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Walmart and other large retailers are canceling orders to help it right-size inventory excesses.
1 This is just the start
This is just the start of what the American people are going to face. If you really care time to do something about who is running this country.
Retailers realized this spring that they built up too much. Amazon said in an April call to investors that it had to scale back after doubling its warehouse footprint. Bloomberg reported weeks later that the mega-retailer was quietly trying to end or sublease at least 10 million square feet of warehouse space. It was a stunning about-face for the company that many investors believed had not only endless growth but an unmatchable logistics machine.
It’s not just warehouse space that Amazon loaded up on – it’s the stuff in the warehouses. According to federal filings concerning the first three months of 2022, the value of Amazon’s total inventories increased 47% compared to the same period last year. But it’s North America net sales only popped 8%.
Amazon was hardly alone in its uncomfortable first-quarter report. Walmart’s inventory jumped 32% from the previous year, compared to a 4% increase in sales. Best Buy’s inventories increased by 9%, while sales declined by 8%.
2 Overstocking at Target, Walmart, Amazon
Overstocking at Target, Walmart, Amazon, and other big retailers is the latest unexpected red flag for what’s happening in the economy.
It’s an about-face from the beginning of 2022 when things were economically pretty peachy. Too peachy, one could argue: People were buying so much stuff that our ports and terminals could barely handle the massive import volume. Companies were desperate for someone, anyone, to come work for them. And movie theaters, offices, planes and other locales many eschewed during the pandemic were poised to bounce back; the omicron wave appeared mild compared to previous bouts of the coronavirus.
The vibes were good. Now, the vibes are completely terrible.
More and more spooky recession signs are cropping up seemingly every day, ranging from cooling housing starts to meek GDP growth, all amid the Fed tightening rates. Record-setting inflation – particularly for gas – is only adding to the premonitions, as Vox’s Emily Stewart wrote Wednesday in a piece aptly titled “The bad vibes economy.” But even as things feel bad, many still cast doubt that we’re headed for a recession this year, pointing out persistently low unemployment and the fact that certain indicators, while not as strong as at the beginning of this year, are still unusually healthy.
No one is shocked that what goes up must go down. What’s shocking us all is how quickly the situation changed.
3 Glum transportation indicators confirm the bad vibes
A downturn, if not a full-on recession, is clear in the transportation world. While the rest of the economy debates whether things are that bad, it’s been clear for months to logistics providers that the situation has worsened — and the velocity of that change is still stunning.
The cost to move a container from Asia to a major port in North America or Europe has sunk by 23% since the beginning of this year, according to maritime research firm Drewry. Spot rates have plummeted even faster; marketplace Freightos said rates from China to the West Coast are down 38% month-over-month. FreightWaves forecast this week that ocean shipping volumes will “drop off a cliff” by this summer, based on slumping bookings out of China.
Spot van rates in trucking are down 31% since the beginning of this year, with some truck drivers reporting that rising diesel and plummeting rates have already harmed their business.
Even our mighty railroads are reporting a 3% year-to-date decline in volumes across the board, with only carloads of coal, chemicals and “stone, sand and gravel” (aka, frac sand) increasing.
In a call with investors announcing results for the second quarter, Walmart CFO John Rainey said the company has “canceled billions in orders” to deal with inventory pileups that have amassed over the last few quarters.
The big-box store, like other retailers this quarter, has found itself with higher-than-usual levels of inventory as a result of delayed orders from Q1 and Q2 that have only recently arrived, compounding existing orders for the season. On top of that, consumers have drastically shifted spending away from discretionary categories, leaving Walmart with excesses in categories like apparel.
Walmart said Tuesday that it had “canceled billions of dollars in orders to help align inventory levels with expected demand.” Target disclosed the following day that it had canceled over $1.5 billion in orders, and revealed that it had shipped in much of its back-to-school goods early.
Nevertheless, U.S. import activity keeps chugging along near all-time highs.
Unprecedented throughput at the nation’s terminals has not been enough to clear queues of waiting ships. As of Thursday morning, there were still 130 container vessels waiting off North American ports.
According to newly released numbers from Descartes, U.S. imports totaled 2.53 million twenty-foot equivalent units in July. That’s up 3% year on year and 15% from July 2019, pre-pandemic. It was the best July on record, with volumes up 2% sequentially from June. This July marked the fifth-highest monthly volume ever recorded by Descartes.
by Tom Ryan
Walmart, Target, Macy’s, and Kohl’s are among retailers that have recently said they are canceling some orders to better balance inventory levels, a replay of a strategy used at the start of the pandemic.
Other steps retailers are using to clear inventories as spending has slowed on some non-discretionary categories are employing markdowns and packing away products for the following year. The elevated inventory levels also reflect intentional over-buying to mitigate shortages and the easing of supply chain constraints.
5 One risk of canceling
One risk of canceling orders is straining or damaging relationships with trading partners. After the pandemic arrived, many retailers were called out for not honoring their contracts to pay in full for goods that were in production as well as for requests for postponements, discounts or delays in payment. Several issued statements assuring their commitments, with Levi’s and Gap offering low-cost financing to factories to weather payment delays.
The other risk is not having enough inventory to meet demand. Many retailers and brands indicated they missed sales opportunities during the 2020 holiday season due to overly-lean inventories as demand recovered more quickly than expected.
Second-quarter analyst calls found retailers aware of potential inventory shortfall risks from overly aggressive actions.
6 Christina Hennington
Christina Hennington, Target’s EVP and chief growth officer, said steps being taken by the discounter’s buying team include “rigorously re-forecasting expectations for the balance of the year and beyond and determining where to reduce future receipts and orders. In some cases, it meant working with vendor partners to reduce our fall receipts in light of our updated expectations. It also meant quickly building compelling promotional plans to drive unit velocity for products we already owned, all with a focus on providing great value and generating excitement for our guests.”
John David Rainey, Walmart’s EVP and CFO, said it had cleared most summer inventory, was reducing exposure in electronics, home, and sporting goods, and canceled “billions of dollars in orders” to realign inventories. He said, “Our actions in Q3 will allow us to make significant progress toward rationalizing absolute levels and mix, which will enable our stores to be well positioned ahead of the holiday season.”