Finance - Intermediate Accounting - Chapter 09 - Inventories - Additional Valuation Issues.pdf

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CHAPTERNINE
INVENTORIES: ADDITIONAL VALUATION ISSUES
What Do Department stores face an ongoing challenge: They need to keep enough inventory to
meet customer demand, but not to accumulate too much inventory. If demand falls short
of expectations, the department store may be forced to reduce prices on its existing in-
Inventory ventory, thus losing sales revenue.
For example, the following table shows recent annual sales and inventory trends for
Changes major retailers, compared to the prior year.
Company Sales Inventory
Nordstrom % ϩ %
Tell Us? Federated Department Stores ϩ % Ϫ %
JCPenney ϩ % ϩ %
Wal-Mart % ϩ %
May Department Stores ϩ % %
Target % %
Best Buy % %
Circuit City Ϫ % ϩ %
Sears % ϩ %
Source: Company reports, fiscal years 2003 and 2004.
For over half of these retailers, inventories grew faster than sales from one year to the next—
a trend that should raise warning flags for investors. Rising levels of inventories indicate that
fewer shoppers are turning out to buy pared to activity in the prior period.
As one analyst remarked, “. . . when inventory grows faster than sales, profits drop.” That is,
when retailers face slower sales and growing inventory, markdowns in prices are usually not
far behind. These markdowns, in turn, lead to lower sales revenue and e.
Bankruptcies of retailers like Ames Department Stores, Montgomery Ward, and
Bradlees Stores indicate the consequences of poor inventory management. And more re-
cently, Kmart, which filed for bankruptcy in January 2002 and has since been acquired by
Sears Holdings, was in an inventory “Catch-22.” In order to work out of bankruptcy, Kmart
needed to keep its shelves stocked so that customers would continue to shop in its remaining
stores. However, vendors who were worried about Kmart’s ability to manage its invento