Siddharth and Arriana Cavale

NEW YORK, (Reuters) – Major U.S. retailers who recently struggled to restock shelves due to product shortages revealed this week that they now have too many merchandise and are discounting products that are no longer in stock.

This is a warning sign that retailers could face more problems due to rising inflation and high gas prices. Retailers now have a lot of merchandise to sell, and this is contributing to higher costs.

Costco Wholesale Corp. (NASDAQ:) stated that their inventory increased 26% in the fiscal third quarter. This was due to an increase of “few hundred millions dollars” in holiday merchandise as well as a heavier spending on smaller appliances.

Gap Inc (NYSE): A 34% increase in inventory was due to poor Old Navy sales and longer transit times, Gap Inc’s CFO Katrina O’Connell stated Thursday.

The CEO of Macy’s, Jeff Gennette (NYSE.) also cited this week an “imbalance in inventory.” According to Gennette, “Supply Chain constraints were relaxed” and it received goods from overseas sooner than “we expected”. In the meantime, customers changed their purchasing patterns and bought fewer household items, while buying occasion-based clothing.

Citi research on data from 18 retail outlets shows that average US retail inventories are growing faster than sales. The results were reported by Citi. Paul Lejuez, Citi analyst, stated that inventories increased by 10 percentage points faster than sales at 11 of 18 retailers. It is the biggest gap since prior to the coronavirus epidemic, and reflects a trend which began in March 2022.

Major retailers bought a lot of merchandise during the supply-chain crisis and increased their investments to ensure they had enough stock so that shoppers could buy with ease.

But the retailers’ moves backfired, according to executives and analysts. Inflation was at an all-time high and fuel prices were rising quickly. This led to shoppers having to retrench rapidly and buying less clothes, televisions, and appliances with high margins.

That scenario is prompting retailers like Walmart (NYSE:) and Macy’s to clear out excess inventories by discounting more items and offering deeper promotions, a move that would erode margins. Walmart CEO Doug McMillon said on its earnings call that it had started “aggressive” price rollbacks to encourage sales of some higher-margin goods, including apparel.

EXCESSIVE MERCHANDISE

According to Walmart, as inflation increased the prices of all things, including TVs and toothpaste, consumers with lower income have reduced their spending. Target (NYSE:).

High-income consumers have demonstrated resilience by buying suits, gowns, and shoes and spending more money on services and economic data, as well as results from retail stores that target more wealthy households.

Excess merchandise is costly as warehouses costs increase. According to the retailers, Walmart and Target stores had 32% and Target 43% more merchandise than a year ago, respectively, and Best Buy sold 9% more merchandise for the quarter. Macy’s said on its earning call inventories rose 17% from the same period in 2021.

Adrian Mitchell, Macy’s Chief Financial Officer, stated that consumers’ rapid shift from “pandemic” categories and the receipt of items earlier than anticipated, due to loosening supply chains, led to higher inventories. According to Mitchell, Macy’s second quarter gross margins will reach 2019 levels.

It is expected that retailers will increase their discounts this year to get rid of unsold stock. For example, Macy’s Chief Financial Officer warned about “an elevated promotional climate.”

StyleSage research data shows that 57% of mid-tier department stores (Macy’s, Kohl’s,NYSE:) increased price promotions during May.

According to StyleSage, 36% of clothing items were discounted by retailers as of May middle, up from 32% for April. However, the average discount remained constant at 12% from January.

Jane Hail Associates’ research shows that Kohl’s offers eight promotions in the second weeks of May, in comparison to the three offered in the previous year.

Walmart also offered up to 65% discount on the top-rated products and 25% off tech and home items during May 9. Last year’s tech deals had a 10% discount and home product offers only limited products.