Wholesale Inventories, Sales Plunge in October

WASHINGTON – Wholesalers cut back on their inventories in October by the largest amount since the period following the 2001 terrorist attacks while they watched their sales plunge by a record amount.

Analysts predict more grim news in the months ahead as the current recession deepens.

The Commerce Department reported Wednesday that wholesalers, the companies in the supply chain between manufacturers and retailers, reduced their inventories by 1.1 percent in October, the biggest cutback since a similar drop in inventories in November 2001.

The inventory decline was much bigger than the 0.2 percent decrease economists expected.

Sales at the wholesale level plunged by 4.1 percent in October, the largest decline on record.

The inventories-to-sales ratio increased to 1.16 in October, up from 1.12 in September. That means that it would take wholesalers 1.16 months to sell off their stockpiles at the current sales pace.

It was the highest inventory-to-sales ratio since a similar level in February 2007 and was another warning signal of potential production cutbacks in coming months as businesses try to get their inventories back in line with slowing sales.

The declines in inventories and sales provided further evidence that the economy is in a steep recession. Many analysts believe the current recession, which has already lasted 12 months, will drag on until the middle of next year. If it lasts past April, it will become the longest recession in the post World War II period, surpassing recessions in the mid-1970s and early 1980s that both lasted 16 months.

The financial crisis has taken its toll on Main Street with retail sales falling sharply, sending shock waves through the rest of the supply chain.

The 1.1 percent drop in wholesale inventories reflected a 0.2 percent fall in stockpiles of durable goods such as autos and appliances, which are expected to last at least three years. Inventories of nondurable goods, products such as food, clothing and petroleum products, dropped by an even sharper 2.6 percent in October, a record amount.

The 4.1 percent drop in sales at the wholesale level reflected a 4.2 percent decline in sales of durable goods, and a 4.1 percent drop in sales of nondurable goods.

Wholesale inventories are goods held by distributors who generally buy from manufacturers and sell to retailers. They make up about 25 percent of all business stockpiles.

Factories hold another third of inventories and the rest of the inventory stockpile is held by retailers. The inventory level for retailers will be reported on Friday.

The cutbacks at the wholesale level reflect the deteriorating conditions at retail stores, where consumer spending has been falling as households struggle with rising unemployment and tight credit conditions.

AutoZone Inc. said Tuesday its fiscal first-quarter profit fell slightly as cash-strapped consumers put off some vehicle maintenance, but the Memphis-based auto parts retailer posted a profit that beat Wall Street expectations.

Traffic at malls remained sluggish last week, even as retailers stepped up bargains, Lazard Capital Markets analyst Todd Slater wrote in a research note Monday.

Retailers are increasing their promotions as consumers cut back spending during what is expected to be one of the worst holiday seasons in many years. Deckers Outdoor Corp.'s UGGs brand of sheepskin shoes and boots, and American Apparel Inc., which sells cotton T-shirts and apparel, appeared to be exceptions and were generating "solid" business at full price, Slater said.

"The best traffic and conversion was seen at Aeropostale, Banana Republic, Bath & Body Works, Coach, J. Crew, Old Navy, Victoria's Secret, and Limited Too (soon to be Justice), as each was more aggressively promotional than during Black Friday," he added.

Beaten-down shoppers last month handed retail stores their worst results in at least 39 years.

Costco Wholesale Corp., usually a strong performer, reported a bigger-than expected sales drop. Abercrombie & Fitch Co., Kohl's Corp. and Macy's Inc. all reported sales declines of more than 10 percent. One notable exception was Wal-Mart Stores Inc., which posted sales gains.

Overall, sales dropped 2.7 percent last month, according to the Goldman Sachs-International Council of Shopping Centers index based on 37 stores. It was the worst showing since at least 1969, when the index began.


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