US retailers destock, restock faster, boosting freight

Evidence of inventory destocking at least partially responsible for the recent surge in US imports and rising domestic freight volumes is showing up in retailers’ earnings reports, with several store chains claiming reduced stockpiles helped boost pricing and profit in late 2016.

But transportation executives say destocking is far from even across the retail world, let alone other industries. Although some are enjoying an earlier-than-usual uptick in freight demand in the first quarter, others are still waiting for an event big enough to jog the demand dial.

The largest US retailer, Wal-Mart Stores, reported a big reduction in US inventories this week, company-wide and on a comparable store basis. “We’re entering the new year in a very solid inventory position,” Brett Biggs, executive vice president and CFO, said Feb. 21.

Wal-Mart drove inventories by dollar value down 3.2 percent year-over-year in the fourth quarter to a still impressive $43 billion. Comparable store inventories were down 7.2 percent year-over-year, despite strong sales growth in the fourth quarter, the company said.

Technology that provides real-time information on in-stock levels helped Wal-Mart draw down inventories even as comparable store sales rose 1.8 percent and in-store traffic rose 1.4 percent in the United States, Doug McMillion, president and CEO, told Wall Street analysts in a fourth-quarter earnings call.

“I recently visited a store in Morrisville, North Carolina, where they had reduced inventory so significantly that the back room was empty enough for them to build a training academy," McMillion said. US e-commerce sales were up 29 percent year-over-year, he said.

With $486 billion in total revenue in its last fiscal year and $308 billion in US sales, excluding $57 billion in Sam’s Club sales, a 3.2 percent overall reduction in inventory by Wal-Mart has the potential to move the freight shipping dial more than the percentage figure alone would suggest.

That 3.2 percent reduction represents $1.4 billion worth of goods stocked by Wal-Mart. Other publicly-owned retailers that released earnings data this week also reported success in destocking, led by department store operators Kohl’s and Nordstrom.

At Kohl’s, “We've really, dramatically reduced inventories this year,” chairman, president, and CEO Kevin Mansell said Feb. 23 during an earnings call transcribed by Seeking Alpha. “Our clearance levels and fall transitional inventories are way down compared to last year.”

Kohl’s dropped inventory by $243 million, or 6 percent year-over-year, and store inventories were down 5 percent. “All businesses and all brand types reported lower inventory levels,” Wesley McDonald, CFO, said. “We were also better able to flow in our spring transitional goods.”

Clearing those store backrooms and warehouses makes room for new merchandise, and that generates transportation demand. The late-year pickup in freight volumes reported by some trucking companies owe much to destocking, as well as higher industrial output.

“By year-end, overall inventory was down about 5 percent in dollars and 7 percent in units,” Mansell said. “More importantly, our fall seasonal inventory was down about 25 percent, and our spring forward transitional inventory was up about 9 percent within that total.”

Better inventory management is crucial to Kohl’s as it strives to reduce its “footprint” at existing locations and relocate to smaller stores while increasing online sales. “Our intent is to continue to lower inventory per store about 3 percent per year for the next three years,” Mansell said.

“An improved supply chain focused on speed, localization initiatives, and leveraging technology to increase the percentage of inventory shipped from stores to fulfill online demand or online demand picked up in store will all play a factor in this,” Mansell told investment analysts.

“This is one of the most important initiatives in the company,” he said. The need to stock sufficient goods to fulfill fast-moving online orders is complicating inventory management for traditional retailers. As brick-and-mortar inventories drop, online inventories rise.

For much of 2015 and 2016, an inventory buildup across US businesses amid slow consumer demand was blamed for depressing freight volumes. That began to change as the fourth quarter got under way in October, when the Cass Freight Shipments Index first reported an uptick.

“It now looks as if the October index, which broke a string of 20 months in negative territory, was one of the first indications that a recovery in freight had begun in earnest,” Avondale Partners said in its latest commentary on the index, which rose 3.2 percent year-over-year in January.

At XPO Logistics, LTL volumes “have inflected positive for us since December,” Bradley S. Jacobs, CEO, said Tuesday. “Tonnage per day is actually up” at XPO’s US LTL subsidiary, the former Con-way Freight. “This is the first time since we bought Con-way that’s true.”

The inventory picture is complicated, however, with higher sales and industrial activity building up inventories in some industries whereas other businesses take stockpiles down, and some do both. A seasonal influx of new goods is adding to inventories at The Home Depot, for example.

Merchandise inventories were up 6.3 percent year-over-year at the end of January at the home improvement retailer, as Home Depot prepared for spring house and garden sales. Almost 6 percent of Home Depot sales are now online, which means carrying more stock keeping units.

US business inventories rose 0.4 percent on a seasonally adjusted basis in December, the last month for which Census Bureau data are available. However, the business inventory-to-sales ratio dropped from 1.38 to 1.35, a sign goods sold faster and moved faster late last year.

The retail inventory-to-sales ratio slipped from 1.48 in November to 1.47 in December, perhaps a sign that destocking and restocking are closely, but not entirely, matched. “It wasn’t as big a drop as we might have expected,” said Don Orr, president of Central Freight Lines.

The Waco, Texas, less-than-truckload carrier handles a large amount of retail freight in Southern California, in local distribution and moving it eastward toward inland markets. “Our customers seem to be very optimistic, more so than we’ve seen in the last year or two,” he said.

In the long-run, whether inventory drops or rises may not be as important as whether it moves faster.

Contact William B. Cassidy at bill.cassidy@ihsmarkit.com and follow him on Twitter: @wbcassidy_joc.

DON'T HAVE AN ACCOUNT?

Register