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B.C. retailers confident despite inflation threat

Some Canadian apparel retailers are intentionally carrying more inventory
Lululemon CEO Calvin McDonald said in September that his company is carrying more inventory than it was earlier in the year | Lululemon

Inflation has started to crimp discretionary consumer spending, as headwinds slow the economy and prompt consumer goods companies to reassess inventory levels.

B.C.’s 4.8 per cent unemployment rate in August was far below the 5.9 per cent rate one year earlier, putting additional dollars in more workers’ pockets. Retail spending this summer in the province, perhaps as a result, was up, compared with 2021.

That could change, however, as inflation and higher interest rates threaten consumer confidence because both raise household expenses, leaving less money available for discretionary purchases.

Some U.S. retailers have seen sales languish, leading them to discount excess inventory. American Eagle Outfitters Inc. (NYSE:AEO), for example, saw its inventory level soar 36 per cent year-over-year in the quarter ended July 30, prompting discounting that pushed its profit margin down to 31 per cent, from 42 per cent in the same quarter in 2021.

FedEx (NYSE:FDX) CEO Raj Subramaniam, whose company is a bellwether for the global economy, this month warned of a "worldwide recession," and said the U.S. consumer is "spending less," and the U.S. economy is slowing.

Some Canadian retailers, however, remain somewhat confident.

Roots Corp. (TSX:ROOT) said earlier this month that it was intentionally increasing inventory by 15 per cent, compared with last year.

“We are comfortable with this inventory increase, as our core collections represent the majority of our product offerings,” Roots’ CEO Meghan Roach explained on the company’s conference call.

She said much of the company’s sales are for products that do not go out of style, and therefore could be put in storage for a year if they remain unsold.

Lululemon Athletica Inc. (Nasdaq:LULU) CEO Calvin McDonald said his Vancouver-based leisurewear retailer has increased inventory.

“For much of last year, we were under-inventoried and not able to fully maximize our business,” he said earlier this month.

“In terms of inventory, we remain comfortable with both our quality and quantity, and we are well positioned for the fall season.”

Vancouver-based Aritzia Inc.'s (TSX:ATZ) inventory was $299 million at the end of May, up 81 per cent from last year, CEO Jennifer Wong said on a July conference call.

“This increase includes higher in-transit inventory due to the strategic decision to order and ship our fall product earlier.”

She said her company was "on track to have the product to meet demand through the fall and winter season.”

Despite these confident corporate outlooks, some analysts remain skeptical.

Baird Equity Research said in September that data showing clothing manufacturers' increased production heightens the risk of inventory imbalances, and "potential increases in discounting over the near-term.”

Jefferies and Co. analyst Randy Konik in August predicted sales for non-essential items would cool.

“Demand is clearly slowing, while company costs remain sticky. Margins are under pressure,” he said in a video on Jefferies’ website.

“Inflation is still a problem. Inventories are high. Promotions are beginning."

Earlier this month, he reiterated his sell rating on Lululemon’s shares.

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