The coronavirus pandemic has disrupted the lives of individuals and businesses around the world. To make matters worse, an outbreak at a manufacturing plant or seaport disrupts the supply chain. Supply shortages were met by an increase in consumer demand. Typically, when supply decreases and demand increases, prices increase, causing inflation. This time was no different, with consumers in many parts of the world seeing uncomfortable inflation.
walmart (WMT 0.56%), the world’s largest retailer, is experiencing these macroeconomic headwinds directly. Inflation eats away at profits. Meanwhile, to counter supply shortages, Walmart ordered more inventory than needed, thinking it was better to overrun than to have empty shelves. That could challenge the retailer as consumers focus spending on experiences more than items amid economic reopening.
Walmart has more inventory than it would like
In its most recent quarter, which ended April 30, Walmart had $61.2 billion in inventory. That was 32% more than the $46.4 billion inventory it had at the same time last year. It comes at a time when economic reopening is gaining momentum, causing people to spend more on experiences rather than physical goods like electronics.
At an investor conference on June 7, Walmart’s international chief Judith McKenna noted that a third of the increase in inventory value was due to inflation. Another important part was the intentional stocking up to keep shelves stocked. However, McKenna admitted that the company has around 20% more inventory than it would like. In other words, he keeps about $3 billion worth of inventory that he wishes he hadn’t bought.
Early in the day, Target (TGT -3.16%) issued a similar warning to investors. The difference with Target was that it announced a bold move to eliminate excess inventory. Target ended its first quarter with inventory of $15.1 billion, up 44% from $10.5 billion in the same period a year earlier.
Target is embarking on a massive discount campaign to reduce inventory to a more reasonable level. These discounts are going to hurt Target’s profits. It lowered its second-quarter operating profit margin expectations from 5.3% to 2%.
Meanwhile, Walmart was more measured, saying it would go through its inventory more thoughtfully.
What were Walmart and Target thinking?
Why did Walmart and Target order so much inventory? Each has seen robust revenue growth since the start of the pandemic. Walmart grew revenue at a compound annual rate of 2.5% over the past decade, but grew 6.7% in 2021. Meanwhile, Target compounded revenue over 10 years at a rate of 4.3%, but in the last two years it was much higher at 19.8% and 13.3%, respectively.
Higher-than-usual sales growth has left every retailer with stock-outs, frustrating customers who would find empty shelves when visiting stores. So they each placed larger orders than usual to anticipate the issue and account for any future supply disruptions caused by COVID-19.
Tough times for retailers could be great for consumers
After a few years of lean inventory, consumers are entering more comprehensive stores. In addition to a wider selection, excess inventory could mean people are seeing more discounts from retailers to entice consumers to buy. This trend may be tough on profit margins, as Target’s warning attests, but it could finally be a good time for buyers again.