Retailers’ biggest holiday wish is to get rid of all that excess

As some of the nation’s largest retailers report quarterly earnings and revenue this week, Wall Street will pay close attention to another number, too — inventory levels.

Walmart, Target, Gap, Kohl’s and others are trying to sell through a glut of extra merchandise piling up in store backrooms and warehouses.

Their quarterly filings will serve as progress reports, especially as retailers gear up for the holiday season, a time of higher foot traffic, fierce competition for consumers’ wallets and plentiful sales events. Investors want a clearer sense of how much excess stuff retailers have sold off — and how deep they may have to discount to keep merchandise moving.

“Inventory is the most important factor,” said Michael Baker, a retail analyst for equity research firm D.A. Davidson. “That’s usually not the case — usually it’s just a factor. Inventory is going to take on more meaning than the other metrics.”

Retailers are under pressure to clear out inventory and start fresh in the next fiscal year. Balancing inventory has taken on additional urgency, as economists warn of dwindling savings accounts, rising credit card debt and the risk of a recession.

“The idea is to get clean in front of an environment where sales may be a little tougher to come by,” he said.

Retailers have dealt with a sharp turnabout over the past six months. Many of the same items that flew off shelves during the pandemic’s earlier days — such as loungewear and coffee makers — have wound up on the clearance rack.

With housing and grocery prices surging, fewer Americans are buying big-ticket and discretionary items. Inventory, which accounts for the value of goods in transit as well as those in stock, also rose due to supply chain issues.

Sudden changes in tastes “from sweatpants to swimsuits and suitcases” put companies in a tough position, said Oliver Chen, a retail analyst for Cowen.

Retailers typically place orders about six to 12 months ahead, with bulky items and home goods on the higher end of that. After seeing such strong consumer demand and coping with supply chain-related out-of-stocks, some companies placed bigger or expedited orders.

Big retailers fought so long and hard to build up inventory that they weren’t able to adjust properly when they needed to slow the influx of merchandise. “You can’t change on a dime,” Chen said.

Walmart and Target were among the retailers that shocked investors with significant jumps in inventory levels in the first quarter, which ended April 30.

Target slashed its forecast twice, once in May and again in June, saying it would cancel orders, cut prices and take other dramatic steps to clear the clutter.

Walmart’s U.S. CEO, John Furner, acknowledged at an investor day in…