Retailers are already nervous about Christmas

Retail executives can't figure out what's keeping shoppers from spending in their stores — so how are they supposed to forecast customer demand six months from now?

As companies work their way through bloated spring inventories — with memories of an unseasonably warm winter not far in the past — many are taking a cautious approach to the Christmas holiday orders they're now starting to place.

Shoppers walk past the Santa Claus photo booth in at the Westfield Mall in Annapolis, Maryland.
Jim Watson | AFP | Getty Images
Shoppers walk past the Santa Claus photo booth in at the Westfield Mall in Annapolis, Maryland.

Roller-coaster first-quarter earnings and a muddy start to the current period have many industry executives uncertain about the potential for a second-half spending rebound. Yet they face a delicate balance. While placing too aggressive a holiday order can leave retailers with too much merchandise — forcing them to run unplanned promotions — having too little in stock can pressure their overall revenues.

"I expect we're going to see tremendous discipline on the inventory levels," said Steve Barr, U.S. retail and consumer sector leader at PwC. "Retailers are being very cautious."

Several major brands have already whittled down the amount of merchandise they carry at a given time, as part of a long-term strategy to fuel demand. The idea is that if they have fewer versions of the same T-shirt in stock, shoppers will feel a need to snatch up something they like before it's gone. In theory, that will result in fewer items ending up on the sale rack and eating into retailers' margins.

Urban Outfitters, for example, has trimmed the number of weeks' supply it keeps in stock. That strategy contributed to more full-price selling at the company during the first quarter. And Kohl's, where inventories per store ended the same period 2 percent lower, has outlined a plan for mid-single-digit reductions during the remaining three quarters. Inventories also ended the quarter lean at Wal-Mart and American Eagle.

Sluggish sales early in the second quarter, however, are expected to once again leave many retailers with too much product. Though Macy's ended the first quarter with 1 percent less inventory per square foot, management warned that slow-moving warm-weather merchandise — left on the shelves during a cold start to spring — would require additional markdowns in the second quarter to clear through.

According to DynamicAction analytics firm, the number of online orders that used a promotion jumped 75 percent in April from the prior-year period. That follows an even more promotional March, when 86 percent more orders were on sale or used a coupon versus the prior year.

DynamicAction CEO John Squire said one reason retailers are leaning so heavily on discounts is that their systems aren't sophisticated enough to read and react to customer demand or buying patterns, leaving them with excess goods. He dismissed weather as an excuse, saying the very best companies can use data to determine how large an order they should place for certain items or brands. That includes keying into more profitable items.

"Weather has been around since the beginning of time," he said. "Their entire collection is not jackets."

Some retailers have made tweaks to their supply chains that allow them to place smaller orders up front, and quickly restock when they notice a particular style is popular. This is one reason Urban Outfitters has been able to pare down its inventories.

Yet Barr said these proficiencies are limited to a small number of retailers, and are more aspiration than reality. He added that it's easier for brands that sell directly to the consumer to tap into this strategy, as they have more control over their supply chain.

For department stores and other wholesalers, however, it gets tricky, with vendors feeling the aftershocks. One example is accessories brand Steve Madden. Though the company's wholesale footwear sales increased 2.7 percent in the first quarter, CEO Ed Rosenfeld told analysts that its wholesale accounts "continue to be pretty darn cautious."

"It's even more challenging … in terms of getting those upfront orders, because when the retailers are a bit cautious, what they're trying to do not only with us but everybody is to place fewer orders upfront and to try to chase more in season, so that they can take less risk and essentially push some of the inventory risk onto the brand," he said.

In particular, management told analysts at Sterne Agee CRT that department stores are being thoughtful on initial orders for fall boots and booties. And many of the orders that shipped in the second quarter last year are being postponed until the third quarter this year, analyst Sam Poser said.

Other brands that lean heavily on wholesale accounts face similar challenges. Following Deckers' earnings report last week, Poser warned that even if a retailer places an order for the company's Ugg boots, it could be canceled if winter gets off to another warm start.

On the flip side, Barr said retailers can't be too timid when placing their orders. If the temperature were to plummet in November and a retailer ran out of winter coats, they'd be giving up sales to a competitor.

"Let's take last year and flip it around — what if we have a really cold winter?" he said.

"If you enter the holiday with tremendous fear, all you're going to do is come out on the losing end."