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I am absolutely fascinated by these charts. The first one isolates the clothing and shoes category, and compares at government-reported retail sales versus the inventory-to-sales ratio. From 1993 through 1Q2007, the inverse correlation was like clockwork. Sales go up while inventory/sales go down and vice versa (i.e. little respect for inventory management). But starting in 2007, the two became one. For the past year and a half, the inventory/sales ratio fell while sales were falling. That’s a first for US retail.
  • We can’t even blame this on the fact that it is government data, which has historically been mediocre. The second chart maps the inventory/sales trend for public companies versus the US retail universe as defined by the government. Pretty close.
  • Yes retail is more mature now than it was 15 years ago. Yes there are better inventory management systems in place today versus the 1990s. But neither of these hit critical mass in 1Q07. What did happen in ’07 is that much of the margin benefit from sourcing and quotas went away. Then several quarters later the consumer turned down. We saw inventory cuts, and we saw them big time.
  • Then we had rising input costs. Now we’re faced with a strengthening dollar. Both of these last through ’09 at least in my opinion. In fact regardless of the consumer, I think we see this sourcing pressure (due to supply/demand imbalance out of Asia) through at least 2010.
  • We’ve all heard management teams say “we’re managing our business conservatively in this tough retail climate.” In other words “we don’t have a clue what sales will be like, so we’ll err on having less tied up in our supply chain.” A defensive strategy, but not one that promotes growth.
  • I still think that the bifurcation between winners and losers in this space will be massive heading into ’09.
Huge decoupling in 1Q07
Inventory/Sales for companies reporting comps vs government retail stats.