The Carrying Cost of Returned and Unsold Stock in Limbo
By Joanna Lambert, Founder and CEO, Opera Garment Solutions
The carrying cost of returns is the running cost of holding returned and unsold garments that have not yet been routed to a disposition. It covers the capital tied up in the stock, the space and handling it occupies, and the value lost to depreciation and markdown the longer the decision is deferred. A faster disposition decision is a working-capital lever.
What does it cost to hold unsold and returned inventory?
Holding stock carries a cost for every day it is held, whether or not the stock is moving. For returned and unsold garments waiting on a disposition call, that cost runs against units that are not on sale and are not generating revenue.
The cost has two parts that compound. The first is the standing cost of holding any inventory: the capital it absorbs, the space it occupies, the labour to handle it. The second is specific to fashion. Seasonal stock loses realised value as the season runs, so a unit held in limbo is a unit depreciating while it waits.
Deferring the disposition decision does not pause either part. It extends both. A returned garment sitting in a holding state while a route is decided keeps absorbing capital and keeps ageing through the markdown curve. The wait is itself a cost line, even though it rarely appears as one in the management pack.
What are the components of inventory carrying cost?
Inventory carrying cost is conventionally broken into a small set of components. The standard practitioner split, rooted in APICS and ASCM materials, separates the cost of capital from service costs, risk costs and storage. The table below uses an operator-readable version for returned and unsold stock specifically.
| Component | What it is, in one line |
|---|---|
| Capital cost | The cost of money tied up in stock that is not selling, charged at the brand’s cost of capital on the inventory value held. |
| Storage and space cost | Warehouse space, racking, utilities and handling that the parked stock occupies and that productive stock could use. |
| Handling cost | The labour to receive, inspect, move and re-store returned units while a disposition decision is pending. |
| Obsolescence and depreciation | The value lost as seasonal stock ages through the season and moves down successive markdowns the longer it is held. |
| Insurance and shrinkage | Insurance on held stock, plus loss to damage, theft and condition deterioration while it waits. |
| Opportunity cost | The working capital and warehouse space committed to unsellable stock that could fund or hold sellable stock instead. |
For returned garments specifically, the obsolescence and handling lines run heavier than for primary stock. A returned unit has already moved through fulfilment and back, carries inspection and re-store handling, and often sits in a worse condition state than the day it shipped.
How much of inventory value does carrying cost consume each year?
Carrying cost is commonly estimated at around a quarter of inventory value per year, with published estimates running from a 15 to 25 per cent rule of thumb in APICS practitioner material to 25 to 55 per cent in Richardson (Transportation and Distribution, December 1995).
Treat that band as a rule of thumb, not a measured fact. The literature scatter is wide, and no single authority owns the exact figure. Most brands do not measure their own carrying cost at all, which is why the round number gets reused in place of a real one.
The figure that matters is the brand’s own. Carrying cost is firm-specific, built from the brand’s actual cost of capital, its space cost per unit, and the shape of its markdown curve. There is no fashion-specific authoritative percentage to borrow. What is defensible to say is that fashion’s risk and obsolescence component runs heavier than the cross-industry average, because seasonal garments depreciate on a schedule that non-seasonal stock does not. Model the number on your own inputs and use the published ranges only as a sense-check on the result.
Why does returned and unsold fashion stock lose value the longer it is held?
Seasonal apparel carries most of its value at full-price sell-through early in the season. Realised value falls as the garment moves through successive markdowns, and the longer a unit is held before a disposition decision, the further down that curve it travels.
Fashion and apparel are among the hardest product categories in which to match supply to demand, and the mismatch shows up as markdown. A garment held in limbo is exposed to that markdown depreciation for the whole time it waits.
For returned and recoverable stock, the depreciation point compounds the channel point covered in the cost of markdowns and liquidation on returns. A unit pushed into markdown loses value against full price. A unit held while the disposition is undecided loses value to time before it even reaches a channel. Both run on the same stock at the same time. For the scale of unsold inventory depreciating across the market, how much unsold fashion is destroyed each year sets out the volumes.
How does stock in limbo tie up working capital?
Stock in limbo lengthens the cash conversion cycle. The cash conversion cycle is days inventory outstanding plus days sales outstanding minus days payable outstanding. Returned and unsold stock that sits undecided extends days inventory outstanding, which lengthens the cycle and raises the working capital needed to support the same level of sales.
Deferring a disposition decision is, in cash terms, a decision to keep funding that stock. The capital stays committed to units that are not selling, for as long as the decision is open. Speed of disposition shortens days inventory outstanding directly, by moving the unit out of the held state and either back into sellable inventory or off the books.
This is the working-capital frame behind the per-garment maths. The unit economics of returns recovery works through the per-unit net position; the carrying-cost point is that every day a recoverable unit waits, it adds to the cost side of that calculation. The CFO’s case for returns recovery sets out the wider P&L decision the disposition route feeds into.
How does speed of disposition reduce the carrying cost of returns?
Speed of disposition reduces carrying cost by shortening the time a unit spends in the held state. Every component in the table runs as a function of time. Capital cost, space cost, handling and depreciation all accumulate while the decision is open, so resolving the decision sooner stops the accumulation sooner.
A returned garment ends up in one of a small number of disposition states. Write-off and jobber clearance both resolve the carrying cost by ending it at a loss, with jobber clearance recovering under 7 per cent of garment value in Opera’s pilots and write-off recovering nothing. Recovery resolves it by returning the unit to a sellable state instead. The faster any of these is decided and executed, the less carrying cost the unit accrues on the way.
A faster route through recovery accrues less carrying cost than a disposition decision that stalls. Garment returns recovery, an operation built to clean, condition and where needed repair returned and unsold garments, takes the unit out of the held state and back to resale-ready condition. That both ends the carrying cost and restores the value the markdown curve was eroding, frees up the working capital the held stock was absorbing, and releases the space it occupied.
Opera Garment Solutions provides a single point of access to a network of professional garment care experts, recovering returned and unsold stock to resale-ready condition in the market where it sold, so the disposition decision resolves into recovered value rather than a deferred loss.
Frequently asked questions
What does it cost to hold unsold inventory?
Holding unsold inventory carries a running cost for every day it is held: the capital tied up in the stock, the warehouse space and handling it occupies, insurance and shrinkage, and the value lost to depreciation. For seasonal fashion, depreciation runs heavier because the stock ages down the markdown curve while it waits.
What are the main components of inventory carrying cost?
The standard components are capital cost, storage and space cost, handling cost, obsolescence and depreciation, insurance and shrinkage, and opportunity cost. The split is rooted in APICS and ASCM practitioner materials. For returned and unsold garments, the obsolescence and handling components run heavier than for primary stock.
What percentage of inventory value is carrying cost?
Carrying cost is commonly estimated at around a quarter of inventory value per year, with published estimates running from 15 to 25 per cent (APICS practitioner material) to 25 to 55 per cent (Richardson, 1995). Treat this as a rule of thumb, not a measured fact. Carrying cost is firm-specific, so model it on your own cost of capital, space cost and markdown curve.
Does returned stock lose value the longer it sits?
Yes. Seasonal apparel holds most of its value at full-price sell-through early in the season, then loses realised value through successive markdowns. A unit held in limbo is exposed to that depreciation for the whole time it waits.
How does holding stock tie up working capital?
Stock that sits undecided extends days inventory outstanding, which lengthens the cash conversion cycle (days inventory outstanding plus days sales outstanding minus days payable outstanding). A longer cycle raises the working capital needed to support the same sales. Deferring a disposition decision keeps that capital committed to units that are not selling.
What is the cost of returned stock sitting in a warehouse?
A returned unit in a warehouse holding state accrues capital cost, space and handling cost, insurance and shrinkage, and depreciation, all running as a function of time. Returned stock typically carries heavier handling and obsolescence costs than primary stock, because it has already moved through fulfilment and back and often sits in a worse condition state.
How does faster disposition reduce carrying cost?
Every carrying-cost component runs as a function of time, so resolving the disposition decision sooner stops the accumulation sooner. Faster disposition shortens days inventory outstanding, frees up the working capital the stock absorbed, and releases the warehouse space it occupied. Recovery resolves the decision by returning the unit to sellable condition rather than ending it at a loss.
A held garment is a cost running in the background of the management pack, accruing against a unit that is not on sale. The carrying-cost view turns disposition speed into a working-capital number the finance and operations seats can model together: take the brand’s own cost of capital, space cost and markdown curve, apply them to the volume currently sitting in limbo, and the cost of indecision reads as a figure rather than a footnote. The next step is to put that figure against the recovered-value alternative for the units that can be returned to resale-ready condition.
References
- Helen Richardson, “Control your costs, then cut them”, Transportation and Distribution, December 1995 (carrying cost put at 25 to 55 per cent of inventory value).
- APICS / ASCM practitioner materials (inventory carrying-cost components: capital, service, risk, storage; a 15 to 25 per cent rule of thumb, a practitioner estimate, not a measured constant).
- McKinsey and Business of Fashion, The State of Fashion 2025 (scale of excess inventory: 2.5 to 5 billion excess items in 2023).
- Cash conversion cycle definition: standard corporate finance (CCC = days inventory outstanding plus days sales outstanding minus days payable outstanding).
( About the author )
Joanna Lambert
CEO & Co-Founder, Opera Garment Solutions
Joanna Lambert is CEO and co-founder of Opera Garment Solutions, which recovers returned, damaged and unsold clothing for fashion brands across the EU and the UK from hubs in the United Kingdom, the Netherlands and Spain. She writes on the EU destruction ban and on what returned stock is worth when it goes back to sale.