To follow up on my earlier post, the Wall Street Journal has an article today sounding a cautious tone on retailers expanding inventory before the holidays (Overconfident Retailers Risk a Holiday Stock Shock, Nov 7). It warns that overly optimistic predictions could lead to big discounts and disappointing overall returns. It also has the following:
J. Crew Group, however, has shown it is possible to increase same-store sales without actually boosting inventories. Credit Suisse’s Paul Lejuez estimates that J. Crew’s inventory-per-square-foot fell more than 10% from a year earlier in the October quarter. In the same period, the company said same-store sales likely rose by a high-single-digit percentage. And while Mr. Lejuez expects that inventory will decline in the fourth quarter, he doesn’t believe that will prevent the company from meeting its forecast for another improvement in sales.
How did they manage to do this? It is not just that Michelle Obama likes their style. Rather it is that they are avoiding discounts:
Even with less merchandise on the shelves, J. Crew was able to generate more sales per store by selling at higher prices. While the company probably offered discounts on many products, the reductions were smaller than last year.
And size matters. It is easier for a smaller chain to restock and adjust inventory:
Part of J. Crew’s formula has been skillful fashion choices. But it also has an edge over other retailers because of its small size. J. Crew has just 319 stores, while American Eagle operates in 1,114 locations. That makes it easier for J. Crew to respond nimbly to specific inventory needs as they become apparent.
This raises the interesting question of whether there is a sweet spot in apparel retailing: big enough to have some economies of scale and brand awareness but small enough so the ship is still easy to steer.
UPDATE: The Washington Post has an article on a similar theme (Retailers tighten belts to bring numbers up, Nov 14). Here is an interesting nugget:
J.C. Penney said that stocking less inventory is helping the department store sell more products at full price. Though profit dropped 78 percent from a year ago, to $27 million, because of a one-time pension expense, the company said sales were stronger than expected and upgraded it forecasts for annual sales.
“Last year, our industry was over-inventoried and J.C. Penney was not immune from the aggressive clearance selling,” chief executive Myron E. Ullman told analysts in a conference call on Friday. “This year is different.”
This comes back to my earlier point: Will retailers manage to stay disciplined on price — not just for this year but going forward.