Retail finance chiefs are entering the busiest shopping season of the year with declining profit margins as their companies offer more discounts to compete for sales and clear out excess stock.
Profit margins in the sector have shrunk in recent months due to a mix of high inflation, excess inventory and growing expectations from consumers for price reductions. Among retailers in the S&P 500 that reported financial results through Nov. 22, the average margin on earnings before interest and taxes declined to 10.7% in the third quarter from 13.2% in the year-earlier period, according to S&P Global Market Intelligence.
Some chief financial officers in the retail sector say markdowns are necessary to start the new year without the drag of excess stock on their shelves. Companies were caught off guard earlier this year by rapid changes in consumers’ buying habits, leaving them with a glut of early-pandemic favorites such as athletic wear and home goods. Other CFOs say their companies view the promotional environment as an opportunity to attract more customers.
Below is a roundup of retail CFOs’ remarks on this topic during recent earnings calls. Some responses have been edited or shortened.
Katrina O’Connell, CFO, Gap Inc.
“We’re just prepared to compete when the customer is ready to shop. And so we know we have to get out ahead of ensuring that we’re early enough, that we’re promoting at a time when [customers are] willing to buy, and we’re not waiting too late to clear the merchandise. And on the flip side, if they’re not going to shop until later, we don’t want to be too far out ahead of it.”
Adrian Mitchell, CFO, Macy’s Inc.
“We will take the necessary markdowns based on demand versus the expectations we have week-to-week as we progress through the fourth quarter. And we know that customers from a pricing standpoint are looking for value. All the surveys that we’ve seen would indicate that the value is going to be an important driver for the customer.
So as we think about our initial ticket, our promotions, our markdowns, we expect to manage through that as best we can, but the good news is we have the pricing science to be able to do that.”
Wendy Arlin, CFO, Bath & Body Works Inc.
“We are definitely focused on prioritizing clean inventories. We know that if we end the season clean, it will enable us to start 2023 on a very solid footing. In terms of pricing, as you saw in our remarks, we were more promotional in Q3 year-over-year, and we’re planning to be similarly more promotional in Q4 as we look forward. We saw that the customer is extremely price sensitive right now. And we have made our plans to meet the customer where their mindset is.”
Michael Fiddelke, CFO, Target Corp.
“We’re definitely not operating at a profit level we expect to over time. And the one-time impacts we’ve seen this year from the volatility and the change in trend has led us to more markdowns and salvage action on inventory than we’ve seen historically by a wide margin. And so we would expect to get a lot of that margin and that improved markdown performance back.”
Andrew Page, CFO, Foot Locker Inc.
“Note that while the promotional environment has continued to intensify, we are receiving more support from our vendors to help fund markdown dollars. Historically, we’ve managed a collection of four basic inventory levers: cancellations, [return-to-vendors], push outs and vendor allowances, or VAs. We’ve worked closely with all of our brand partners to balance all of these levers. Each brand partner utilizes all of them. But this year, based on heavier overall inventory levels, VAs are higher than usual.”
Jill Timm, CFO, Kohl’s Corp.
“In terms of the promotional intensity, I definitely think it’s going to be widespread. I don’t know if there’s any particular category that’s going to have more promotional intensity than others. I just want you to know that that is a core fundamental of who Kohl’s is, and we’re prepared to compete this holiday.”
Jeff Howie, CFO, Williams-Sonoma Inc.
“Our approach has been very consistent in terms of the level of promotions that we’ve been doing. And plus, I want to reiterate that we remain committed to not offering site-wide promotions in our brands, and we will do whatever it takes to continue to not do that. We think that our in-house design proprietary product really resonates with the customer because of its differentiation and commands its own pricing power, and we’re seeing that in our results.”
Scott Goldenberg, CFO, TJX Cos.
“Talking about just the markdowns this year, we keep talking about our markdowns rate has been better all year than our fiscal ’20 levels, although our markdowns have been slightly higher than what we had anticipated. But they’ve been built into each forecast that we give you and have largely been exactly where we thought they would end up….A lot of our inventory pickup has been due to getting inventories a bit earlier than we expected as the supply chain improved.”
Write to Kristin Broughton at [email protected]
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