As Holiday Season Looms, Inventory Buildup Worries North American Retailers

Slower-than-expected sales ahead of the upcoming Black Friday shopping bonanza in the U.S. are likely to lead retailers to offer higher-than-expected discounts as they attempt to clear unsold merchandise, the Wall Street Journal reported Wednesday.

The scant uptick in consumer spending -- despite a fairly healthy labor market and low inflation -- has retailers worried about the prospect of not meeting earnings targets during the year-end shopping season. While data for the month of October is not yet available, U.S. retail sales barely rose in September. In the third quarter, American businesses accumulated $56.8 billion worth of inventory.

Specialty stores and apparel companies are currently experiencing “a build-up in inventories beyond the natural increase ahead of the holidays,” Macquarie Research reportedly said in a recent report, which also named 10 companies where inventory is growing faster than sales, including Lululemon Athletica, Nike Inc., Under Armour Inc. and VF Corp.

For instance, Lululemon recently reported an inventory total of $280.6 million at the end of the second quarter -- 55 percent higher than at the end of the second quarter of 2014. The Vancouver, Canada, company -- known for its yoga apparel -- reported a 16 percent increase in sales over last year. Senior officials at Ralph Lauren also told analysts last week that inventory at its department stores is “a little bit” elevated, the Journal reported.

According to Bank of America CEO Brian Moynihan, consumer spending is likely to have seen an uptick in October, as benefits of low gas prices translates into “a consistent move by the consumer to spend.”

For now, though, sputtering sales and a looming inventory glut might now force retailers to offer heavy discounts to clear its shelves -- a potential boon for holiday shoppers.

“If you’ve got excess inventory and you have to be promotional from the outset, that means all the new goods you are bringing in for the holidays will have to compete with the discounted merchandise,” Paul Lejuez, a Citi analyst, told the Journal.