The retail industry has a problem: too much inventory

A potential recession cutting consumer spending is only one of many worries retailers have. Now they have to figure out how to get rid of all the inventory they loaded up.

Yesterday, Target said earnings would take a short-term hit — sending its stock down 2% after falling nearly 30% from its worse-than-expected earnings in May.

Inventory overload: In reaction to extended shipping times during COVID, many retailers placed large orders above what they needed — and now they’re finding themselves with excess inventory.

Holding excess inventory is a big problem for retailers. To get rid of inventory, they can:

• Sell by discounting products — which lowers their profitability.
• Hold the inventory for the next season — which ties up their cash in unsold product.

In Target’s case, they’re doing a combination of both. According to WSJ, Kohl’s and Walmart are holding higher inventory levels — and retailers like Wayfair, Best Buy and Bed Bath & Beyond could see bigger impacts.

Expect a bigger hit if retailers sell products needed during COVID but less so afterward (i.e., electronics, furniture, etc.).

How did this happen? Many retailers failed to anticipate what products were needed as the economy shifted.

• Gap overstocked on activewear and hoodies — instead of the party dresses and office clothing customers wanted.
• Abercrombie & Fitch (NYSE:ANF) and American Eagle (NYSE:AEO) saw their inventory levels jump 45% and 46%, respectively (CNBC).

The SPDR S&P Retail ETF (NYSE:XRT) — a basket of retail stocks on the S&P 500 — is down 27% this year, but for many retailers, the pain might not be over yet. There’s a bright side for consumers: discounts — which were hard to come by during COVID.