Retailers’ stockrooms are stuffed, and that’s probably not a good thing.
The Census Bureau on Tuesday said retail inventories rose 0.3% in October from a year earlier, three times the rate economists polled by Bloomberg anticipated and the fastest pace of growth since July. Rising inventories generally mean merchandise isn’t flying off shelves—an ominous sign, given the season.
There is a bullish argument one could make when considering the increase, in the form of retailers stockpiling merchandise ahead of the holiday season. But that would mean forgetting Christmas comes every year, says Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.
“It’s a bad thing,” Shallet says. “There’s too much inventory and companies are going to need to blow it out” by discounting deeply at the expense of profit margins.
The inventory build-up comes as retailers reporting third-quarter results and updating their outlooks for the current quarter and full year lament the impact of tariffs stemming from the U.S.-China trade war. Some have stepped up imports to boost inventories in advance of the latest round of tariffs—10% on about $156 billion in mostly consumer goods including smartphones, laptops, toys, and videogames—set to kick in on Dec. 15.
(ticker: DLTR), which also operates Family Dollar stores. “Timing did not allow for significant mitigation,” finance chief Kevin Wampler said after the company noted that tariffs are set to increase its cost of goods sold by $19 million, or 6 cents a share, in the fourth quarter. To try to get ahead of the pain, the company built inventories by 14.4% from a year earlier across its Family Dollar chains.
But there’s more to the story than tariffs alone. Consumer spending has been resilient despite a manufacturing recession, Shallet notes, but that will be the case only until consumers start to worry about their jobs—and there are some nascent signs of anxiety.
Consumer confidence in November fell to the lowest level since June, the Conference Board said Tuesday, with its gauge of current conditions deteriorating significantly. And fewer Americans have been quitting their jobs, Labor Department data show, a sign that workers aren’t so optimistic about finding a new job quickly.
It isn’t all that surprising, then, that overall consumer spending in October rose at the most sluggish pace since February, with retail sales for October slowing to the lowest rate of growth since May.
What’s more, retailers’ inventory-to-sales ratios are near the expansion’s highs. Lower is typically better when it comes to the amount of inventory to sales, and
(ROST) gets high marks with a ratio of 13.8. The discount apparel chain has worked to bring down inventories massively in recent years, thereby boosting margins and helping drive the stock 160% higher over the past five years.
For Dollar Tree, its inventory-to-sales ratio is 16.5, on par with those of rival
(DG), apparel retailer
(GPS), and department store
(JWN). Some analysts applauded Nordstrom recently for its inventory management, which should let the company be more selective when its comes to marking down prices this holiday season.
Bringing up the rear of the S&P’s retail members is jewelry chain
(TIF), with a 56.7 ratio of inventories to sales. Some of that, the company said, is because it increased stocks in anticipation of a stronger holiday season. The company, which has been trying to restore its exclusive status in the luxury market, agreed this past week to merge with LVMH Moët Hennessy Louis Vuitton.
Investors won’t know for a while whether Tiffany and others get their wish for holiday sales. But they’ll have some good clues after this Thanksgiving weekend.