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Looking Ahead to the Retail 4th Quarter

  
  
  
There was a Dow Jones piece that appeared yesterday on The Wall Street Journal's website, "Concerns Mounting Retailers May Not Have Very Merry Christmas", that linked expectations for 4th quarter business with retailer's inventory plans.  
"The poor numbers may force retailers to reduce already spartan inventory plans further to avoid the 2.8% drop in holiday sales they rang up last year and the margin crushing markdowns they had to take to move excess inventory."

This is poorly worded (somehow linking inventory levels to the sales decreases last year), but the point is clear; if retailers don't bring in more inventory they will likely see further decreases this year. And that's simply wrong.  

Clearly, there are very few retailers who are seeing comp store increases right now. Comp's have been down for quite a while now, and as much pressure as there is on both merchants and senior management to plan for increases, in this environment it's simply not prudent to plan for increases until increases actually materialize.  

It's equally imprudent to plan inventory levels to be any greater than what's necessary to support those plans. Even when sales are declining, retailers must strive to keep inventories in line, to keep inventory turning over, in order to avoid a cash flow crunch.  

In this environment, if sales should turn around before the 4th quarter, retailers have no choice but to chase inventory once that happens. And if sales turn during the 4th quarter, sales could cut into the planned ending inventory levels, thus reducing their markdown exposure. At worst, if sales should take off, which is not very likely given what we know now, retailers will have to accept a ceiling on their potential increases. The downside risks at the moment are far greater than the upside potential.  

All of which means that if retailers are cutting their inventory plans, it's not that they aren't looking for increases, it's that the risks of committing inventory now to chase future increases are simply too great.  

This is also exactly how smaller, independent retailers should be thinking. Instinctively, they are usually very aggressive in chasing sales, but they've had to become far more cautious given what's happened over the past couple of years, especially during the last six months. Many are still struggling to bring inventory levels in line with the "new normal" of sales volume.  

Wait for increases to materialize before you plan for increases. Keep inventories in line with sales, and keep inventory turns where they need to be to generate cash flow. Stay liquid. Defer commitments for new inventory as long as possible. Be ready to chase when things finally turn. This is the game plan for all retailers right now.

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