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7 Retailers With Inventories Growing Faster Than Sales

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7 Retailers With Inventories Growing Faster Than Sales

Excess merchandise is becoming a problem for many U.S. retailers; consumer spending appears to be weak heading into the holiday season.

Despite the hype that surrounds Black Friday, some analysts are advising caution for investors betting that this year's Christmas Shopping extravaganza will propel retail stocks into the black. The backlog of goods is worrying for storeowners, but could be a benefit for consumers, as many shops may want to offer even deeper discounts to clear the unsold merchandise before the end of the year.

Here's a look at seven such retailers with sales lagging inventory growth.

Related Link: Apparel Stocks Heading Into The Holiday: BMO Sees Opportunities For Off-Price And Specialty Names

1. Lululemon Athletica inc. (NASDAQ: LULU)

Athletic apparel maker Lululemon has been suffering from an inventory imbalance problem; the firm's inventory total at the end of the second quarter was $280.6 million, 55 percent higher than the previous year.

Although the company has blamed the surplus on delays at West Coast ports, the figure was troubling to investors who swiftly sold shares in Lululemon after the report. Although the firm has outlined plans to move excess goods in the coming months, its mere 16 percent sales increase was worrisome, causing shares to decline.

Over the past six months, Lululemon shares have fallen 27.56 percent, as traders wonder about the direction of the firm.

2. Under Armour Inc (NYSE: UA)

Under Armour, famous for its moisture-wicking athletic apparel, has seen its popularity soar over the past few years. The brand has become more recognizable among the general public. However, in its latest earnings report, the company's balance sheet showed that inventories had increased 36 percent to $867 million during the third quarter.

The company says part of the reason for the rise was the firm's increased effort to improve shipping times, especially during the holiday season. Meanwhile, sales rose just 23 percent to just $865.6 million.

3. VF Corp (NYSE: VFC)

Footwear and accessories seller VF Corp saw its shares decline 13.67 percent over the past three months after an earnings miss in the third quarter.

Although the company struggled with factors like currency pressures and a difficult retail environment, analysts were concerned to see the company's inventory spike considerably. Overall inventory growth at VF Corp was 11.8 percent the third quarter, the firm's largest inventory increase over the past several years.

The company's sales also increased at a much more sluggish pace of just 3 percent.

4. Skechers USA Inc (NYSE: SKX)

Shares for casual footwear retailer Skechers have also been on the decline recently after a lackluster earnings report revealed the firm was struggling to clear out excess inventory.

The company's backlog of goods rose by 38 percent in the third quarter, while sales increased by just 27 percent. The firm's COO David Weinberg said most of the excess inventory was expected to ship in November, but the trend caused concern among traders who sold off their Sketchers shares to bring the company's stock price down 38.01 percent over the past month.

5. Dicks Sporting Goods Inc (NYSE: DKS)

Pittsburgh-based sporting goods superstore Dicks Sporting Goods was riding high on forecasts that athletic apparel sales were set to increase.

However, the firm's second-quarter earnings report revealed that inventory levels were becoming dangerously high and could soon signal trouble ahead. Although analysts acknowledged a general rise in same-store sales, they pointed out that the company's 13 percent increase in inventory from a year ago could be a red flag.

Excess inventory suggests that a company's goods are no longer in demand, but Dicks Chief Executive Edward Stack assured investors on the earnings call that this was not the case. He said the company's latest marketing and merchandising strategies would move the excess goods.

Now, with an earnings report due out on November 17, investors will be watching to see whether the firm is still struggling with inventory management.

6. DSW Inc. (NYSE: DSW)

Footwear warehouse DSW Inc. saw its shares decline 10.15 percent over the past month following preliminary third-quarter results that disappointed investors.

The company is struggling alongside its peers, as the retail environment becomes more and more challenging. Inventory management was one area management said it was hoping to improve in the coming months. They cited increasing marketing activities and creating new promotions as ways to move excess goods.

The company's 2015 first-quarter results showed that inventories rose by 13.8 percent while sales rose just 9.4 percent, the beginning of a worrying trend.

7. Michael Kors Holdings Ltd (NYSE: KORS)

High-end retailer Michael Kors' second-quarter results beat market forecasts, but revealed that the firm was dealing with a similar bloated inventory problem.

The firm announced that inventory had increased 15.3 percent compared to the same quarter last year, while same-store sales fell 8.5 percent. The company said holiday inventory was partly to blame for the surplus, but that European inventory also made up a large part of that figure.

For luxury brands, excess inventory can be a challenging obstacle, as they are often reluctant to hold sales or clear out previous seasons at a deep discount since that can take away from the brand's exclusivity.

Why?

Macroeconomic conditions are largely to blame for apparel retailers' inventory missteps.

The dollar's rising strength has cut down on tourism, something that has significantly reduced foot traffic in many stores. Weather conditions have also played a role as an unusually warm autumn has kept consumers from buying winter gear over the past few months. Because most retailers have to buy their stock months in advance of the season, planning around the weather is nearly impossible.

Related Link: Enough Is Enough: Why This Analyst Upgraded Macy's To Buy After Sharp Downside

Who Benefits?

As bloated inventories become a larger problem in the retail space, shoppers will be the beneficiaries.

Many companies have boosted their inventories in anticipation of robust shopping trends this holiday season, something some analysts say could be overdone. Despite economic improvement and a lower unemployment rate (which give consumers more spending power), that doesn't mean excess money will be spent on apparel.

Things like electronics, home goods and automobiles appear to be among the big ticket items this year, leaving apparel makers with too much product and not enough buyers. The result is likely to be better sales and deeper discounts throughout the holiday season as retailers attempt to clear their surplus.

Retailers that have been planning for softer sales are also likely to benefit as their new, holiday inventory won't be competing with deeply discounted items from last season. American Eagle Outfitters (NYSE: AEO) is one such firm that has been able to trim its inventory and posted just a 4 percent increase in inventory levels and a 12 percent rise in sales.

Discount retailers like Ross Stores, Inc. (NASDAQ: ROST) and TJX Companies Inc (NYSE: TJX) also stand to gain in an environment where inventories are a problem. Both firms sell off-season designer merchandise for bargain prices and are able to negotiate better deals when inventory levels are high.

Related Link: Is It All Doom And Gloom? Bernstein's Retail Sector Outlook

However, selling off surplus goods to discount stores can be a tricky business for retailers, especially those in the luxury market. Not only will they have to compete with sales of their own goods at bargain prices, but making off-season goods available to lower income consumers can take away from the exclusivity of a luxury brand.

What's Next?

With a heavily discounted holiday season on the horizon, stores may see a large increase in sales due to promotional deals. The National Retail Federation has forecast holiday sales will increase 3.7 percent this year, down slightly from last year's 4.1 percent gain.

However, one of the biggest questions investors are asking is whether the spending will be geared at apparel or if consumers will continue to focus on other goods like electronics.

Image Credit: Public Domain

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