas-based retailer is increasingly concerned about the effects that rising inflation rates are having on its customer base, especially if prices remain elevated for months to come.

Limiting Food Hikes

In order to compete with the dollar stores, which many of its regular customers are increasingly flocking to, Walmart, like its rival Target, is planning to limit price hikes on basic foodstuff items.

Target CEO Brian Cornell told Marketwatch in early June that the retailer had expected a “post-stimulus slowdown,” but that it did not “anticipate the magnitude of that shift.”

The big retailers are now trying to dispose of excess inventory like furniture, electronics, and appliances by offering major sales for these products, in order to prepare their stores for the fall and holiday seasons.

Their primary concern is how far they can go with with generous discounts to remove these items from their stores without encouraging a financial hit this summer.

Retailers still are still reporting strong consumer demand, even as rising prices are becoming a major concern as the year goes on.

However, inflation is showing little sign of abating through 2022, providing little relief for consumers, which means that retailers may be forced to offer further markdowns that could limit their annual profit margins this year.