US retailers have so much extra stuff in their stores and warehouses this holiday season that they are telling some of their suppliers to stop sending them products — even if those items are selling well. 

The unusual move highlights the magnitude of the excess merchandise that US retail companies are struggling to sell. The average amount of inventory held by the 20 biggest public apparel companies in the US was up 26% to $2.1 billion in the third quarter of this year versus pre-pandemic levels in 2019, according to an analysis by consultancy AlixPartners of S&P Capital IQ data. The figures are unadjusted for inflation. And the average inventory held was up 30% versus the same period last year.

Steve Greenspon, chairperson of the International Housewares Association trade group, said an employee at a major retailer told him recently that executives are instructing buyers to reduce inventory. “‘You could give it to me for free and I cannot take it,’” Greenspon said the buyer told him.

Executives at brands including VF Corp., the owner of Vans and North Face; Guess? Inc.; and Hanesbrands Inc. have talked in their most recent earnings calls about the pullback from their wholesale customers — whether those are small boutiques or large department stores.

“Many of our wholesale customers had warehouse constraints that limited their ability to take delivery of new product during the quarter,” La-Z-Boy Chief Financial Officer Bob Lucian told analysts during a Dec. 1 earnings call.

Supply-Chain Woes

The buildup of inventory is a consequence of supply-chain problems in 2021 that delayed the arrival of many holiday shipments until the spring, just as rising inflation forced consumers to downshift their spending. Companies including Target Corp., Walmart Inc. and others said they were canceling orders earlier this year to try to slow the growth of the piles of poor-selling merchandise. Retailers have also increased the breadth and depth of discounts to stoke demand among inflation-shy customers. 

Those measures have helped reduce inventory — but not enough, hence the trend of recent months. 

“I’ve never really seen a time before — or heard of a time — when retailers have been cutting back on what sells just because they don’t have the space,” said Paul Cosaro, chief executive officer of Picnic Time, which sells picnic gear and other home goods. “It’s not because of soft sales,” he said, adding the pullback was notable but not widespread. 

Cosaro and some other suppliers say demand has been robust for their products when they send the items directly to consumers on behalf of a retailer, a process known as drop shipping. Retailers have been leaning more on some suppliers to handle shipments to avoid having to hold the inventory themselves or delaying orders, forcing suppliers to store the merchandise. 

“The cost of money and capital is on us,” said Thomas Nichols, president of Pretika Corp., which manufactures and distributes skin-care devices to retailers. “We’ve been ordering less and yet we still have high inventory levels.” Nichols said he’s producing less in order to enter 2023 with lower inventory levels. Storage has become more expensive as US interest rates have gone up and as demand for warehouse space has outpaced supply.

Sharing Pain

“Typically in times of duress, people try to share pain vertically through the supply chain,” said David A. Shiffman, co-head of consumer retail at Solomon Partners, a boutique investment bank. Retailers have also been grappling with inflation that’s at the highest rate in decades and geopolitical and economic headwinds. “I haven’t seen the confluence of this many obstacles in the path of retailers — and the challenges that the C-suite is facing — in three decades,” Shiffman added. 

Some of the slowdown in orders is strategic, Shiffman said. Companies, particularly those that sell fashionable apparel and accessories, “want to make room and secure their orders for spring,” he said. 

The International Housewares Association’s Greenspon said that in recent weeks, some retailers have started to replenish certain items sooner than he had expected, a sign that some constraints might be starting to ease. He’s also CEO of Honey-Can-Do International, which sells home items and other consumer products to retail companies. 

Overall, the race to clear goods is good news for shoppers. “Consumers are going to continue to get phenomenal deals while all of this is going on,” Greenspon said. He expects the excess inventory levels in home goods to start diminishing within the next five to six months.

The combination of excess inventory, increased markdowns and cautious consumers is putting pressure on some retailers’ profitability. That’s making some companies consider charging consumers for returns as a way to increase revenue, said Melissa Minkow, director of retail strategy at digital consultancy CI&T.

“Return policies got really, really loose as a kind of competitive differentiator over the past few years,” she said. “We’re seeing a big pullback on that.”