Winter Carryover Presents Big Challenge in Fourth Quarter and Beyond
It’s becoming apparent that the warmest winter in more than a century will be a drag on the outdoor industry for a while longer. While snowsports, apparel and footwear dealers blew out some unsold winter goods at deep discounts this spring, nearly everyone carried over more product than usual. The outdoor specialty channel is headed into fall with 13 percent more carryover than this time a year ago, which was admittedly in the wake of an epic snowpack, according to Leisure Trends Group.
“Every retailer I know is talking about canceling apparel orders,” said one independent specialty retailer. “They figure let’s put what we’ve got in stock back on sale at full price.”
“Retailers are using the slightest excuse to cancel orders,” said Teresa Delfin, founder and CEO of Mountain Mama, which makes performance outdoor apparel for pregnant women. “In the last month, I’ve been getting a lot of inquiries about contract language around cancellations.”
This raises the risk of another fall and winter of early and deep discounts reminiscent of 2008-09. Retailers say the pricing environment remains particularly difficult online. While they were able to grow their topline through the spring and summer, their bottom lines are sagging headed into the critical fourth quarter. One major pure-play specialty retailer canceled a full-price back-to-school promotion in August within days when it became apparent customers were not responding.
“We cut our pre-season orders by up to 20 percent,” said an executive with one online specialty retailer. “We hope if the volume is there we can chase orders, but it’s really risky to be taking on inventory right now.”
The worst hit retailers were forced this spring to choose between paying winter vendors for unsold goods or using their cash to buy spring goods that might help them recover.
“We don’t need winter product until October, so we pay vendors we need for in-season product first,” said one independent specialty retailer, who carried over a large amount of backcountry skis and other gear. The retailer added that consolidation of brands under a handful of public companies complicated his accounts payable situation when debts he owed to a winter sports vendor threatened his access to a top-selling spring/summer brand owned by the same parent company. In the end, the retailer managed to secure spring/summer goods, enabling his store to move from a 25 percent decline in year-to-date sales at the end of April to an 8 percent increase at the end of July.
“Now I still owe some winter vendors money, and I’m getting into some credit issues,” the retailer said. “I will have to start canceling orders.”
The bottom line is that vendors and retailers of winter sports products have more money tied up in aging inventory. This has reduced retailers’ open-to-buy budgets — a situation that could take years to mend and hampers vendors’ ability to invest in the kind of continual product innovation that helped the industry grow through and after the recession.
“At this point, it does not matter if it’s a good winter or not,” said one investment banker. “The vendors can’t get their money out of their 2011-12 inventory to develop product and pay their vendors up the supply chain, and retailers can’t get financing to tide them over. The banks don’t want to lend to any business with less than $50 million in annual sales. They say the Treasury Department is breathing down their necks and the situation in Europe is much worse.”
Several vendors acknowledged they will be shouldering much more of the inventory risk this fall and winter than in the prior two years.
“Retail floors will not have a lot of new on the floor from 2011-12,” said Dan Nordstrom, owner and CEO of Outdoor Research. While the company managed to grow its sales 27 percent in the first quarter, that was far shy of its expectations last fall, when it expanded its rapidly growing apparel line. Nordstrom said vendors will have to play with terms and prices to push through new product this fall and winter.
“For fall, retailers will try to generate liquidity by converting that inventory into cash,” said one independent specialty retailer, who paid for all the goods he ordered last winter but still canceled a $150,000 apparel order in late July. “The big issue is the e-commerce guys who bought big. They are the guys who will affect the stability of the industry, because they serve the whole U.S.”