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Are inventory levels too high?

REAL ECONOMY BLOG | June 07, 2022

Authored by RSM US LLP

In March, overall consumer spending continued at a robust pace, with the three-month annualized real consumer spending increasing 4.7% on a year-over-year basis. But even with healthy consumer demand, companies are beginning to rethink current inventory positions as they plan for back-to-school and winter holiday seasons.

In recent earnings and other releases, some national retailers indicated that current inventory levels are elevated and that discounting will most likely be required to lower inventory positions. Additionally, as inflation eats into consumers’ wallet share (especially for those with fixed monthly budgets), some consumers are not as willing to spend on discretionary goods, as those retailers referenced a noticeable shift of general merchandise dollars to grocery.

inventory levels

As of March (the latest data available), the three-month average seasonally adjusted inventory levels for furniture and furnishings, and apparel wholesalers have reached the highest levels in the past 10 years.

While the three-month annualized real consumer spending on furniture and furnishings, and apparel increased 1.5% and 1.1%, respectively, this reversed three consecutive months of declines in each category. Further evidence of perhaps higher than required inventory levels is based on the inventory-to-sales ratios (a key metric to determine whether inventory levels will support consumer demand) for both furniture and furnishings and apparel retailers, which is at 1.9 and 2.2, respectively, both in excess of the five-year pre-pandemic average.

The takeaway

Consumer goods companies, especially those in the middle market, need to make hard decisions and ask not just whether too much inventory is on hand, but whether the right inventory is on hand. As we approach back-to-school and the holiday buying seasons, excess inventory from late last year and this year will be a drag on company balance sheets. Companies will need to look for ways to offset older inventory through discounts or other methods to make room for inventory needed in the coming months.

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This article was written by Mike Graziano and originally appeared on 2022-06-07.
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