Retailers Remain Lean after Wholesale Report
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Retailers like Target Corporation (TGT), Wal-Mart Stores, Inc. (WMT), and Costco Wholesale Corporation (COST) continue to keep their inventories lean, after the Commerce Department’s Wholesale Inventories report showed that businesses reduced inventories by 0.9% in September.
Inventories Drop as Sales Rise
The Commerce Department’s Wholesale Inventories report showed that businesses cut inventories at the wholesale level for a record 13th straight month, despite a sixth straight increase in sales in September. While the number was lower than expected, the cuts suggest that retailers are relying on smart inventory management to stay as lean as possible.
Steady gains in sales typically help convince businesses to stop slashing inventories, but rising unemployment and other economic headwinds have caused some delay. However, many analysts believe that retailers will eventually be forced to rebuild their stockpiles given their rising sales. In fact, the nation’s retailers reported a continued rise in sales last month.
Economists believe that once wholesalers and retailers begin rebuilding their inventories, it will trigger higher factory production and economic growth. And since this has been the longest stretch of inventory declines in more than a decade, many market participants are looking forward to a change in pace to bolster the economy.
A Decent Retail Earnings Season
The nation’s retailers posted their best month of sales in more than a year in October as shoppers sought bargains and high-end stores alike. Year-over-year sales rose 1.8%, the best since June 2008, according to Thompson Reuter’s calculate of 30 major chain stories. And the increases came from stores ranging from Costco Wholesale [[COST]] to Nordstrom Inc. [[JWN]].
Retailers are hoping that the momentum will continue through the holiday season, where the many retailers record a majority of their sales. However, some industry experts warn that a full turnaround may not take effect for some time, and cautioned that the strong results were largely due to the fact that comparable sales in October 2008 were particularly bad.
In the end, consumer sentiment will determine the success of retailers and the economy. Unemployment numbers came in better-than-expected this week, but remain low, while a lot of their spending in recent months has been on the heels of government incentives. As a result, whether or not this continues into the holiday season is hard to predict and opinion vary.
The Takeaway…
- Wholesale inventories declined, despite an increase in sales, by 0.9% compared to economist estimates of a 1.0% decline.
- Retailers reported continued growth in October ahead of the critical holiday season, while maintaining extremely lean inventories.
- Consumer spending has been on the rise, but unemployment remains high, and government incentives may begin to wane.
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