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Analysis: Retailers keep inventories low for back-to-school sales

A woman shops with her daughter at a Walmart Supercenter in Rogers, Arkansas June 6, 2013. The annual shareholders meeting for Walmart takes
A woman shops with her daughter at a Walmart Supercenter in Rogers, Arkansas June 6, 2013. The annual shareholders meeting for Walmart takes

By Dhanya Skariachan

NEW YORK (Reuters) - Stung by leftover inventory because of a wet, cold spring and unsure about consumer spending, many retailers are ordering conservatively for the second busiest selling season of the year behind the end of the year holiday period, according to executives in shipping, banking and manufacturing.

"I don't think this is going to be a blowout year. I think this is going to be a little bit of a tough year," John Barbour, CEO of educational products maker LeapFrog Enterprises Inc said about the rest of 2013. "People have less money in their pockets."

While the U.S. economy has recovered modestly since the financial crisis, median household income is still below where it was before the 2007-2009 recession began, a recent report from Sentier Research showed. (For a related graphic, click http://link.reuters.com/taf69t)

Better inventory tracking tools also enable retailers to wait longer than usual to place back-to-school orders. That could mean higher profit margins in the back half of the year as retailers will likely not have to offer as many discounts to get rid of excess inventory. But they also risk not having enough stock if consumers spend more than anticipated.

"From their perspective, it is better to have missed sales than to end up having too much inventory, which you have to mark down," BB&T Capital Markets analyst Anthony Chukumba said.

Market research firm NPD Group expects consumers to start shopping later but spend more this year, especially online. NPD sees a 3 percent rise in back-to-school sales from last year.

Many retailers declined to provide details of the size and timing of back-to-school orders. But figures on shipments, factory orders and credit are down or flat with last year.

Data from China, where U.S. retailers get electronics, garments, toys and many other products made, showed new export orders shrinking in June at their fastest pace since September 2012.

United Parcel Service Inc, the world's No. 1 package delivery company, on Friday forecast second-quarter profit below Wall Street expectations, saying customers were selecting slower but cheaper shipping services in a weak economy.

Import volume at the major container ports is expected to rise 1.1 percent in July, versus 3.3 percent for the same period last year, according to a report from the National Retail Federation and Hackett Associates.

Those ports handled 1.38 million TEU in May, up 0.6 percent from May 2012. A TEU is one 20-foot cargo container or its equivalent. June was estimated at 1.37 million TEU, down 0.7 percent from a year ago.

A ho-hum first half "has brought some caution in for sure," said Craig Errington, vice president of marketing at Wrangler, a unit of VF Corp. He declined to comment on the size of orders for the upcoming season.

SAFE INVENTORY

Working capital lines of credit that stores tap to buy inventory are "at historically low levels" and not showing the usual peak before the back-to-school season, said Keith Vercauteren, who works in the capital finance arm of Wells Fargo, which has many retail clients.

Vercauteren said utilization on its lines of credit averaged about 17 percent for the first quarter. Its lines of credit have averaged more than about 30 percent utilization before 2008.

Unlike years past, when retailers would buy 15 to 20 percent more than what they sold the previous season, they played safe this time and bought the same amount of backpacks and school supplies as they sold last year, said Steve Russo, owner of FAB Starpoint, which makes "Hello Kitty" and other licensed goods.

"Although weather played a big factor this quarter, the economic backdrop remains very challenging for our customer," Michael Bloom, president and chief operating officer at discount chain Family Dollar Stores Inc said on an earnings conference call. "She is stretching her budget and forced to make choices."

June sales reports from other retailers such as lingerie chain Victoria's Secret parent L Brands Inc and Cato Corp also showed that shoppers were holding back on nonessential purchases.

Some retailers said they can order less or later because they are able to manage inventory better with the help of smarter tracking tools and buying strategies.

"We are getting smarter at supply chain. So what the vendor might perceive as being cautious may also just be (us) being smarter at how we use supply chain, how we use forecasts," said Ron Boire, merchandising chief at Sears Holdings Corp, owner of Sears department stores and the Kmart discount chain.

For example, the stores are buying denim in bulk instead of finished denim products so that it can get them made according to demand.

"The time it takes from concept to shelf has been reduced," said Simon Atkins, the head of Adidas Sport Style US. While it used to be as much as two years, the German sportswear maker is now testing "in-season replenishment."

Ordering closer or during the season also lets stores react faster when they see a product becoming popular.

"If you are ordering 15 months in advance, you might have tied up some of your cash," and not have the ability to do that, said Curt Andrews, vice president of marketing operations at consumer electronics store chain RadioShack Corp.

(Reporting By Dhanya Skariachan; Editing by Martin Howell, Bernard Orr)

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