CFOs Say Holiday Inventory Levels Steady, but Reflect Cost Increases

Inventory balance isn’t just a science – it’s an art. For retail executives, decisions on inventory purchases (made months before items actually hit the shelves) involve considerations about current consumer spending and confidence levels, projections for spending and gut insights on what shoppers will be buying when – and how much of it.

For the 2011 holiday season, this art became even more complicated with the added pressure of cost inflation.According to our fifth annual Compass Survey of CFOs, retailers made confident inventory decisions for the holiday season. A vast majority of retail CFOs report they either increased (31%) or maintained (51%) inventory levels for the holidays, compared to 2010.

While they remain split over whether too little inventory (53%) or too much inventory (47%) poses a greater risk this holiday season, they appear to be erring on the side of more. Just 19 percent of retailers report cutting inventory as their primary response to rising costs. Instead, most retailers are passing cost increases onto consumers (35%) or improving supply chain management (35%).

Inventory is also factoring into growth plans for the next year. When asked about their primary objective for growth, 39% of retailers cite improved merchandise offerings as their key strategy. But while retailers are placing more emphasis on their inventory offerings, they are not naïve about potential challenges. In fact, product and sourcing costs were named as the top threat to margins by 43% of CFOs – a huge 54% jump from 2010 (28%).

Looking ahead, it’s clear that retailers will rely on attractive product offerings to offset the price increases and make the registers ring this holiday season. Bets are in on consumer behavior for the holidays — and save for some promotional planning — all that’s left is waiting for the dice to fall.