Discounting hurt retailers' bottom lines and caused many to scale back their sales and earnings projections for the rest of 2022.

Several months ago, a plague of empty shelves and out-of-stock online merchandise restricted shoppers. Now, retailers say they have a lot of inventory, but much of what they have isn’t in high demand anymore.

According to second-quarter earnings reports, some of the nation’s largest retailers resorted to offering promotions to sell off all that slow-moving stuff. The discounting has hurt retailers’ bottom lines and caused many to scale back their sales and earnings projections for the rest of 2022.

Reasons for the inventory glut include significant shifts in consumer purchasing brought on by inflation. Experts say that rising food and energy prices left consumers with less money for discretionary items like apparel and home goods. Other factors include retailers miscalculating demand for items popular during the pandemic, like athleisure apparel. Also, due to supply chain uncertainty, longer-than-normal lead times worsened retailers’ ability to make forecasts by forcing them to make inventory decisions earlier.

Retailers and industry observers say it will take time to sort everything out.


Spending shifts toward basics

At Walmart Inc. (No. 2 in the 2022 Digital Commerce 360 Top 1000), shifts in consumer demand caused it to cancel billions of dollars’ worth of orders from suppliers late in 2021. But it still had a glut of inventory during Q1 and Q2 of the current fiscal year, the retailer reported.

During an Aug. 16 conference call, Walmart CEO Douglas McMillon said consumers weighed down by inflation recently shifted their spending toward food and consumables. That left the retail giant with a glut of other kinds of inventory.

“Starting back in March, we knew we needed to act quickly and aggressively in some categories, and we have. We’ve made good progress to reduce inventory,” McMillon said.

He said markdowns in apparel were especially aggressive and costly. But unlike some others, Walmart maintained its previously stated outlook for the third quarter and the remainder of the fiscal year.


Target slashes inventory

Target Corp. (No. 5 in the Top 1000) faces similar problems. In Q2, its net earnings plummeted as the costs associated with a massive plan to reduce excess inventory outweighed the effect of a rise in sales. Second-quarter earnings fell 89.9% from the comparable quarter last year to $183 million.

Target announced in June that it would dramatically reduce inventory by slashing prices after supply-chain woes across the retail industry led to a surge in unsold products.

“We could have held on to excess inventory and attempted to deal with it slowly over multiple quarters or even years,” Target CEO Brian Cornell told analysts during an earnings conference call. “(But) it would have cluttered our sales floor and hampered our ability to present new, fresh items.”

Target’s distribution centers reached more than 90% capacity by June. By the end of Q2, Target had lowered that to 80% capacity.


Discretionary spending deteriorates

Other publicly traded retailers, including Macy’s Inc. (No. 16), Kohl’s Inc. (No. 21) and Nordstrom (No. 20), tell similar stories in their Q2 earnings statements and conference calls with analysts.

Macy’s CEO Jeffrey Gennette cited “a continued deterioration of consumer discretionary spending” and high inventory levels for the retailer’s decision to cut its revenue and earnings guidance for 2022. Macy’s new outlook anticipates markdowns and promotions to liquidate “aged inventory,” the company said in a statement.

Nordstrom expects the cost of selling off excess inventory will reduce its gross profit about $200 million in the second half of 2022.

“We estimate that approximately half of this additional markdown pressure reflects actions we are taking to improve our assortment,” Nordstrom CEO Pete Nordstrom during an Aug. 23 conference call with analysts. “The other half is related to external factors such as softening demand and our expectation that the promotional environment in retail will become more competitive in the second half of the year.”


‘Unprecedented times’

Retailers have excess inventory at a time when retail sales are growing. Shifts in consumer priorities have created a mismatch, causing some goods to remain unsold on store shelves or in warehouses, says Mark Mathews, vice president of research development and industry analysis at the National Retail Federation.

Mathews says the unpredictable supply chains and shortages in 2021 were partly to blame for the inventory mismatches of 2022. The struggle to keep goods in stock led retailers to shift from just-in-time ordering — to receive inventory shortly before it’s needed — to “just in case” ordering, he says. That led some retailers to overbuy to ensure they had merchandise available.

NRF’s Mathews says it’s always challenging for retailers to forecast demand accurately. But there was “no template” for the rapid changes in consumer behavior over the past six to nine months.

“These are unprecedented times,” he says, adding that he thinks the current inventory glut is both understandable and a temporary problem.


Nikki Baird, vice president of strategy with retail technology company Aptos, says retailers should have anticipated many changes in consumer buying patterns that occurred once the threat of COVID-19 eased.

“It was easily predictable that when things opened back up there would be less breadmaking and more eating bread in a restaurant, for example,” Baird says. “I realize it wasn’t exactly predictable when that shift would happen, but retailers seemed to have taken an approach of full-bore for pandemic habits until they saw real evidence that the behavior was shifting – and, for inventory management, that’s way too late.”

What the numbers say

The overall inventory-to-sales ratio — a U.S. Census Bureau benchmark showing the relationship of the end-of-month inventory values to monthly sales — was 1.21 in June, meaning retailers had enough inventory to fulfill 1.21 months of sales. That’s about 18% lower in June than the 1.48 ratio in June 2019, before the pandemic. Excluding the immense and volatile motor vehicle and parts dealers’ sector, the June ratio was 1.16. That’s still about 5% lower than the 1.22 ratio in June 2019.

But not all retailers are in the same boat, Mathews says. He says that in the general merchandise, department stores and building materials categories, ratios are above their 20-year averages. In some categories, ratios also exceed those in 2019.


Census Bureau data also show that some categories’ inventories have grown significantly since last year. Some are even higher than they were in 2019. Categories with the highest ratios in June were department stores (2.24), apparel and accessories (2.22), and building/gardening materials (1.93).

Implications for holiday sales

Mathews says inventory gluts are nothing new for retail companies, which are anything but novices at liquidating merchandise through clearance sales. He says data on household wealth, incomes, and spending show that U.S. consumers still have the means to dig deep over the holidays.


“Every month of retail sales this year exceeded the corresponding month last year,” he says.

Retailers are optimistic as well.

“As I look ahead, I expect a strong finish to the back-to-school season, and we’ll quickly transition to the holidays,” Walmart’s McMillon said during the Aug. 16 conference call. “Our fall and holiday products look great. There’s a lot of newness, and we’ve got a strong position in opening price points across categories.”

Target’s Cornell says customer surveys make him hopeful about the rest of 2022. 


“We know [customers are] looking forward to Thanksgiving, and they’re going to look forward to celebrating the Christmas holidays,” Cornell told analysts. “And that comes out each and every week, as we survey consumers and talk to our guests. So that gives us great optimism for our ability to perform during these key holiday seasons.”

Earnings percentage changes may not align exactly with dollar figures due to rounding.

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