Gap to ‘mothball’ unsold inventory until next year
Gap Inc. plans to pack and hold summer, transitional fall and fall merchandise that doesn’t sell due to store closures and potentially lower demand until the next year’s selling season.
Gap’s strategy is a response to inventory levels that have become significantly elevated with its stores temporarily closed in response to the pandemic.
Katrina O’Connell, CFO, said last Thursday on Gap’s first-quarter conference call, “While there is a cost to storing this product, the economics are more advantaged than flowing the goods into what is likely to be a highly promotional environment.”
She added, “We feel quite good that the pack-and-hold consists of either ongoing basics or summer product that was not ever delivered to stores that we can keep on hand.”
Two other methods Gap is using to balance inventories is writing down “now seasonally irrelevant” spring merchandise, with a portion donated to charities, as well as fulfilling online orders from in-store inventory.
Some analysts had reservations about the pack-and-hold strategy.
“We are cautious about whether this season’s products will resonate with consumers next year, given rapidly changing consumer preferences,” Oliver Chen, at Cowen, wrote in a note, according to CNN. “We also view there is a risk associated with the possibility of not having enough of on-trend items for the fourth quarter of 2020, which is the most important quarter for Gap.”
Packaway accounts for nearly half of total inventories for off-price retailers, but full-price sellers only typically make limited use of the tactic to take advantage of opportunistic buys.
Most major retailers so far appear to be focusing on markdowns and order cancellations and adjustments to balance inventories, although that may change with a slow recovery.
Among vendors, PVH, the parent of Tommy Hilfiger and Calvin Klein, is exploring pack-and-hold if promotions become “too aggressive” at the off-price channel in months ahead. He said many competitors are not as well-capitalized “to have the benefit of carrying goods to six or nine months to get to spring next year.”
- Gap Inc. Reports First Quarter Results – Gap Inc.
- Gap Inc. Q1 2020 Earnings Call Transcript – The Motley Fool
- Gap’s risky bet: Putting this year’s unsold clothes back into stores next year – CNN
- PVH Corp. Reports 2019 Fourth Quarter and Full Year Results – PVH
- PVH Corp. Q4 2019 Results – Seeking Alpha
DISCUSSION QUESTIONS: What are the pros and cons of a pack-and-hold strategy to manage inventory imbalances caused by the pandemic? What advice would you have about utilizing packaways to optimize inventories?