Inventory Management Performance Diverges: Q2 Data Comparison of Retail Giants Reveals Industry Adjustment Path

At this time last year, retail inventory levels peaked. Over the following year-plus, industry participants worked persistently to realign inventory with demand, often sacrificing short-term profits in the process. Entering the second quarter of 2023, several retailers and brands finally saw results: many companies saw inventory decline (though not all), profit margins recovered, and leaner inventory combined with faster supply chains enabled supply chain managers to chase popular categories through sourcing practices.

Retailers hope this will bring the most substantial sales profits in a weak demand environment. As the industry moves deeper into the third quarter, the following is a cross-comparison of key operating metrics for some retailers and brands in Q2.

Walmart

Executive Comment: CFO John Rainey: "The team continues to perform exceptionally well in inventory management, with inventory down 5% at the end of the quarter, including an 8% decline at Walmart U.S. We are pleased with the progress we've made on inventory levels, the supply chain has returned to normal, and the inventory structure has improved. In the current uncertain macro environment, we remain disciplined in sourcing general merchandise to reduce future risks from weak demand."

Target

Executive Comment: COO John Mulligan: "Earnings in the quarter were better than expected, a testament to the flexibility and resilience of our team, who successfully navigated multiple challenges. The team deserves credit, but this year's leaner inventory also helped—providing more room to maneuver compared to a year ago when we were dealing with excess inventory. This year, with clean facilities, a renewed focus on retail fundamentals, and ongoing efficiency efforts, the team delivered impressive profit growth despite challenging revenue."

Kohl's

Executive Comment: CEO Tom Kingsbury: "As we implement new planning and allocation processes, we are becoming more responsive to customer demand, chasing trends and minimizing risk through additional discretionary buying, maintaining better in-stock levels on core basics, and improving inventory flow from distribution centers to the sales floor. Looking ahead to fall, we are pleased with our current inventory levels and our ability to manage inventory with continued discipline."

Macy's

Executive Comment: CEO Jeff Gennette: "We ended the second quarter with inventory down 10% versus last year and down 18% versus 2019. We remained disciplined in our inventory commitments and used data-driven tools to adjust the timing and depth of promotions and markdowns, shortening the seasonal clearance event by several weeks. Sell-through on promotions was better than expected, and clearance markdowns were not as deep. Thanks to the cross-functional team's agility, flexibility, and embrace of new ways of working."

"Entering the third quarter, stores and digital channels are less crowded and easier to navigate. Content is fresh and seasonal, with the ability to make discretionary purchases and chase areas of strength, all of which improves the omnichannel shopping experience."

Dollar General

Executive Comment: CEO Jeff Owen: "We are strategically accelerating inventory reduction, primarily through expanded promotional markdowns, especially on non-consumables. While we expect this to create approximately $95 million in operating profit pressure in the second half of the year, we believe it will drive traffic and reduce excess inventory more quickly. We believe this adjustment supports our operating priorities as a low-cost operator and will accelerate improvements in several areas, including store and supply chain efficiency, as well as shrink, damage, and cash flow."

Dollar Tree

Executive Comment: CFO Jeff Davis: "While inventory is below last year's levels, it remains elevated due to early arrivals of imported goods. As the supply chain recovered quickly, seasonal imports from Asia arrived much earlier than our planned third-quarter receipt timing. Going forward, we will continue to manage inventory and related accounts payable to improve free cash flow generation."

Under Armour

Executive Comment: CFO David Bergman: "I'd like to remind everyone that our inventory is in a very healthy state. We don't have a significant amount of aged product in our inventory, and we are normalizing comparisons against last year's leaner inventory days. So, I think we've done a good job balancing promotional and clearance needs while keeping third-party off-price channels within 3% to 4% of revenue, which we consider a reasonable level."

Nike

Executive Comment: CFO Matt Friend: "Regarding inventory, we continue to be very pleased with our position. Nike inventory dollars are down 10% versus the prior year. Total units in the marketplace, including Nike and wholesale partners, are down double digits versus the prior year."

"Partner inventory units are flat to last year and planned to remain lean in the second quarter, an important achievement following higher wholesale receipts in fiscal 2023. Overall, we are very pleased with the relationship between marketplace inventory levels and the retail sales we are seeing, as we begin to increase wholesale receipts in the second half."

Lululemon Athletica

Executive Comment: CFO Meghan Frank: "I'd say we've made significant progress. On a cost basis, we still have some elevated air freight in our inventory balance. So, I'd say it's not fully optimized yet, and inventory turnover is slightly slower than historical levels. Our long-term goal is to return inventory turnover to normal historical levels. So there's still room for improvement, but I think the team has done a great job navigating the dynamic supply chain and positioning inventory so we can capitalize on the demand upside we're seeing and experiencing."

Abercrombie & Fitch Co.

Executive Comment: CFO and COO Scott Lipesky: "The supply chain is in good shape, with freight costs, transit times, and performance all significantly better than last year. With a functioning supply chain, we can again operate the business the way we want, leveraging our rapid response capabilities to read and react to the market and drive inventory receipts. Inventory was down 30% versus last year in the quarter, with both brands and all regions leveraging our rapid response capabilities."

"We continue to expect inventory at the end of the third quarter to be below last year. By year-end, we expect inventory to be flat to slightly down versus last year."

American Eagle Outfitters

Executive Comment: CFO Mike Mathias: "Compared to last year, gross profit dollars increased by $83 million, or 22%, to $453 million, with gross margin up 680 basis points to 37.7%. The improvement was primarily driven by better merchandise margins. Inventory discipline drove lower markdowns as we maintained a focus on healthy promotions. Additionally, we absorbed $25 million of last year's freight headwinds and $30 million of additional markdowns related to end-of-season clearance."

Gap Inc.

Executive Comment: CFO Katrina O'Connell: "Inventory at the end of the second quarter was down 29% versus last year. This includes a 9-point decline related to in-transit inventory (as we lapped last year's supply chain challenges) and a 6-point decline related to the release of most of our packed inventory balance. The remaining 14-point decline came from more efficient inventory management."

"As you know, we made significant progress in reducing inventory at the end of fiscal 2022. In fiscal 2023, we continue to focus on buying moderately and leveraging our rapid response levers. As a result, we plan for year-over-year inventory declines at the end of the third quarter to be broadly in line with our year-to-date trends."