Walmart CEO says inflation on toys and clothing is letting up. This could help the retailer put a dent in its excess inventory.

The softening inflation in non-essential categories comes as Walmart has tried to clean out its inventory heading into 2023.

• Inflation for apparel is much less than it is for food, according to the Bureau of Labor Statistics.
• That could help Walmart work down its stockpile of discretionary goods, as inflation has tightened wallets.
• Walmart has been plagued by excess inventory, reporting a 13% year-over-year increase last quarter.

Good news for customers: Inflation for discretionary items like clothing is easing up, according to Walmart President and CEO Doug McMillon. 

That's also a welcome development for Walmart, which has been plagued by a glut of inventory in non-food items for much of 2022.

"In toys, sporting goods, apparel, categories like that, prices have come down more aggressively," McMillon told CNBC on Tuesday. "We're still inflated but we're not inflated nearly as much as we are in the other categories."

According to the latest data from the Bureau of Labor Statistics, food prices increased by roughly 11% in October compared with the year prior. Meanwhile, apparel, toys, and sporting goods all hovered in the 3% to 4% price-increase range – far lower than the 7.7% average rate of inflation for all items in October.

The softening inflation in non-essential categories comes as Walmart has been trying to clean out its inventory heading into 2023.

Walmart finished the first quarter of 2022 with a 32% year-over-year increase in inventory due to inflation and supply-chain issues. McMillon vowed during an earnings call in May that the company would "work through" excess goods "over the next couple of quarters."

Just as it did for many other big-box retailers, the pandemic created a stocking whirlwind for Walmart. What started as runs on products like toilet paper — leaving Walmart's shelves empty of many items — turned into the world's largest retailer ordering a surplus of goods above their customers' overall demand. 

And with inflationary pressures, which have tightened the wallets of millions of American households, customers more often left items on shelves that weren't needed to survive on a day-to-day basis.

In particular, apparel has been a boogieman for Walmart. In earnings calls throughout the year, McMillon, Walmart US President and CEO John Furner, and others in leadership have all said that the category is contributing to excess inventory.

Even though inventory increases have slowed – it was 13% for the third quarter – apparel still remains a laser focus for Walmart leadership. And along with aggressively slashing prices, Walmart could continue to get rid of its piles of goods through the sale of less costly discretionary items that are more attractive to consumers.

"We're making improvements," Furner said during an earnings call in November. "Apparel and certain categories in (general merchandise) are the heavy categories, and we'll continue to work through those."

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