Markdown

A reduction in the original selling price of an item, typically used to clear inventory.

A markdown is a deliberate reduction in the retail price of merchandise, typically implemented by retailers to accelerate the sale of slow-moving, seasonal, or excess inventory. Unlike temporary promotional sales, a markdown is often a permanent price cut designed to clear out items and free up valuable shelf space and working capital for new merchandise. Investors closely monitor markdown trends because they serve as a direct indicator of inventory health and consumer demand. When a company is forced to mark down its products, it directly reduces its gross margin and overall profitability. While clearing inventory is necessary to maintain liquidity, excessive markdowns suggest that management misjudged consumer trends or over-ordered inventory. Consistently high or rising markdowns can signal deteriorating brand equity and pricing power, as consumers may become conditioned to wait for discounts. Conversely, low markdown rates generally indicate strong demand, efficient supply chain management, and healthy consumer interest, allowing the retailer to capture full-price sales and maintain higher profit margins.

A retailer has a winter coat originally priced at $200. Due to a warm winter, the coat does not sell, so the retailer marks it down to $140 to clear the inventory. The markdown amount is $60 ($200 - $140), resulting in a markdown percentage of ($200 - $140) / $200 = 30%.