Thread: Mike Shedlock: Unsold Merchandise Piles Up at Wal-Mart; Cuts in Orders Will Follow

Thursday, September 26, 2013 12:50 PM

Unsold Merchandise Piles Up at Wal-Mart; Cuts in Orders Will Follow

What happens at Wal-Mart this holiday season will likely happen at many prominent retailers.

The Wal-Mart story is not pretty: Wal-Mart Cutting Orders as Unsold Merchandise Piles Up.

Wal-Mart Stores Inc. (WMT) is cutting orders it places with suppliers this quarter and next to address rising inventory the company flagged in last month’s earnings report.

Last week, an ordering manager at the company’s Bentonville, Arkansas, headquarters described the pullback in an e-mail to a supplier, who said others got similar messages. “We are looking at reducing inventory for Q3 and Q4,” said the Sept. 17 e-mail, which was reviewed by Bloomberg News.

Inventory Goal

Wal-Mart has said in filings that its “corporate goal” is “growing inventory at or less than the rate of net sales growth.” For its U.S. segment, the company has hit that goal only twice in the past 10 quarters, according to data compiled by Bloomberg News. The last time was four quarters ago.

In the second quarter, U.S. inventory grew at 6.9 percent and U.S. sales grew at about 2 percent. In the same quarter a year earlier, inventory increased 3.6 percent while sales rose 3.8 percent. Target Corp. (TGT) stores and Dollar General Corp. (DG) held their second-quarter inventory gains to about twice the rate of sales growth versus triple the pace at Wal-Mart.

Inventory Increase

Bill Simon, chief executive officer of Wal-Mart’s U.S. division, said last month that inventory increased due to “softer than anticipated sales trends, the delay in summer weather and timing shifts in the receipt of merchandise for back-to-school and the upcoming holiday season.”

Even as Wal-Mart seeks to clear its inventory, holiday merchandise is showing up early at stores in states including Illinois, Texas, California and Colorado, according to workers at those locations. Some of them said there is already insufficient room for existing merchandise, forcing them to put the seasonal goods out as soon as they arrive -- about a month earlier than usual.

At a store in Boothwyn, Pennsylvania, on Sept. 14, pallets of Christmas tree lights sat in the middle of an aisle beside dozens of unopened cardboard boxes of Halloween decorations. A 28-inch light-up penguin was being sold for $19.98 beside plastic jack-o-lanterns selling for $1.

It’s a similar scene in Hurst, Texas, said Donna Kennedy-Medford, who has worked at the store for two years.

“This year, there’s more earlier than last year,” she said of the Christmas items. “We have some of it in the back, and some of it has been put out on the floor in a haphazard fashion.”

Wal-Mart is already struggling to keep shelves stocked, in part because stores lack the manpower to move items to sales floors from back rooms and shipping containers in parking lots. The U.S. workforce at Wal-Mart’s namesake and Sam’s Club warehouse chains fell by about 120,000 employees in the past five years, to about 1.3 million, according to regulatory filings. In that time, the company has added more than 500 U.S. stores through July 31.

Seasonal Merchandise

Because back rooms are often full, seasonal merchandise such as Christmas decorations sometimes must be moved directly to the sales floor, said Barbara Gertz, who has worked as an overnight stocker at the Wal-Mart store in Aurora, Colorado, for almost five years.

“The aisles in the back room are so backed up with stuff,” she said. “We brought three pallets of Christmas trees out to the garden center. We usually do that in mid-October. We’re filling it up pretty quick for only being mid-September.”

Unloading Sweatpants

That’s the case at Kennedy-Medford’s store in Texas, where kids’ clothes have sold for as little as 25 cents, she said.

“Just to get rid of things, a lot of stuff is going for a dollar,” she said. “Sweatpants that used to be $8.96 are going for $2 just so we can unload them.”

Other Issues

Wal-Mart clearly has issues beyond inventory control.

You can't help but laugh at this: "A 28-inch light-up penguin was being sold for $19.98 beside plastic jack-o-lanterns selling for $1."

Rather than send a message "penguins will go for $1.00 in January", Wal-Mart would be better of dumping them in the trash bin (where they arguably belonged even in October).

Nonetheless, Wal-Mart said it was adding 35,000 permanent workers and increasing the hours of an additional 35,000, as well as hiring 55,000 seasonal workers.

That seems like a lot of hiring for a company struggling with sales.

Some of Wal-Mart's problems are undoubtedly related to under-staffing, but most of the problems appear to be weak sales. And that problem can hardly be unique to Walmart.

Tough Holiday Season?

Here's the curious statement "U.S. chains are already bracing for a tough holiday season, when sales are projected to rise 2.4 percent, the smallest gain since 2009, according to ShopperTrak"

An allegedly "tough" holiday season is supposed to have 2.4% growth?!

I will take the under. But if sales do go up by that much, then massive as well as profitless unloading of junk at bargain prices will be the reason.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com


http://globaleconomicanalysis.blogsp...-wal-mart.html

Peak Wal-Mart?

Submitted by Tyler Durden on 09/30/2013 10:21 -0400

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Walmart's growth model may be peaking due to structural declines in miles driven, income of its customer base and rising competition from dollar stores.
Structural declines in miles driven, middle and working-class income and rising competition from dollar stores may be leading to Peak Walmart. Walmart's model of superstores built on the edge of town with an inventory/distribution system based on high turnover may have reached the point of diminishing returns.
There are various signs of this, for example: Wal-Mart Nails The "Consumer Recovery" Coffin Shut (Zero Hedge)
Correspondent Mark G. ties together the long-term dynamics in this insightful analysis:
The proliferation of Walgreens & CVS standalone pharmacies, plus new construction standalone Dollar General and Family Dollar stores is reaching something of a critical mass. The only real difference between the first pair and the second pair of chains is Walgreens & CVS have a prescription drug department. Otherwise all four are nearly identical in format and product lines, including complete small grocery departments of dry goods and dairy products. These product lines are so low margin they haven't interested the Brown Truck Store (UPS) so far.
I've observed a rising number of young mothers pushing strollers in the neighborhoods where these standalone dollar format stores are appearing--in other words, car-less consumers.
I also note that all four chains prefer to build new stores in or on the edge of downscale neighborhoods. They do this rather than occupy the rapidly rising number of empty units at strip centers. And in point of fact Walgreens actually vacated a long-time unit at a local shopping center. CVS had built a standalone store on the corner across the street. Walgreens did the same a few miles down the road and also directly across from a Walmart Supercenter. The older Walgreen unit was then closed.
As Orlov and I learned in the USSR, you collapse with the infrastructure you have. Since consumers are having more trouble now getting to the stores, the stores are physically moving back to the consumers. Here we have stores proliferating that can be patronized and staffed by people without dedicated autos who instead walk or bike.
Car-less lower income consumers (and workers) look like major trouble for Walmart. A couple weeks ago in Fort Myers (FL) I noticed another of Walmart's "neighborhood" grocery store size format stores located in a strip center. The thought occurred to me that Walmart is doing poorly in an increasingly diverse array of activities. What's the point of moving into strip centers if Walgreens and CVS are moving out to be closer to their customers?
This theme also suggests a different angle for interpreting Walmart's tentative moves into Internet ordering and home delivery. Under this theory Walmart is principally worried about the proliferation of walking/biking distance neighborhood dollar stores.
Taken as a complete group these stores constitute a "Second Walmart" emerging to directly compete with the first Walmart at the bottom rung of the income ladder.
This makes more sense than imagining Walmart trying to compete with Amazon's wide inventory of high margin and low total national turnover items. That product array demands a compact warehouse distribution network to minimize inventory costs. Walmart's warehouse distribution network is instead optimized to throughput high turnover items.
The neighborhood dollar store story is ominous news for Walmart. The "Dollar Store" story suggests the bottom 25% of Walmart's demographic are losing their cars by force of economic circumstances. This is not something Walmart can do much about, if anything. As a result, Walmart is having its middle-class cream skimmed by Target while its base is being drained by car loss and the "Neighborhood Dollar Stores".
The question is not whether Walmart can survive another downturn but whether it can survive highly skewed recoveries like we're having.
Walmart's rise paralleled the rise of the one car per person household.The fundamental proposition of the Supercenter is you have to drive to get there. Therefore Walmart's decline will undoubtedly parallel the End of Driving.
I prepared the following spreadsheet to highlight the size and growth rate of "the second Walmart":

Company	Ticker	Price	Employees	Stores	Annual Revenues (Billions)	Quarterly Growth
Target	TGT	63.24	361000	1856	$73.48	2.00%
Walmart	WMT	74.65	2200000	10800	$473	2.30%

"The Second Walmart"

Company	Ticker	Price	Employees	Stores	Annual Revenues (Billions)	Quarterly Growth
Walgreen	WAG	54.85	171000	8117	$71.35	3.20%
CVS Caremark	CVS	57.78	203000	7458	$123.63	1.70%
Rite Aid	RAD	4.89	50730	4615	$25.26	0.80%
Dollar Tree	DLTR	57.44	15380	4700	$7.69	8.80%
Dollar General	DG	57	90500	10866	$16.80	11.30%
Family Dollar	FDO	72.57	33000	7600	$10.25	9.00%
Big Lots	BIG	37.19	13100	1514	$5.42	0.60%
			576710	44870	$260.40

Look at the revenue growth rates of the three non-pharmacy "dollar stores" in particular. (Big Lots is an older chain, and the ones I know of are all located in strip centers.) This is what is handicapping them. The three boldfaced "Dollar" stores are all opening standalone stores in residential neighborhoods. The first three drug store/variety store chains are also fairly included since Walmart also has pharmacies in most of its stores now.

For Walmart, peak driving means very serious trouble ahead. The "dollar stores" have four times as many outlets, and they're opening more at a far faster rates.

Thank you, Mark, for an insightful analysis of primary trends in miles driven, income, demographics and retail. Peak Walmart may also presage Peak Mall Shopping and Peak Retail in general. The poaching of competitors' customers appears to be replacing real growth, and perhaps the impending demise of JC Penney is simply the first of many such victims of the retail shark pool.
Here are two charts of the structural declines in miles driven and household income:
Vehicle Miles Driven: Population-Adjusted Fractionally Off Its Post-Crisis Low (Doug Short)





http://www.zerohedge.com/news/2013-09-30/peak-wal-mart