Kohl’s, Dillard’s, Nordstrom prove that reducing inventory can increase working capital, but for how long?

Three weeks from the end of the year, distributors and brands are focused on their balance sheet, and it is above all a question of finding working capital to survive. Reducing inventory now – perhaps by half – can bring retailers closer together. However, figuring out which items to cut is a wild ride when done blindly, or worse, using historical data that doesn’t reflect the fluidity of changing consumer preferences right now.

To top it off, returns are also going to be hot and heavy in January, particularly because online sales (which have exploded during the pandemic) tend to have higher return rates than in-store purchases. Vacation purchases made online are expected to reach $234.9 billion in the United States this year according to one estimate, which also predicts that up to $70.5 billion could be returned.

Cutting inventory to recoup capital is a strategy retailers and brands have pursued all year, but it’s clear they’re still looking to past purchases for guidance.

I recently read about Dillard’s (NYSE:DDS). Despite the pandemic crushing its department store peers, the company improved year-over-year profitability in its fiscal second quarter, which ended August 1.^st, and posted a surprise quarterly profit in the third quarter. Dillard is no stranger to the stock glut. They saw what was happening early and took aggressive inventory liquidation action that saw them exit the period with inventory down more than 14% year over year. As a result, while the chain’s retail sales plunged 35% year-on-year in its fiscal second quarter, retail gross margin increased to 31.1% from 28.7%. the previous year. Combined with strong cost reductions, that paved the way for a $24 million year-over-year improvement in the company’s adjusted pretax loss. Dillard’s continued to clean up inventory, exiting the period with inventory down 20% year over year. This helped it increase its retail gross margin to 36.6% in the fiscal third quarter, from 34.5% a year earlier.

Kohl’s seemed to be making smart inventory cuts that fit with what consumers want right now – activewear and beauty. Recently CNBC reported that the company’s shares rose more than 5%, after Chief Executive Michelle Gass outlined the retailer’s plans to expand into activewear and personal care in 2021. Kohl’s has significantly reduced inventory over the past quarter, putting it in a position where it will be less dependent on cuts during the holiday season. Kohl’s strategy heading into 2021 is to reduce the amount of dressier merchandise in stores and focus more on adding active, comfortable wear. While that strategy looks solid at the moment, I’m curious to see when they might start accommodating the mid-to-late 2021 consumer who can return to work and become more social as, fingers crossed, the benefits of mass vaccinations are setting in.

According to this the wall street journal piece, Todd Kahn, president and CEO of the Coach brand, said they produce 1,000 handbag designs each season, but now only make 500, emphasizing best-selling colors: black, brown and off-white.

Using past buying behavior can give you some leeway, but that won’t go far enough when we’re looking at a year like 2021 where consumer preferences are going to be more shifting than ever. A managing director of consulting firm AlixPartners LLP, commented in the History of the Wall Street Journal, “Simply narrowing down the choices is the wrong approach.” Instead, the piece states, retailers need to understand what consumers expect of them and then champion that.

It reminds me of the famous quote often attributed to John Wanamaker on marketing investments that says, “Half the money I spend on advertising is wasted; the problem is that I don’t know which half. …How silly in the age of data that according to the NRF, 50% of products also fail. So which ones are you dropping?

A new report from Mazars discussed the renaissance of the luxury model as the industry adapts to the changing expectations of new cohorts of customers. According to the report, the luxury sector has long viewed in-person selling as central. Today, however, the article notes that this is changing and that the global luxury sector is reconfiguring itself based on the expectations and demands of customers who may never set foot in their stores, as well as affluent Millennials and Gen Zs and affluent customers from China. These customers expect experiences that allow them to browse and buy online as well as in-store, get instant and accurate information about a product’s durability and authenticity, and be supported afterward. a purchase. This has driven a complete digital shift in the luxury sector, and these retailers and brands are more aligned with customers than ever in their quest to build loyalty, experience creation and loyalty, according to the report.

The reality is that retailers and brands shouldn’t just cut and burn, but rather find a way to choose from their inventory to bring consumers what they want in order to squeeze every dollar to survive..

I recently participated in WWD Virtual Apparel and Retail Summit, where I co-presented with Jonathan Duskin, CEO of Macellum Capital Management. We discussed how businesses should mitigate risk. Move quickly. Test. To anticipate. So take action. And that approach needs to have the right data to support decisions. The fact that only a fraction of retailers and brands have invested in technology that allows them to anticipate consumer buying behavior is, in my humble opinion, difficult to comprehend at this point, especially since innovation in the industry has been accelerated.

Our recent survey further proved this pervasive disconnect.

As we approach next year, we’re likely to see the same for the first six months (i.e. bankruptcies, closures, liquidations), and probably longer, as we let’s wait for vaccinations to reach critical mass. CEOs and business decision makers need to stop being tactical about how they run their business and use something other than history or intuition to effectively improve margins. Harnessing the voice of the consumer using technology is the missing link that allows retailers and brands to ensure their inventory is aligned with what consumers want to buy and create experiences that generate much-needed recurring revenue. .