Sporting Goods Sees 2009 as Year of the Margin

But after undergoing a brutal downtown, still unsightly unemployment and consumer confidence figures, and a fuzzy view on the extent of any second-half bounce back, the market apparently remains committed to conservative inventory planning — even if it means giving up potential short-term gains.

The move to tighter inventories is resulting in reduced markdowns and improved margins. Limiting SKUs also reduces risks by focusing on proven winners. And reduced inventory preserves working capital in a still unsettled economy and credit market.

While it seems like the market is perpetuating a self-fulfilling prophecy, it is exactly what many Americans are doing to get their own financial house in order — and what many would suggest the U.S. government should do as well.

“Inventory is a retailer's and a vendor's largest physical asset,” says Jim Hoff, VP of sales at Asics America. “The conservative positions retailers or vendors are making is an indication of the concern for the economic times we are in. Fear of failure is greater than reward for risk.”
“I believe most retailers are even more focused today than in 'normal times' on managing their inventories to ensure that they are aligned with the sales trends,” says Keith Daly, president and chief executive officer of Foot Locker U.S., which includes the Foot Locker, Kids Foot Locker, and Footaction USA retail nameplates. “In general, the overall reduced inventory levels in our sector should benefit all athletic footwear retailers in the future.”  

But the measures taken by many of the largest retailers in the market also risks creating more “terminal sameness” across the retail landscape as retailers all move to reduce risk and focus on the same key products from the same key brands.  Can a footwear market that was built on innovation and fashion trends survive by selling Air Force 1s and Chuck Taylor All Stars?

With no other major bankruptcies outside the Joe's Sports and Sportsman's Warehouse issues, the industry has so far weathered the downturn better than many expected.  Unlike past downturns, both retailers and vendors are dealing with the credit crunch in addition to plunging consumer spending. Part of the inventory reduction reflects the fact that many smaller stores still can't borrow as much against their credit lines. But for many, the need to conserve cash became paramount for survival.

“This is the worst retail environment we've seen in 40 years,” notes Fran Allen, SVP of sales at Saucony. “It would be irresponsible for most retailers — who don't own their own business — to take aggressive chances in this environment.  Until the consumer shows signs of wanting to spend more money, conservatism is the word.”

Even though meatier open-to-buys are expected once the economy perks up, retailers are expected to continue to look for faster stock turns and less inventory risk going forward with a focus on gross margin dollars. The industry was already moving toward reducing the BOGO (buy-one-get-one) climate of the past that had pulled down profit margins, but another lesson was learned after the collapse in consumer spending in October 2008 led to bloated winter inventories – some of which is still being worked out.

Ron Parham, senior director of IR and corporate communications at Columbia Sportswear, notes that besides margin pressures, another side effect of being over-inventoried is that excess product often winds up in discount stores that can hurt a brand's image and full-price sales of newer product at core channels. Retailers also struggle to get behind new seasonal initiatives when older product needs to be cleared. But the time required to clear merchandise is the biggest frustration. Parham says that after over-expansion caused a similar over-inventoried situation in the late 1990s, two years were spent liquidating those excess inventories.

“It amounts to the lesser of two evils,” says Parham. “But in our experience it's better to have a little pent-up demand by being under-inventoried. If that means there's a little bit of a sell-out situation that would be a high-class problem.”

Todd Spaletto, VP of sales at The North Face, says that many people have been viewing 2009 as “the year of the margin.”  He elaborates, “Last year's overly-promotional retail environment really hurt gross margin dollars — the lifeline of how our specialty retailers provide premier customer service. I think most people are less concerned about big increases in top line sales, and more concerned with showing a healthy bottom line… Short term, I think it is the right strategy for our industry to have in 2009.  However, long term I believe we need to recognize the importance of new, innovative ideas that create excitement with the consumer and establish the foundation for future years' growth.”

Currently, a key challenge for many retailers is figuring out how to bring some freshness to store assortments and avoid under-stocks despite the inventory cuts. This has placed a greater urgency around developing better consumer research to ensure strong initial buys.
“The number one issue on inventory is that every store is different,” says Craig Levra, chairman and CEO at Sport Chalet. “Every store has a different customer base by category and it puts incredible pressure on your people and your systems to make sure every store is merchandised exactly right.” 

But it's also led to greater collaboration between vendors and retailers. In particular, vendors are being looked to much more to refill merchandise in season.

Daly says that Foot Locker's greater focus on improving inventory turns lends itself to a “more disciplined and conservative approach” to inventories. But Foot Locker also remains committed to delivering compelling assortments for consumers.

“We continue to believe, and plan accordingly, that the consumer is looking for freshness and innovation and that editing our assortment to reflect this will provide the greatest return,” says Daly. “At the same time working with our vendor partners on automated replenishment is one key initiative designed to improve our in-stock and productivity position on product.”

Daly says that unless the recovery picks up steam, Foot Locker will very likely remain conservative in inventories.

“We must view existing sales trends and build future assumptions on sales while balancing the necessary inventory to support that,” notes Daly. “Leaner inventories limit the exposure to future markdowns which erode gross margin. Unless we see a change or recovery in sales trends and overall performance, I expect that we will continue to manage our inventories lower over the coming months.”

One newer way The Finish Line has been looking to handle out-of-stock issues has been through the Internet.

“We continued to present our customers with a premium experience – stocking the best brands in our stores and offering customers the option within our stores to order an item from our e-commerce site and have that item shipped to their homes or back to our stores,” says Glenn Lyon, chief executive officer at The Finish Line.

To help that multi-channel cohesion, a division was established in late August that focused exclusively on its growing e-commerce channel, and Don Courtney, a 21-year veteran of The Finish Line, was named its president.

Overall, Lyon called inventory discipline “one of the most important factors for our company.” If heavy promotional activity is required to clear inventories, it clouds Finish Line's “premium” positioning, which not only establishes its high-end selling climate but provides its access to the top-tier brands.

“The effective and efficient management of inventory is something we focus on every day, constantly seeking to improve through better technology, smarter strategies, collaboration with vendors, blending of cross-channel experiences for the customer, and other initiatives,” says Lyon. “This focus must intensify in times of economic challenge and respond to realities. But when your brand is based on the idea of premium, you must be extremely careful not to reduce merchandise inventory too far. The environment requires you to be creative and conscious of other ways, such as e-commerce within and outside of the store, to satisfy customers.”

Saucony’s Allen says careful planning, responsive factories, and a focus on best selling models have helped the running brand fill-in on orders.
“Our operations people have done a really outstanding job managing risk and opportunity, and our replenishment/at-once business is hitting record numbers week after week,” says Allen. “They must be guessing right when it comes to our back up inventory stock.”             

New Balance has invested in staying in stock by using terms  like “never out” as a selling point across many of its new technical running styles.  “In addition,” says Doug Liberta, channel sales manager for sporting goods at New Balance, “we made bets on some of our top selling made-to-order styles with inventory buys to again provide our retailers a safety net when their conservative inventory approach becomes a challenge to meet their consumers needs.”

Even prior to the downturn, Columbia Sportswear was working on some demand planning strategies to better align supply with demand. Instead of having two big purchase months a year, it also is spreading out its buys across months, primarily to better utilize capital. The most noticeable change is that the amount of at-once stock has been reduced over the last few seasons.

“We've been very clear with our retail partners that we're gong to build pretty close to what their advance orders are given the cancellation rates we've seen over the last two or three seasons,” says Parham. “We're trying not to put ourselves in the position of taking on new inventory risks.”

Spaletto says one way The North Face is helping retailers meet their inventory needs is through its new Early Spring Season. “The first quarter has become a big business for us, as it is still really cold in most parts of the country,” says Spaletto.  “With conservative fall/winter buys and good early sell-through, we are seeing a nice increase in demand for our Early Spring products which start shipping in December. I think it speaks to how retailers are feeling more optimistic about fall/winter sell-through and the need to have sufficient inventory of new products to support first quarter sales.”

THE TURNAROUND?

 

With many vendors equally conservative on inventories, the industry still faces unavoidable limits getting back into product given the long lead times for just about every category outside fan apparel, according to analysts.

Matt Powell, senior retail analyst at SportsOneSource, believes the overall cautiousness is hurting new ideas.

“New brands and products are the lifeblood of our industry and should not be overlooked,” observes Powell. “New items and categories are part of leading us out of this mess.  However, the tests must be small and controllable.”

He likewise believes the over-reliance on replenishment will result in “'plain vanilla' assortments with no excitement. There needs to be a balance here.”

A gradual recovery is expected. With easy comparisons against Holiday 2008 and perhaps some pent-up demand, a healthier fourth quarter could pave the way for buyers to increase open-to-buys as well as for banks to lower credit restrictions for a meaningful pickup in Fall 2010.
Jim Duffy, an analyst at Thomas Weisel Partners, believes much of the new conservatism around inventories is cyclical in nature. Once a few retailers succeed by chasing hot product with orders, the rest will soon follow.

“Right now fear seems to be driving the day,” says Duffy.  “If we see a pickup in demand, and it seems that revenue and margins are easier to come by, you'll probably see it swing back towards greed.”