Wholesale Weakness Slowing US Inventory Destocking, Freight Demand

There is growing conviction among US companies that inventory destocking is working, thinning stockpiles of goods built up in 2022 — but just not fast enough.

“The peak of inventory is behind us,” Harmit Singh, chief financial and growth officer of apparel maker Levi Strauss & Co., told Wall Street analysts during a July 6 quarterly earnings call. The clothing maker expects to end the year with inventories below 2022 levels.

On a broad level, however, destocking is not happening rapidly. Early second-quarter earnings reports paint a picture of gradual inventory reduction and ongoing adjustment, with inventories still high in many sectors.

“We are seeing that retailer inventory rebalancing has largely normalized following the significant adjustments affecting nearly all consumer discretionary categories over the past year,” Julien Mininberg, CEO of consumer goods manufacturer Helen of Troy, said during an earnings call Monday.

“Our retail partners are now increasingly matching their orders to consumer demand,” Mininberg said.

Footwear maker Nike referred to a “normalizing supply chain” in which it is carefully managing US inventory — by which it means limiting the availability of inventory.

“Our inventory levels are ahead of our plan and ahead of the competition,” Nike CFO Matt Friend said during a June 29 earnings call. “The large majority of our strategic partners have also done a beautiful job moving through the inventory.”

But wholesalers struggling with flagging consumer demand are having trouble reducing inventories.

Merchant wholesale inventories in May were still 4.1% higher than in May 2022, although they were down 2.6% from their November 2022 peak of $930 million, according to non-seasonally adjusted US Census Bureau data released on Monday.

Wholesale retailers reduced inventories 1.4% from April, the unadjusted Census Bureau data showed, but no more than expected when accounting for seasonality in the late spring.

A more cautious consumer is hobbling attempts to fully destock and begin restocking and shipping. Inventories remain high enough to be a drag on US imports and surface freight demand, extending a contraction in freight volumes that began last October, according to several sources.

Research firm Armada Corporate Intelligence estimates that 61.5% of US businesses are still overstocked, with only 23.7% holding “effectively balanced” inventories and 11.3% understocked.

Positive shipper sentiment about inventories decreased 25 percentage points, from 57% in the second quarter index to 33%, in BlueGrace Logistics’s third-quarter Logistics Confidence Index. “Neutral” sentiment rose from 30% to 53%, “indicating a growing uncertainty,” BlueGrace said.

Slow sales, less freight

Flagging wholesale demand extends the down cycle at a time when shippers and carriers are looking for signals of improvement, such as the “pop of expectations” the Conference Board saw in its Consumer Confidence Index in June.

That index rose from 102.5 in May to 109.7 in June, its highest level since January 2022. The board’s expectations index rose from 71.5 in May to 79.3 in June.

The June uptick in consumer confidence was not foreseen in May sales data from the Census Bureau, however. Sales at wholesale stores did rise from April to May, but not as much as expected, leading to an 0.2% seasonally adjusted decline in May.

The US wholesale inventory-to-sales ratio was 1.41 in May, up from 1.40 in April and 1.30 a year ago, reflecting higher inventories and slower movement of goods from shelves and warehouses.

“Wholesale activity has slowed, and that activity generates a lot of trucking ton miles,” said Jason Miller, associate professor of logistics at Michigan State University (MSU) and coauthor of the MSU For-Hire Trucking Ton-Miles Index.

That slowdown will “put a damper on freight movements,” with the ton-miles index dropping about 2% in May, Miller said last week. “My sense is we’re in the trough of this freight recession, and we’re going to stay in that trough for a while.”

Predictions of a market swing toward higher freight demand are premature, said Miller.

“I don’t see a rebound in manufacturing activity,” he said. “Containerized imports are down by double digits from last year. I think we’re looking at a best-case scenario that we start getting out of this trough by the second quarter of next year.”

Right stock, right price

The US apparel industry is paying the price for importing a record 1.9 million TEUs of clothes and footwear in 2022, an 11.3% increase from 2021, which was also was a record year. Those imports were driven in part by disruption in manufacturing and deliveries during the COVID-19 pandemic.

US apparel sales at wholesalers were down 14% year over year in May on a nonadjusted basis and 16.1% when seasonality is considered. The inventory-to-sales ratio at apparel wholesalers was 3.24 in May, up from 3.19 in April, a sign that clothing is moving off shelves more slowly.

During the pandemic, “our inventory backlog created supply chain challenges in our US distribution centers, resulting in our inability to fulfill all demand,” said Chip Bergh, president and CEO of Levi Strauss. The lower fulfillment rate resulted in higher out-of-stock rates in stores, he said.

Out-of-stock rates in late 2021 led to accelerated imports in 2022, as well as the desire to avoid potential labor disruption at West Coast US ports.

Levi Strauss last week lowered its revenue growth forecast for 2023 from 1.5% to 3% to 1.5% to 2.5% because of softness in the US wholesale market. The company is taking “surgical pricing actions” to improve its wholesale business, which is still about 2% higher than in 2019, Singh said.

He expects the wholesale business to stabilize at less than 30% of Levi Strauss’s overall revenue. Direct-to-consumer sales via e-commerce are rising as wholesale receipts decline, Singh said. That may indicate some purchasing habits consumers picked up during the pandemic are still in place.

“Clearly, the lower or moderate-income consumer is being squeezed,” CEO Bergh said during Levi Strauss’s earnings call. As a result, wholesale retailers are being cautious with orders.

That means destocking is likely to slow, further depressing freight demand, unless consumers begin to feel more confident as the fall holiday sales approach, especially those with moderate incomes.

By: William B Cassidy / JOC