NEW YORK--With the holiday selling season well under way--and generally underwhelming--most of the big retailers are weighed down by heavier-than-usual inventory levels.

An HFN study of inventory-to-sales ratios for major retailers that sell home furnishings shows an average level of 1.51 entering the fourth quarter, versus 1.48 a year ago.

A lackluster back-to-school season and late starts for colder weather in most parts of the country contributed to more crowded back rooms that many retailers are trying to promote their way out of.

"There is more inventory than demand right now," said Michael Stanley, managing director with factoring firm Rosenthal & Rosenthal. In efforts to clear these cluttered shelves at the start of the holiday sales period, retailers "have gone more promotional," he said. This excess inventory environment may have led to an adjustment in fourth-quarter orders and may affect first-quarter shipments down the line.

Kohl's saw the largest increase in third-quarter inventory levels with an inventory-to-sales ratio of 1.62, compared with 1.40 for the year-ago period. "We finished the quarter slightly over our inventory guidance of midsingle digits with 7.6 percent more inventory per average store," said Kevin Mansell, Kohl's president, during the company's third-quarter earnings call. Despite an increase in inventory levels, more risky categories such as seasonal were at "essentially the same level as last year," which he said "is a really good place to be." He added that "those are areas that I think are very high risk; they do have a tendency, if sales don't happen, to be more draining."

Kohl's expects its inventory levels to be up low-single digits on a per-store basis at the end of the fourth quarter. "We've adjusted fourth-quarter receipts as necessary to reflect our more cautious sales guidance for the quarter, and as I indicated, continue to improve our inventory effectiveness," Mansell said.

J.C. Penney's shelves were also weighed down during the quarter, recording a 1.66 inventory-to-sales ratio, compared with 1.52 for the same period last year. "Inventory levels were above expectations at the end of third quarter, and about 10 percent higher than last year," said Robert Cavanaugh, executive vice president and chief financial officer at J.C. Penney, during the company's earnings call. "The higher inventory levels reflect merchandise associated with the addition of 50 new stores and the earlier receipt of holiday merchandise due to the calendar shift as well as the impact of third-quarter sales," he said. He added that promotional activity is expected to increase at J.C. Penney and across retail "due to the higher inventory levels that resulted from soft third-quarter sales."

Sears Holdings also experienced heavier third-quarter inventories. The retailer recorded a 1.43 inventory-to-sales ratio for the quarter, compared with 1.34 for the year-ago period. High inventory levels contributed to tightened margins at Sears. "Our gross margin rate decreased by approximately 90 basis points (from 0.9 percent), to 27.4 percent, and was impacted by incremental markdowns taken to clear seasonal merchandise and higher inventory levels due to lower sales," according to the company's earnings statement.

Consumers are already beginning to see this increase in promotional activity as holiday discounts appeared well in advance of the Black Friday sales weekend. Retailers including J.C. Penney and Wal-Mart took price cuts on thousands of items, starting in October.

Mark Bienstock, senior vice president with Westgate Financial, said that in addition to stepping up promotional activity, retailers are increasingly migrating to just-in-time, factory-direct inventory supply-chain models. "Retailers want to keep [holiday] inventory as lean as possible and are asking vendors to hold it in the factories," he said. "[Retailers] are going as much as possible to factory-direct models to have [inventory] ready for a just-in-time basis." Kohl's push to manage its receipt flow closer to sales is an example of this supply-chain change.

Some third-quarter housecleaning efforts did prove effective. Linens 'n Things saw the steepest inventory-to-sales ratio drop of retailers surveyed: to 2.41 from the year-ago period's 2.57. A major aspect of the first stage of Linens' three-phase, nine-year turnaround plan involves clearing out distressed and aged inventory. The company's goal is to pare down distressed inventory to 10 percent of its total number of SKUs (it is now at 14 percent) by the end of the plan's first phase.

Linens' promotional focus during the quarter may also have helped slim down inventory. The company engineered a marketing boost during the quarter to overcome a projected home decor shortfall and expectations of a highly promotional retail environment as the holiday season neared, as earlier reported by HFN.

While large department store chains grappled with more crowded shelves, mass merchants Target and Wal-Mart maintained their historically low inventory levels. Wal-Mart logged a 0.57 inventory-to-sales ratio compared with 0.60 for the year-ago period, and Target came in at 0.90 versus 0.88 for the same period last year. Wal-Mart is known to have one of the most efficient retail supply chains. --Michael Rudnick