The second quarter was rough for retail.
While there are potential signs of growth and consumer recovery on the horizon, retailers are still grappling with operational hits that are reverberating from the ongoing pandemic. That is happening alongside a consumer base that is dealing with inflation by changing its shopping behaviors. Meanwhile, many retailers are cutting guidance as demand for nonessential goods erodes in some categories.
This quarter, Target saw operating income fall 87% year over year, as gross margins dropped on markdowns and increased costs from merchandise, shrink and frieght. The company said it would be taking markdowns and canceling orders — a short-term pain in order to prepare for the last part of the year.
While Walmart performed better than anticipated in Q2, operating income in its U.S. business fell 6.7% due to lower operating profits and margins on markdowns.
As big-box retailers and others have reported earnings over the past few weeks, a number of patterns emerged regarding operations. Below are some quotes from retail’s C-suite executives addressing their results and points of friction with inventory, cost inflation and the state of freight.
Inventory
Doug McMillon, CEO, Walmart
Starting back in March, we knew we needed to act quickly and aggressively in some categories and we have. We have made good progress to reduce inventory levels where we focused and taken markdowns. The aggressive approach we took to move through apparel in particular put financial pressure on us, but it helped relieve pressure on our stores and through our supply chain.
John David Rainey, CFO, Walmart
General merchandise inventory growth rates are down more than 15 percentage points from Q1, but still with more work to do. We have cleared most summer seasonal inventory, but we are still focused on reducing exposure to other areas such as electronics, home and sporting goods. We have also canceled billions of dollars in orders to help align inventory levels with expected demand. We estimate that only about 15% of our total inventory growth in Q2 is still above optimal levels and our actions in Q3 will allow us to make significant progress toward rationalizing absolute levels and mix, which will enable our stores to be well positioned ahead of the holiday season.
Brian Cornell, CEO, Target
Consider the alternative, we could have held on to excess inventory and attempted to deal with it slowly over multiple quarters or even years. While that might have reduced the near-term financial impact, it would have held back our business over time. Of course, this decision would have driven incremental costs to store and manage the excess inventory over a longer period. But much more importantly, it would have degraded the guest experience. It would have cluttered our sales force and hampered our ability to present new, fresh and fashionable items, the ones our guests expect from Target.
James Reinhart, CEO, ThredUp
Unlike traditional retailers whose brand equity around pricing, inventory commitments and fashion manufacturing lead times can become a liability in a hyper promotional and slowing macro environment, our consignment structure and flexible responsive supply chain enable us to take minimal inventory risk. We don't set trends or have to bet on trends in many quarters into the future, we can let the data drive our decision making.
Jeff Kinnaird, executive vice president of merchandising, HomeDepot
We are still having to pull inventory forward. If you think about today's supply chain environment, our focus is to be there for our customers, to be there for our pros in terms of the right job lock quantities and the right timing of events and other activities. So part of our inventory overage is obviously due to that work in terms of being there for our customers.
We do have some carryover inventory from the spring season, but it is really low-risk inventory that we're managing through and ensuring that we're ready for next season. But overall, we feel very good about our in-stock position. We're managing the inflation of our environment in inventory and will be there for our customers in terms of in-stock.
Joe McFarland, executive vice president of stores, Lowe’s
In February, I discussed the launch of our game-changing, new store inventory management system, or SIMS. While we are just six months into the implementation, we are already seeing strong results. With the improved inventory visibility, we are reducing nonproductive hours the associates spend searching for product while also improving the customer shopping experience in-store and online.
Jill Timm, CFO, Kohl’s
In terms of inventory and promotions … we're actively working down inventory. We've done that through cutting receipts. We've been aggressive on clearance as well as promotions. Obviously, as we go into the important holiday period, we want to make sure we're still flowing freshness and we have those gifting opportunities for our customers. So we'll continue to watch that move into the holiday period.
Ernie Herrman, CEO, TJX Companies
We are in a terrific inventory position, and we have plenty of open-to-buy to take advantage of the current environment. This allows us to offer even more exciting merchandise and value to our shoppers, which is our top priority every day.
Jeff Gennette, CEO, Macy’s
Over the past year and a half, I’ve spoken to the success our team has had in navigating supply chain volatility. This quarter was no different. The improved use of data analytics enabled the team to respond quickly and adjust our inventory flow accordingly. We ended the quarter with inventory levels up 7%. We acknowledge that we still have opportunities to improve our inventory balance by channel and store and mix of merchandise categories and brands. We are targeting appropriate inventory levels by the end of the year and plan to be aggressive in taking the necessary markdowns to drive faster sell-throughs in our aged inventory in seasonal goods, private brand merchandise and pandemic related categories.
Cost inflation
John David Rainey, CFO, Walmart
We’re managing our supply costs as well as we can. Units did strengthen throughout the quarter, particularly in July and late July. I think you heard that earlier. So seeing some positive units there was refreshing given how we had started the quarter. Fuel prices were coming down. So we think that could have had some of an impact as well.
John Mulligan, COO, Target
While pressure from excess inventory has presented the biggest challenge to our team this year, dealing with high costs and volatility in the external supply chain has run a close second.
And today while conditions remain far from what we would have considered normal in the years before the pandemic, there are early signs that both costs and volatility may have peaked.
Adrian Mitchell, CFO, Macy’s
When you think about freight and delivery, fuel costs are currently trending down, but they remain elevated to what we saw earlier in the year.
James Reinhart, CEO, ThredUp
This past quarter, we reduced expenses across headcount, R&D, CapEx and discretionary spending, not pertinent to the current growth trajectory of the business. This includes making the difficult decision to lay off about 50% of our corporate workforce as well as shutter one of our processing centers.
Sarah Nash, interim CEO, Bath & Body Works
We are proactively working to combat the inflationary pressures by challenging ourselves on expense management and working within our supply chain to decrease costs where possible, all without compromising quality and our focus on the customer, something we will never do.
Freight
Doug McMillon, CEO, Walmart
We are making good progress to reduce costs. We have reduced the number of shipping containers in our system, for example, by more than half from the Q1 level and are now much closer to our historical averages. We are also managing pricing to reflect our fully landed costs.
John Mulligan, COO, Target
[L]ead times in global shipping have begun to decline. Spot rates to move shipping containers have fallen somewhat. And in light of the reduction in petroleum prices, we've all seen recently, fuel surcharges have been easing somewhat compared with the peak rates we saw earlier in the second quarter.
That said conditions remain highly unfavorable when compared to the years before the pandemic and we're mindful of the continued risks in the months ahead. including potential slowdowns at the West Coast ports, a reversal of the recent decline in energy costs and the possibility of additional COVID lockdowns in China.
In addition, we continue to encounter far too many delays affecting overseas shipping which require us to pay spot rates to move containers, rates that are well above our pre-negotiated shipping rates. As such we're maintaining our practice of moving receipt dates earlier than we would have in the past which allows us to mitigate the business risk from receiving shipments later than expected.
Jill Timm, CFO, Kohl’s
So freight today, although a dynamic environment, we are seeing some of those costs come down. They're still higher than last year. But then in Q4, we start lapping some of those higher costs. So although the margin isn't improving, it's going to change buckets, really from being more freight-pressured into more of those promotions and clearance activities to make sure that we can move into 2023 feeling good with the inventory composition.
Scott Goldenberg, CFO, TJX Companies
We did say if the environment was such that the freight would moderate, we would be able to improve our margin. That certainly is what’s happening in the back half. And we still would expect our freight rates to be better next year … We are taking advantage of where we’re moving our goods into what ports. ... Part of why the inventory is up is you have the freight and cost impact that’s buried in the overall inventory.
