NKE Nike Inc

By Suzanne Kapner 

Unsold goods are piling up on retailers' shelves, a worrisome trend that signals weak consumer spending heading into the Black Friday kick off to the holiday season.

A glut could make it harder for department store chains to hit their earnings targets in reported results arriving this week. But it could be a boon for shoppers if higher-than-expected discounts are needed to clear unsold merchandise.

Nomura and Citi retail analysts on Monday forecast weak third-quarter results at Macy's Inc. and Kohl's Corp. due to slower-than-expected sales that had left the pair awash in excess merchandise at the end of the period. Executives at Michael Kors Holdings Ltd. and Ralph Lauren Corp., which supply the chains with goods, earlier said there has been a buildup of inventory at big department stores.

Chris Peterson, president of global brands at Ralph Lauren, told analysts last week that inventory at department stores is "a little bit" elevated, referring to the broader retail industry.

Specialty stores and apparel manufacturers also are experiencing "a build-up in inventories beyond the natural increase ahead of the holidays," according to a recent report from analysts at Macquarie Research. The report named 10 companies where inventory is growing faster than sales, including Lululemon Athletica, Nike Inc., Under Armour Inc. and VF Corp.

In an extreme example of the trend, Lululemon said its inventory jumped 55% in its most recent quarter, compared with a 16% sales increase, both over the year-earlier period. The company said it had to restock shelves after having too little inventory a year ago, and cited West Coast port delays that caused some goods to be shipped later than planned.

On Tuesday, Cowen and Co. published a report warning "inventory is above sales growth across retail," and noting that merchandise levels were bloated at DSW Inc., Dicks Sporting Goods Inc. and Skechers U.S.A. Inc., among other chains. Under Armour said accelerated deliveries resulted in its higher inventory levels, but also aided sales. VF said it stocked up since it plans to open more retail stores. The other companies weren't available for immediate comment. On recent calls with investors, some retail executives cited the easing of congestion at West Coast ports, among other reasons.

The surplus is building despite a macroeconomic backdrop that is expected to lay the groundwork for healthy holiday spending. The unemployment rate is falling and gas prices remain low while consumer confidence is high. The National Retail Federation predicts that holiday sales will rise 3.7%, only slightly less than last year's 4.1% gain.

But as sales have sputtered, some analysts and industry executives are beginning to question whether those predictions are too optimistic.

"Sales over the last several months have been softer than many retailers had anticipated," said Robert Drbul, a Nomura Securities Co. analyst. "Consumers are not spending a lot of money on apparel right now. They are buying electronics, cars and items for the home."

Retailers also are feeling the effects of a downturn in tourism to the U.S. as a result of the stronger dollar, and unusually warm weather across much of the country that has curbed shoppers' appetite for sweaters, coats and other cold-weather goods. Since most retailers place orders six to nine months in advance, they have little ability to adjust to short-term changes in demand.

The result is that inventory levels are growing faster than sales at many chains. The gap isn't as wide as in 2013, when retailers loaded up on goods they were unable to sell and wound up discounting heavily to clear their shelves. Still, any buildup is worrying to analysts, who say it sets retailers up for a difficult start to the year-end selling season.

"If you've got excess inventory and you have to be promotional from the outset, that means all the new goods you are bringing in for the holidays will have to compete with the discounted merchandise," said Paul Lejuez, a Citi analyst.

Retailers that have done a better job of matching supply and demand are in a far stronger position. American Eagle Outfitters Inc., for instance, has made a concerted effort over the past six months to get lean. Its inventory in the three months ended Aug. 1 increased just 4% despite a 12% gain in sales. As a result, American Eagle sold more items at full price during its most recent quarter, according to Adrienne Yih Tennant, an analyst with Wolfe Research.

Gap Inc., on the other hand, has continued to rely on deep discounts to clear unsold goods, according to Ms. Tennant. This past weekend, everything except leather jackets was on sale for 40% off at its namesake brand. The company said on Monday that it had made progress clearing out the backlog and that by the end of its most recent quarter store inventory levels would be even lower than its previous guidance of "down slightly."

"As expected, October was a very promotional month as we cleared through Fall collections in anticipation of our new holiday arrivals and in order to enter the critical season with tight inventories," a Gap spokeswoman said.

The looming inventory glut is proving a boon for off-price retailers like Ross Stores Inc. and TJX Cos.'s T.J. Maxx and Marshalls chains that buy surplus goods that have either been returned to suppliers or farmed out to jobbers and sold on the gray market.

"They've been out there with their checkbooks picking off a lot of very good deals," Nomura's Mr. Drbul said. That will only make life harder for the full-priced retailers who will now be competing with the steep bargains offered by the off-price chains.

Write to Suzanne Kapner at Suzanne.Kapner@wsj.com

(END) Dow Jones Newswires

November 10, 2015 20:01 ET (01:01 GMT)

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