Introduction

Our quarterly US Retail Inventory Tracker reports review inventories held by US retailers in the Coresight 100, our global focus list of retailers, brands and non-retail companies. In this report, we assess inventory turnover ratio trends over the past eight quarters. The inventory turnover ratio indicates how efficiently a retailer manages inventory, showing how many times inventory turns over in a particular period, calculated as the cost of goods sold (i.e., the amount of goods sold at wholesale prices) divided by inventory held at the end of the period. A relatively high inventory turnover tends to be positive for a retailer, while low or slowing inventory turnover may indicate lower sales and challenges in inventory management. As retailers have different fiscal year-ends, the quarters under review in this report may not be identical. Most companies in our coverage reported results for the fourth quarter of fiscal 2020 (4Q20), ended January 31, 2021. In November 2020, US retail sales saw strong growth of 8.1%, despite several states reinstituting more restrictive mandates owing to the surge in new coronavirus cases. In December, US retail sales continued to rebound strongly, with consumers shifting spending away from services and experiences to retail goods. In January, US retail sales growth accelerated to a revised 13.0% as stimulus checks boosted consumer spending. In February, US retail sales growth slowed to a still-solid 7.2% as consumers continued to purchase goods rather than services but pulled back spending in a month that saw no stimulus checks and a nearly nationwide winter storm that kept millions inside for almost one week.

Overview: Inventory Turnover Rates Increase Year over Year

Most retailers covered here saw their inventory turnover rates increase compared to the same quarter in the previous year as well as sequentially (quarter over quarter).

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Figure 1. Inventory Turnover Ratios by Quarter: All Retailers [caption id="attachment_125490" align="aligncenter" width="725"] Source: Company reports/Coresight Research[/caption]  

How Various Retail Sectors Turned Over Inventories 

4Q20 continued to see a rebound from the point of inventory turnovers, mainly led by soaring digital sales. Home remains an outperforming category at most department stores, discount stores, mass merchandisers and off-price retailers. Further reflecting demand for home categories, home-improvement retailers witnessed 10% year-over-year growth in inventory turnover ratios. Apparel specialty retailers saw their inventory turnover ratios increase by 13% year over year, versus a 9% increase in the prior quarter—mainly supported by strong demand for casual and athletic wear. Off-pricers maintained their growth momentum from the last quarter, with inventory turnover ratios increasing by 24%, following 19% growth in the last quarter. The one covered beauty retailer, Ulta Beauty, saw a 13% increase in its inventory turnover ratio, versus a 7% decline in the prior quarter, driven by increased demand for skincare products but offset by weak demand in the overall makeup category. Department stores saw their inventory turnover ratio increase by 6% year over year—versus 18% growth in the prior quarter—driven by strong demand for home, beauty, and activewear and athleisure categories. Department stores see these categories as a key part of their strategy going forward. Luxury retailers posted a significant 11% year-over-year decline in inventory turnover ratios, following a 22% decline in the prior quarter, as demand for luxury goods remained subdued. The one covered electronics retailer, Best Buy, saw 3% growth in its inventory turnover ratio, versus a 24% increase in the prior quarter. The company saw demand spike in certain categories, including computing, appliances, gaming and home theater. Discount retailers reported a 16% increase in inventory turnover ratios, while warehouse clubs saw a 1% decline in inventory turnover ratios. Drugstore retailers saw flat growth in inventory turnover ratios versus a 1% decline in the prior quarter. Food and mass retailers maintained their growth momentum from the last quarter, with inventory turnover ratios increasing by 10% and 5% year over year, following 4% and 5% growth in the prior quarter, respectively. On a sequential (quarter-over-quarter) basis, most retailers witnessed positive growth in their inventory turnover ratios. Among our covered retailers, only drugstores reported a sequential decline in their inventory turnover ratios versus a strong increase in the prior quarter.

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Figure 2. Inventory Turnover Ratios by Quarter [wpdatatable id=848 table_view=regular]

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Inventory turnover = Cost of goods sold for the quarter/ending inventory for the quarter; averages are non-weighted (arithmetic) *Excludes Wayfair, an outlier                                                           Source: Company reports/Coresight Research

Sector and Company Overview

We look at the inventory levels of selected retailers across sectors and assess why inventory levels changed from the year-ago period.

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Figure 3. Latest-Quarter Inventory Values of Covered US Retailers: YoY % Change [caption id="attachment_125530" align="aligncenter" width="725"] Source: Company reports/Coresight Research[/caption]   Apparel Specialty Retailers Inventory is a particular issue for apparel retailers: These companies are vulnerable to excess stock as a result of the weather (which is unpredictable), changing consumer tastes or simply making misjudgments about the selection and design of products. Most apparel specialty retailers saw consumer demand for casual and athletic wear, while demand for structured apparel—such as for the office and events—remained weak. The majority of covered companies reported higher inventory turnover ratios than the year-ago period.

	Commentary
American Eagle Outfitters	The company ended the fourth quarter with inventory down 9% year over year, mainly driven by reductions in American Eagle (AE) stock. The company cut receipts due to its inventory-optimization initiatives, which focus on choice and SKU (stock-keeping unit) count reductions. In Aerie, the company continued to invest in inventory to support its growth momentum. Management said it will continue with the inventory-optimization initiatives in the first half of 2021 and will refine plans for the second half of the year.
Gap	The company’s inventory was up 14% year over year at quarter-end, driven by three key factors. First, about 10 percentage points of the increase stemmed from stock the company strategically held back in the first half of fiscal 2020, due to pandemic-related store closures, to be reintroduced for sales in the first half of 2021. Second, pandemic-related US port congestion and impacts on shipping lanes contributed to higher in-transit inventory levels. Third, Gap owned an inventory of pandemic-related safety products, such as masks and hand sanitizers, at year-end.
Urban Outfitters	The company’s inventory was down 5% year over year. Management said that Covid-19 had impacted Urban Outfitters’ ability to replenish and deliver timely new receipts to all channels in the first quarter of fiscal 2022 as it continues to experience delays and increased costs in bringing product into the US and the UK from Asia. The company expects these challenges to gradually moderate as the year progresses. Management said that it will take about two years to complete Phase 1 of the company’s new North American facility in Kansas. Urban Outfitters expects this facility to support the growth and expansion of its Retail segment business in North America by offering faster and more efficient inventory processing.

Off-Price Retailers Off-price retailers Burlington Stores, Ross Stores and The TJX Companies saw major year-over-year declines in their inventories as they aggressively cleared aged merchandise through markdowns. This was compounded by challenges in replenishing depleted inventory levels in their stores due to delays in getting through receipt backlogs and owing to their conservative approaches to planning in the current coronavirus-impacted environment.

	Commentary
Burlington Stores	The company’s total inventory was down 5% at the end of the quarter. The company’s in-store inventories were down 16% on a comparable store basis. Reserve inventory, which includes stock that is being stored for later release (either later in the season or in a subsequent season), was up 5% and comprised 38% of total inventory versus 33% last year. In 2021, the company will continue to manage in-store inventories conservatively. Burlington Stores noted that its reserve inventory could move up or down depending on sales trends and the availability of attractive pack-away inventory-buying opportunities.
Ross Stores	The company’s total inventories were down 18% year over year, with average store inventories declining by 16%, driven by the West Coast port congestion. Packaway inventory levels were 38% of the total inventory versus last year’s 46%, as the company used packaway inventory to replenish store inventory throughout the quarter. Management remains confident that the company will be able to rebuild its inventory in apparel, with part of that coming from demand chase, packaway inventory and goods to be purchased in advance of the season.
The TJX Companies	The company ended the quarter with inventory down 11% year over year. Management said that the company is doing a great job procuring merchandise and adjusting logistics to get it to its distribution facilities and stores, which will improve its store inventory position.

Beauty Retailer

	Commentary
Ulta Beauty	The company’s total inventory decreased by 10.0% as it adjusted its inventory receipts to recent demand trends and reduced holiday receipts. Management said that the company looks to clean out its stock, replacing it with new product, mainly in the makeup category.

Department Stores All the covered department stores witnessed a year-over-year decline in inventory levels at the end of the quarter.

	Commentary
Kohl’s	The company’s inventory level was down 27% year over year, with the turnover rate reaching a 10-year high due to tighter inventory management. Going forward, the company will continue to manage its inventory tightly and lean into trending categories such as activewear and home. The company’s long-term goal is to achieve an inventory turnover ratio of 4.0, from 1.5 in the latest quarter.
Macy’s	The company ended the fourth quarter with inventory down 27% year over year. Macy’s management team reported that the company has very good sales-to-stock parity, and the inventory turnover rate has improved 18% in the second half of fiscal 2020, providing momentum heading into the first quarter of fiscal 2021. Management said that the company will manage its inventory conservatively for the first half of fiscal 2021, which will be helpful in managing markdowns and driving higher sell-throughs.
Nordstrom	The company’s inventory was down 3% year over year. In the first half of fiscal 2021, the company plans to cut its sales-to-inventory spread by half, with inventory realigned at Nordstrom Rack. In 2Q21, the retailer expects inventory levels for its Nordstrom brand to be fully realigned with the expected sales level after normalizing for the Anniversary shift.

Discount Stores The majority of discount stores reported higher inventory turnover ratios than in the year-ago period. These retailers continued to attract a broad base of budget-conscious shoppers amid economic uncertainty.

	Commentary
Big Lots	The company’s total inventory was up 2% year over year. Total inventory included significant growth in in-transit inventory as the company chased sales and worked to get stock back ahead of Lunar New Year. In 1Q21, the company expects inventory to be up by around 15% against very depleted inventories in the same quarter last year but flat compared to 2019 against a two-year double-digit sales increase.
Dollar Tree	The company’s total inventory declined by 3.0%. At Dollar Tree, inventory declined by 5.9%, while inventory per selling square foot decreased by 9.2%. At Family Dollar, inventory increased by 0.5%, while inventory per selling square foot declined by 11.3%. Management said that the company will continue to be more productive with lower inventory, substantially increasing its inventory turns.

Electronics Retailer

Commentary

Best Buy

The company ended the quarter with inventory up 8.0% compared to the same period last year. About half of the increase was attributed to inventory in transit. In 2021, Best Buy anticipates more promotional pressure versus 2020 as inventory availability increases and competition likely rises.   Management said that the company experienced inventory constraints in a number of categories, such as gaming, printing and computing, which moderated sales growth. The company expects the inventory constraints in key categories to continue in the next quarter.

Home and Home-Improvement Retailers

Most of the covered home and home-improvement retailers reported strong improvement in their inventory turnover ratios compared to the year-ago period.

	Commentary
Home Depot	The company’s inventories increased by 14%, driven by strong demand during the quarter. Inventory turns were 5.8X, up from 4.9X in the same quarter last year. Management said that the company is in a strong inventory position for the spring season.
Lowe’s	The company’s inventory was 23% higher than the previous year’s levels as it stocked up on products to meet elevated customer demand. The company noted that lumber inflation increased inventory values by about $240 million.
Williams-Sonoma	The company’s inventories were down 9.0% year over year. Williams-Sonoma is experiencing additional delays due to pandemic-related slowdowns and port congestion, foam shortage owing to the harsh February weather in the South, and a shipping container shortage. CFO Julie Whalen said that the company is working with its vendor partners and expects that its inventory position will return to more normalized levels in the second half of 2021.

Luxury Retailers Most luxury retailers expect inventory to sequentially decline in the next quarter to align stocks with expected demand and revenue declines.

	Commentary
Capri Holdings	The company’s inventory declined by 18% year over year, reflecting the aggressive inventory-reduction program Capri Holdings implemented at the beginning of the pandemic.   The company expects inventory to sequentially decline in the next quarter owing to the cancellation of holiday receipts and the repurposing of spring/summer 2020 products for later seasons.
Ralph Lauren	The company’s net inventory, which excludes inventory reserve and allocated goods and materials, was down 4% year over year, with a 2% decline in North America and a 15% decline in Europe but a 7% increase in Asia. In the next quarter, the company expects inventories to increase against last year’s double-digit decline.

Mass Merchandisers All covered mass merchants reported a higher inventory turnover ratio compared to the year-ago period. For 2021, these retailers are planning for full shelves and better in-store stocks to fulfill customer demand quickly.

	Commentary
Target	The company ended the quarter with inventory up 18%, versus a sales increase of over 21%.   In 2021, Target is planning for full shelves and better in-store stocks, which will bring inventory turnover rates and payable leverage back down to more sustainable levels. The company noted that this will require a net investment of working capital for the year.
Walmart	Total inventory increased by 1.0%, which the company attributed to the continued recovery of in-stock levels from the first half of 2020.   Management said that Walmart is focusing on building automated systems that optimize all aspects of inventory in real-time—from how the retailer gets inventory from its suppliers to keep products in stock, to fulfilling customer demand in the fastest and most economical way possible.

Warehouse Clubs Our covered retailers reported a slight decline in inventory turnover ratios compared to the year-ago period, mainly due to aggressive inventory accumulation to support the business going forward.

	Commentary
BJ’s Wholesale Club	The company ended the quarter with inventory up 11%. Management said that the company made a number of aggressive inventory purchases to plug holes in its in-stock position as well as prepare well for the upcoming spring and winter seasons.
Costco	Total inventory increased by 17%. Management said that the company had front-loaded some core and non-seasonal inventory items to mitigate some of the replenishment challenges due to port congestions and delays.

Looking Forward

Impacted by the holiday season, most retailers reported an increase in their inventory turnover ratios in 4Q20, both year over year and sequentially. In January, we saw a significant return to in-store shopping amid increased vaccine distribution throughout the US. However, in February, store traffic saw a sequential decline as many states opted to extend pandemic-related restrictions and winter storms affected the South, Midwest and Northeast. As some states eased their restrictions in March owing to a decline in cases, we expect to the month to have seen an improvement in traffic trends. Many retailers managed their inventory conservatively, so they witnessed depleting store inventory levels that impacted their sales. Furthermore, retailers noted that crisis-related US port congestion and impacts on shipping lanes contributed to higher in-transit inventory levels in the reported quarter. Some retailers, such as BJ’s Wholesale Club and Costco, are making a number of aggressive inventory purchases to plug holes in their in-stock position and support business going forward. In the next quarter, against the weak comparatives, we expect to see strong improvement in inventory turnover ratios for most covered retailers, driven by an improvement in sales and in-store traffic trends. The e-commerce channel continues to help retailers reduce their in-store inventory and offset losses from brick-and-mortar closures. Some retailers, such as American Eagle Outfitters, Kohl’s, Macy’s, Ulta Beauty and Urban Outfitters, are therefore looking to strengthen their digital models. This involves the expansion of curbside-pickup and ship-from-store capabilities and the implementation of automated fulfillment technology at stores and distribution centers. These measures will likely help retailers to adjust inventory levels in stores quickly and help distribution centers to meet changing consumer demand. As consumers continue to engage with retailers across a wider variety of channels, having real-time knowledge of where all inventory sits has become vital for most retailers. Retailers need to reassess their usual assortment and accumulate more stock in some categories and less in others, given the fluctuations in consumer demand. An efficient and flexible inventory management system could reroute in-store stock that has low demand in some areas to locations where demand is high. Furthermore, to reduce the risk of supply chain disruptions going forward, retailers could diversify sourcing options and work with a variety of suppliers and manufacturers.