David Jones, Myer confident on inventory but experts suspect profit margins still under pressure

Department store giants David Jones and Myer have confirmed their inventory management is on schedule, with winter stock coming on board to replace products sold through summer sales, but retail experts warn that may not necessarily be a sign of success.

The confirmation of new stock comes as the stores continue to offer massive discounts, and experts note the new supply of products could be coming at the expense of already-slim margins.

“What are they paying for this new inventory? Are they picking up good deals that enable them to continue discounting and yet make a profit?” City Index analyst Peter Esho told SmartCompany this morning.

Inventory management has been at the forefront of the retail debate recently, with more successful companies pinning their success squarely on the ability to handle stock well. Kathmandu and Super Retail Group have both attributed recent financial upticks to stock management.

Speaking to The Australian Financial Review, both Myer and David Jones said new stock was coming in, without any delays.

“The excess inventory which was well reported in the full-year 2011 results and again in our first-quarter sales announcement, has not had any impact on our planning for winter,” David Jones group executive of fashion and beauty, Sacha Lain, told the publication.

“Our ability to maximise the new intake for season’s launch is a consequence of the successful and well-managed executive of our inventory reduction plans throughout the first half of 2012.”

A Myer spokesperson said the company had not delayed any orders for the new season.

But managing director of Retail Doctor, Brian Walker, says merely getting rid of inventory isn’t the issue – bigger questions need to be asked that could raise questions over whether Myer and David Jones are performing well.

“In these types of situations it’s the supplier that wears the pain. The negotiated terms, the trading conditions,” Walker said.

“In one sense, all inventory is linked to sales so the fact you are reducing inventory means you are increasing the effectiveness of your working capital investment. But what kills companies is excess stock sitting around for months.”

Walker says recent massive discounting may have hurt margins, but the key to a good inventory strategy was replacing the stock most required, rather than all of it.

“When you start looking at stock profiles, the important thing is replenishment of the bought goods. So if you sell a particular men’s shirt in a certain size and it sells out, and you don’t have a replacement, that’s what hurts them.

“It’s not necessarily reducing the overall quantity, but it’s the quality of the stock. It’s about selling the right products in the right categories at the right time.”

Esho says while the critical financial terms of supplier deals were not known, the larger department stores still had to manage their stock much more effectively.

“If you’re getting good terms and concessions – and keep in mind the dollar has been strong – then it’s possible for them to be doing very well.

“We simply don’t know the financial terms. The questions we have to ask surround whether these suppliers are just giving away stock at the right prices. What exactly are they paying for all this, and how is it impacting their margins?”