Christmas Becomes Inventory War Game for U.S. Fashion Brands

Updated on
  • Companies relying on radio-frequency tags, machine learning
  • Idea is to end season without need for another big fire sale
The Death of the Department Store

Michael Kors Holdings Ltd., Ralph Lauren Corp. and other fashion brands are locked in a high-stakes contest this Christmas.

But the winner won’t be the company that sells the most -- it’ll be the one that winds up with the least amount of unwanted merchandise.

After years of struggling to manage their inventory, brands are using increasingly sophisticated tools to track apparel and accessories through the supply chain, aiming to avoid the typical post-Christmas fire sales. The idea is to improve profit margins, even if it means ceding some revenue.

Despite the technological advancements, it’s still no easy task. The decline of department stores has exacerbated the problem in recent years, with their nonstop discounting hurting the prestige of brands like Polo and Kate Spade. That’s increased pressure on brands to show they can get the balancing act right this holiday season.

“There’s a dashboard that they are watching,” said David Bassuk, co-head of the retail practice at AlixPartners LLP. “It’s literally managing a war.”

This year’s Black Friday early results suggested customers are willing to spend more again -- but the benefits aren’t being spread equally across the industry. Even with discounts, brick-and-mortar stores failed to boost customer traffic. Shopping is increasingly flowing online, with mobile devices becoming the preferred means of commerce.

Every Monday morning, retailers typically hold a manager meeting to look at the sell-through rates, or the percentage of the total inventory sold, for the past week. During the holiday period, they meet daily -- and decide if they should use promotions or increase their markdowns to stay on track with their inventory, Bassuk said.

The rise of omnichannel marketing -- the notion of having brick-and-mortar stores work seamlessly with e-commerce operations -- has made matters more complicated. Customers, for instance, may buy an item online and then return it to a store.

Getting It Right

“This holiday season is more critical than the recent past to get this right,” Bassuk said. “There’s a lot of speculation about whether retailers are really able to manage inventory properly in the world of omnichannel.”

Michael Kors and other upscale brands are still using discounts to drive sales. But they’re aiming to be more targeted with their promotions.

Michael Kors Chief Executive Officer John Idol has pledged to cut the number of days with big promotions by as much as 65 percent this quarter. The company is currently offering 25 percent off purchases, but that deal ends on Dec. 12.

Building an impression of scarcity is key for high-end brands. Toward the end, Michael Kors lowered its number of stock-keeping units by 12 percent this month, according to retail data tracker Edited.

Less Is More

Overall, there’s little sense that promotions have abated this holiday season. In the week leading up to Black Friday, the number of marked-down apparel and accessories was up threefold from the same period of 2014, according to Edited, which used data from the websites of America’s 19 largest retailers.

But there’s hope that smarter promotions will set up retailers and fashion brands for a better 2018. The industry also has closed thousands of stores this year, helping supply better match demand.

Tapestry Inc., the owner of the Coach and Kate Spade brands, uses historical seasonal sales data to build its stock allocation plan for each store. And it has the capability to restock its retail stores as many as three times a week during the holiday season, said spokeswoman Andrea Resnick.

Investors appear optimistic about fashion brands’ prospects: Tapestry shares climbed 20 percent this year through Thursday’s close, while Michael Kors gained 39 percent and Ralph Lauren increased 11 percent. All three companies advanced in Friday trading as U.S. stocks rose.

Retailers have traditionally been dependent on historical sales and loyalty data to predict trends. In an era of big data, they’re relying more on analytics and machine learning -- a form of artificial intelligence -- to better maintain inventory.

They build out customer profiles based on shopping patterns, helping companies predict the kind of assortments and quantity needed for their websites and stores, said JoAnn Martin, vice president of retail industry strategy at supply-chain management company JDA Software Group Inc.

E-Commerce Burden

But the rise of e-commerce and increasing demand for fast delivery have made the process more complicated, she said. That’s what led to especially bad inventory problems in recent years.

“With a lack of understanding of where to put that product, they bought more than they needed,” Martin said.

High-end department stores and specialty retailers have started tagging their products with radio-frequency identification sensors, which casinos have been using for their gambling chips, to track inventory in real time.

Managers still sometimes make gut decisions, but it’s a gamble, said JDA’s Martin. Coach didn’t anticipate that products with prominent logos had come back in fashion, and its outlets failed to stock enough of the merchandise last quarter.

In a skittish retail industry, it’s probably safer to stock too little than too much. But that means companies will have lower sales growth when they begin to rebound, said Simeon Siegel, an analyst at Instinet LLC.

He likens lean inventories to being on antibiotics, a painful but necessary part of getting healthy again.

“Companies who have been sick -- and have already been on a year of antibiotics -- need to take another round,” he said.

— With assistance by Lisa Wolfson

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE