State of the economy as told by retailers

Shoppers get ready; Black Friday is arriving earlier this year. Retailers — eager to clear inventory before the holidays — are about to dump their excess inventory on you in the form of discounts.

Just how much inventory? Foot Locker (NYSE:FL) and Kohl’s (NYSE:KSS) hold 52% and 48% more inventory than last year, respectively.

How did retailers land in this situation?

Retailers are struggling with excess inventory resulting from:

1/ Ordering too many of the wrong items — loading up on COVID items while shoppers were already preparing to return to normal life.

2/ Inflation shifting spending toward necessities and cheaper goods. 85% of consumers say rising prices has changed their shopping habits (Morning Consult).

Urban Outfitters CEO said, “it’s going to be ugly in terms of the amount of discounting and markdowns.” Sounds good for consumers, but retailers are about to watch their profit margins evaporate.

Not all retailers are struggling…

“Luxury, in general, is doing really well,” per senior research analyst of Jane Hali & Associates (FT).

• Signet (NYSE:SIG), a jewelry retailer, is seeing the strongest sales from items over $10,000.
• Ferrari (NYSE:RACE) raised its full-year forecast, with sales hitting a record $1.33B in the recent quarter.

In August, luxury fashion platform Farfetch (NYSE:FTCH) reported strong earnings and narrowing losses. Still, the market hasn’t shown much mercy to these luxury stocks, with $RACE, $SIG and $FTCH down 25%, 35% and 72% this year, respectively.

Investors: Retail stocks are also discounted

The S&P Retail Select Industry Index is down 30% in 2022 — underperforming the S&P 500. But apparel stocks have fallen even harder, with brands like American Eagle and Abercrombie & Fitch losing over half their value.

Still, the sentiment isn’t showing in the data yet. U.S. retail sales have largely remained flat this year, rising 0.3% in August, with 8 of 13 retail categories growing.

The one retail stock that’s still outperforming the S&P 500 — Lululemon (NASDAQ:LULU). Lulu is holding 85% more inventory, but they’re still seeing strong sales even in this market.