An opening that reframes inventory success
Cutting thousands of products might look like a retreat, yet Lowe’s treated it as a precision strike that swapped clutter for clarity, turned stock into cash, and lifted gross margin by 50 basis points while keeping price competitiveness intact. The headline move—trimming roughly 15% of the assortment by the end of next year—did not shrink choice so much as sharpen it, replacing overlapping and slow-moving items with a tighter mix aligned to demand and margin goals.
That shift came with discipline at scale. Inventory closed Q3 at $17.2 billion, about $400 million lower year over year even with approximately $600 million added from acquisitions and higher tariffs pressuring costs. The math suggests faster turns and smarter exits outweighed external headwinds, signaling operational control rather than a one-off windfall.
The bigger story sits in how AI rewired the basics: demand planning that senses store and channel signals, allocation that narrows misplacement, and replenishment that exits unproductive items smoothly. The question ceased to be how much inventory to hold and became which inventory deserves to stay.
The context that explains why it matters
For big-box retail, volatility is now standard. Tariffs raise input costs, and excess inventory magnifies the hit by tying up working capital just as demand oscillates across channels. When turns accelerate, cash frees up for growth investments and markdown risk eases, cushioning profitability through cycles.
Retailers have responded with a curated assortment era. Rather than chase breadth for its own sake, merchants are pruning duplicative, low-productivity SKUs and reinforcing the items that drive traffic, attachment, and margin. A cleaner mix improves resilience: fewer slow movers reduce clearance exposure, while depth behind “hero” SKUs protects service.
Signals across the sector validate the pivot. Dollar General labeled SKU reductions a “big win,” and Advance Auto Parts deepened line reviews to pull out unproductive items. A relevant earnings call in May set a clear narrative: a tighter, data-led mix paired with stronger replenishment is the new margin playbook.
The mechanics behind Lowe’s shift
SKU rationalization sits at the core. The target—about a 15% reduction—focuses on slower movers, look-alikes, and low-ROI items, not category-leading essentials. Exits are sequenced with clearance strategies that protect sell-through and preserve attachment with compatible alternatives, keeping service levels steady while cleaning up the tail.
AI-enabled planning ties the system together. Demand sensing at the store and channel level refines forecasts, reducing bias and catching emerging patterns earlier. With more accurate reads, allocation gets sharper, out-of-stocks shrink, and overstock pockets fade. Automated replenishment then sustains faster turns and supports orderly exits without forcing blunt markdowns.
Supplier diversification adds resilience. By broadening the vendor base and reassessing category line structures, Lowe’s mitigates tariff and supply shocks while matching products to both consumer demand and margin objectives. Governance turns this from a one-time project into a cadence: recurring category and SKU reviews, feedback loops from sell-through and forecast error, and timely exit calls when performance slips.
The voices and evidence that lend credibility
Leadership messaging has been consistent: data-driven simplification and inventory discipline are not cost-cutting slogans but operating principles. AI is framed as an enabler of accuracy, speed, and working capital efficiency, allowing decisions to shift from intuition to measurable outcomes without losing merchant judgment.
Peers underscore the cross-format relevance. Dollar General’s “big win” on SKU reductions shows that smaller boxes benefit from clarity just as large boxes do, while Advance Auto Parts’ line reviews echo the same productivity logic in a complex, fitment-heavy catalog. The throughline is unmistakable: tighter assortments, stronger replenishment, better margin mix.
Analysts and operators read the early results as proof points. The 50-basis-point gross margin lift tied to exits and strong clearance sell-through, alongside $17.2 billion of inventory that fell year over year despite acquisitions and tariffs, supports the thesis that inventory can be a margin lever rather than merely a cost center. Competitive pricing stayed in play, which mattered as consumers navigated inflation and value hunting.
The playbook and what comes next
A practical framework emerges. First, diagnose the assortment by ranking SKUs on productivity, duplication, volatility, and strategic role; the goal is to protect winners while exposing the tail. Next, design exit waves with markdown plans and attach-rate safeguards to keep baskets whole. Then, power decisions with AI for demand sensing, bias correction, and store- and channel-level allocation rules that compress error bands.
To de-risk supply, diversify vendors and rebalance line structures to hedge tariffs and shocks without compromising continuity on critical items. Finally, measure what matters in concert: gross margin rate, turns, forecast error, and service levels. When those metrics move together, the business gains margin quality rather than fleeting gains from price alone.
Guardrails preserved growth as the program matured. Hero SKUs maintained depth, price competitiveness endured, and clearance learnings fed back into planning models. With that operating rhythm in place—quarterly line reviews, incentives tied to inventory productivity, and closed-loop learning from exits—the path forward was clearer: curated assortments, AI-enabled execution, and supplier breadth formed a durable system that favored speed, precision, and resilience.
