Steep Markdowns vs. Carryover – Which Road Should You Take?

By Blacks Senior Consultant Steve Pruitt

Several retailers have asked me lately when it is appropriate to take steep markdown to clear goods, and when they should be carried over. This is a particularly important issue in the current economic climate so I wanted to address it with our Premium members.

We all know that as you get to the end of a season it’s important to get your inventory as low as you can, but you also need to keep an eye on your balance sheet. And in this environment, a healthy balance sheet is more essential than ever. You don’t want to turn inventory into cash at a very low rate because it will kill your balance sheet. On the other hand, if you have items that have no forward selling potential, and therefore can’t be carried over, you need to take markdowns at whatever cost you can get out of them.

But before you take extreme markdowns, make sure that your balance sheet can support it. I realize that this is not a simple answer, and in fact, the decision to markdown or carryover takes some careful study.

Merchandising theory says you need to clear the inventory to free up some cash flow, but what if you are borrowing against the inventory? You don’t want to liquidate it at a low rate, because you are liquidating your assets. So, if you are using your inventory as collateral for leverage you have to be careful at what price you liquidate assets. This is a very pertinent issue right now because lenders and factors are looking very closely at your balance sheet to see if you are liquidating below cost. This could have an impact on your ability to leverage going forward.

In a perfect world, we don’t want carryover, but unfortunately, we aren’t living in a perfect world. In many cases, if we can sell the goods going forward, it may be better to pack it up and bring it back out again in fall. But remember to reduce your OTB in fall so you can get your money back out.

The answer to whether to markdown or carryover will be different for each merchant and is a subject that needs to be examined closely. If you need help determining which decision is best for your business, feel free to contact me and we’ll walk through the options.