Firms Keep Close Watch Over Inventory

NEW YORK — Less is more.

After inventory levels rose more dramatically than sales in the first half, analysts said companies should closely monitor the demand-supply equation going forward, especially given the recent volatility in world markets and anxiety over consumer confidence.

“Remember the fourth quarter of 2008, when holiday [sales] fell off a cliff and everybody sat there trying to liquidate [excess inventory]? That’s not a profitable way to do business,” said Michael Binetti, analyst at UBS Investment Bank.

Kate McShane, analyst at Citi Investment Research, is particularly concerned about inventory levels, given the uptick in footwear prices.

“We are entering uncharted territory with high single-digit to low double-digit increases in prices in a tentative economic environment. Concern about building levels of inventory [is mainly] based on the lack of visibility into demand in the second half,” she said. “Higher inventories could eventually mean pressure on gross margins as the company has to work through the product.”

Firms have recently seen their share values take a tumble from investor nervousness after announcing higher-than-expected inventory levels.

Wolverine World Wide Inc. was one such company that saw its market capitalization shrink nearly 9 percent last month, after reporting its second-quarter inventory grew 46 percent from a year ago.

“Anyone who has inventory up more than 40 percent and guiding for back-half revenue growth of just 10 percent is going to raise some eyebrows,” said Susquehanna Financial analyst Christopher Svezia. “The underlying concern is that the economy could slow down more meaningfully, or there will still be no job creation.”

Conversely, shares of VF Corp. spiked the day it announced a slowing of its inventory buildup to 17 percent year-over-year in the second quarter, from 24 percent year-over-year in the first.

“Inventory management has been and continues to be a big deal at VF, and we have a lot of disciplines in inventory control,” said Robert Shearer, the firm’s SVP and CFO, noting that after discounting cost increases, inventory value from unit volume grew 8 percent. “[This] aligns with our projected revenue growth [of about 12 percent] for the second half of the year. The quality of inventory is high. And as the year progresses we expect to show continued improvement from year-over-year comparisons just as we showed significant progress in this second quarter.”

Analysts also are watching Skechers USA Inc., which has been working hard for several months to liquidate excess stock of its first-generation toning inventory, which nearly doubled year-over-year at the end of the first quarter. In the second quarter, the firm sold about 2 million pairs — or about half the total aged stock — for a loss of $21 million.

“We feel this was a big step in reaching our goals for the year, which include right-sizing our inventory, bringing new product to the market and getting our overhead in line with anticipated 2012 sales,” said David Weinberg, Skechers’ COO and CFO. “We will continue to aggressively manage our inventory over the coming quarters and expect to see further reductions in the back half of 2011.”

In the retail arena, Binetti observed that “many [stores] are planning very conservatively into the back half because prices are going up, so units are going down.”

Finish Line Inc., for example, said inventory at the end of the first quarter was up 6 percent year over year, a relatively low number that matches its top-line expansion.

“We’ll continue to build inventories as our sales dictate,” said Sam Sato, the company’s president and chief merchandising officer.

Foot Locker Inc. also is operating with leaner inventories this year. The retail chain’s president and CEO, Ken Hicks, told Footwear News the focus now is on ensuring the back-to-school season starts in a good position with an improved merchandise flow.

“We now place multiple orders and have [them] come in over a period of time, so [we can] get the right shoes in the right stores and not have some stores backed up and other stores out of product,” he said.

Wes Card, CEO of The Jones Group Inc., noted, “Everybody’s being cautious. There are a lot of mixed signals [about the economy] and the entire industry is focused on getting better inventory productivity, because the offprice channels got flooded at the end of last year and it was hurtful to the bottom line.”

Jones’ inventory was up 26 percent year-on-year as of the end of the second quarter, about which Card added, “We’ll maybe not chase every last sale, but we feel good that … our inventory levels are in sync with our sales plans.”

Of course, some firms are more bullish than others. Timberland Co. CFO Carrie Tefner told FN, “This is a good year for anticipating demand [as we’re] seeing [consumers] getting more comfortable spending again.”

She added, “Our business has a tendency to be back-half weighted [with boots and colder-weather styles], so our challenge with factories is that we have a lower capacity for the first half of the year and we need all the capacity for the back half. We’re trying to do more level loading with core products, as we don’t want to be in a situation, as we were in certain parts of last year, where there was demand and we were [lagging behind].”

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