Explosion of Excess Inventory

The WSJ wrote an excellent piece this December about luxury stores bursting with inventory (click here) - as the sale of luxury goods are leveled off after the pandemic, luxury brands which stay away from deep discounting, have few options to deal with the excess inventory. The Journal reported that 13% of luxury goods were sold through outlets (up 260% over the last decade), and online sellers such as MyTheresa said they had 44% higher unsold inventory versus the previous year. Luxury isn’t immune to the industry-wide issue of excess inventory.

Hyde monitors the US Apparel inventory as reported by the Federal Reserve on a quarterly basis; as of Q3 2023, it was up 2% versus the previous quarter and 5.45% since the same quarter last year. Overall, this inventory held has increased 29% CAGR over the past three years. The concerning part is that the growth has been through arguably “good” times in retail, with expanding customer spend, and relative resiliency in pricing.?

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Hyde also tracks a basket of retailers and brands (see below), which show an average reduction in the cash position between Q2 2023 to Q3 2023 of -9%. In contrast, this quarter the inventory position has on average increased by 6.9%. The resulting ratio of inventory to net cash position is up 47% between Q2 2023 and Q3 2023.

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Compared to our analysis of the same metrics last quarter (Q1 2023 to Q2 2023) - the average change in cash position has not improved (from -10% to -9%), and the inventory position has worsened (from a reduction of -2.7% to an increase of 6.9%).?

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Excess inventory is a combination of new production which remains unsold, and returns (which are estimated to be close to 18% at the end of 2023 - click here). Excess inventory costs brands and retailers in three ways: financing the inventory on a monthly basis (which has increased in tandem with interest rates), the opportunity cost of the cash held down in stock (versus buying new stock or expanding the brand), and disposal (e.g. write-downs, liquidation and dumping, all of which causes profitability dilution in excess of 90%).

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Our outlook: Brands and retailers will need to address this challenge head-on, with a combination of discipline (focus on bottom line), empowering their merchandisers with better analytics and less reliance on historical data, and innovative ways to liquidate. Learn more here.