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FASHION VALUE CHAIN

The four apparel firms collectively have $1.7 billion more merchandise than they had a year ago. They have three options for dealing with surplus inventory: bite the bullet and write it off now, severely discount it, or store it until next season, when consumer demand may return. In many circumstances, businesses will employ a combination of all three tactics, although the amounts may vary greatly depending on their diagnostic.

Many have blamed low sales on inflation and drained wallets, an assertion that has some merit. Abercrombie & Fitch’s adult-focused eponymous brand had its best second-quarter sales since 2015. However, poor sales at Hollister, whose client base is lower on the income range, pulled down its performance. A similar segmentation was observed at Macy’s, where its flagship location saw comparable-store sales fall 2.8% while higher-end Bloomingdale’s increased 5.8%. Apparel retailers who believe this is the primary issue will rely more heavily on discounts and clearing.

However, they may be losing money if the explanation is merely that clients are overstocked on certain wardrobe items. Casual, work-from-home clothing was also the type of item that now struggling retailers like Hollister, Old Navy, and Kohl’s likely overstocked. “Consumers did not oppose rising prices.” Companies should not anticipate them to pounce on the other side’s discounts,” says Simeon Siegel, equities analyst at BMO Capital Markets.

If corporations believe that is the primary cause of unsold inventory, the prudent strategy would be to store it for later seasons when buyers feel the need to replace their wardrobe. That, of course, comes with its own baggage. Keeping inventory takes up space and poses a risk.

Still, that is a risk that may be worth taking for most apparel sellers, which will be dealing with some fierce price competition in the coming months. Companies that mentioned such a strategy included Carter’s, CRI -0.71%▼ a children’s apparel company, and Gap, GPS -3.46%▼ which said last Thursday that roughly 10 percentage points out of the 37% in the inventory growth was for pack and hold. Kohl’s said in its latest earnings call that roughly $82 million of its excess inventory included products it had packed away, such as sleepwear and fleece. The inventory glut will leave no apparel seller unscathed, but companies making the  right customer diagnosis today could come out looking sharper.