EVERYTHING MUST GO

Shoppers can expect even bigger holiday markdowns this year

Obsession
Fashion
Obsession
Fashion

The end of the year is a time when retailers rake in revenue by clearing out inventory amid a holiday-induced frenzy of consumer spending. It’s tricky though: if they have too little inventory, they can miss out on profits; if they have too much, they can get stuck with unsold overstock. Year-end discounts help clear out the excess, and this year, there’s a lot of excess.

As 2015 nears its end, a wide range of US companies, and especially clothing brands, find themselves with dangerously bloated stockrooms as inventory outpaces sales. While that’s bad for the stores, it should translate to markdowns on a wide range of products from coats to activewear as brands try—sometimes desperately—to entice consumers to buy.

Among the brands with overloaded storerooms are department stores such as Macy’s and Nordstrom, Michael Kors and Skechers, Gap and Urban Outfitters. The strong sales reported by activewear brand Lululemon last quarter were likely due to aggressive discounting of its overloaded inventory that’s expected to continue. VF Corp, the parent company of brands including The North Face, Lee, and Vans, has also indicated it has more stuff than it would like on hand.

In fact, across US clothing retail, 2015 has seen a high ratio of dollar value held in inventory compared to sales. Data from the US Census Bureau is so far only available through September, but it seems unlikely the rest of the year will reverse the trend.

A report by Nomura Securities, a global investment bank, released this week said that inventory at department stores grew 7.5% in the third quarter, but it estimates sales will only rise 1.7% in the fourth quarter. (The upside for off-price retailers such as TJ Maxx is that they’ll have a lot to buy.)

The reasons for the inflated inventory are varied. Across many, many earnings calls recently, corporate executives pointed out that unseasonably warm weather has affected sales. Nobody is rushing to buy fleeces or coats when it’s still too hot to wear them—actually, cold-weather clothing is one category shoppers can expect to see discounted.

A major port strike early this year on the west coast of the US has also played a role, since it backed up product deliveries and items only arrived in stores when they were almost out of season, leaving a lot left unsold.

Perhaps the biggest reason, however, is a large-scale shift that’s hitting retail’s major players. “We’ve had this steady year-over-year sales contraction, a lot of which is because of promotional pressures, and a lot of which—I would argue—is because of e-commerce,” says Simeon Siegel, an analyst at Nomura Securities, tells Quartz. “I would say that since the recession, we’ve been going through a series of inflated inventories.”

The internet has lowered the barrier to enter the market, especially in apparel where it takes relatively little capital to get started. Clothing brands such as Gap and stores such as Macy’s are consequently facing a surge in competition from small brands, as well as from growing clothing giant Amazon.

At the same time, customers have become so accustomed to discounts that they’re now reluctant to buy at full-price, or they may opt for cheaper fast-fashion options.

It wasn’t mentioned by Nomura, but there’s also evidence to suggest Millennial shoppers are spending less money on clothes and moving their dollars to items such as cellphones.

If retailers overestimate how much they’ll be able to sell at full price, as many have this year, discounts become the fallback.

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