Why sporting goods industry inventories rose by 57% in Q2 2022

The aggregate inventory level for 28 public sporting goods companies, tracked by SGI Europe, rose more than 57 percent year-over-year to more than €31.9 billion at Q2 end and was up by nearly 32 percent from the end of 2021 when it stood at €24.27 billion. Eleven companies had inventory increases of more than 100 percent from June 30, 2021, to June 30, 2022, but only one had a triple-digit increase from the end of last year. That firm, Crocs, had an inventory total nearly 135 percent higher from the prior six months, partly because of its acquisition of Heydude.

Inventory growth can be attributed to a number of factors. Most notably, for many firms, merchandise-on-hand levels were too low in Q2 2021 because of supply chain constraints that were exacerbated by pandemic-related shutdowns in China and Vietnam and transportation troubles that slowed the flow of goods to their intended destinations. The scenario caused lost sales, canceled orders or late deliveries of key seasonal products for many brands.

Some of the current inventory escalation is related to “normalizing efforts” to put inventories more in line with current sales and seasonal trends and prepare for important seasonal and holiday demand.

China, North America are inventory “hot spots”

But at least a few industry analysts attribute part of the year-over-year inventory escalation to a corporate misreading of demand, given worldwide inflationary concerns and the “hot spot” markets of China and North America. While Europe was cited as not having any significant inventory problems at this time, sportswear/apparel merchandise levels in North America are said to be too high because of a retail trend away from minimum advertised pricing (MAP) that is accelerating the market’s promotional environment. It is a situation that is unlikely to subside until sometime in Q1 2023.

In China, meanwhile, companies have already begun to take action to clear aged inventory that didn’t sell during the shutdowns of the country’s no-Covid policy. Adidas – 40 percent of whose manufactured goods were in transit at Q2 end, accounting for one-third of its inventory increase – is taking back slow-moving, excess inventory in China to move through its factory outlet channel.

Half of the 28 public companies whose inventories we monitored are primarily in the footwear business. A dozen are more focused on apparel, with nine primarily selling sports equipment. All reported inventory totals were converted to euros at the average quarterly rates in Q2 2022 and Q2 2021. The percentage variations would be slightly different in reported currency. Allbirds and Signa Sports United were not yet publicly traded in Q2 2021, so their respective year-over-year comparisons are unavailable. These two firms accounted for almost €451.4 million of inventory in Q2 2021, or 1.48 percent of the total. 

Inventory insights from key firms

Here is an overview of what some key firms said about inventory during their most recent earnings calls:

• Foot Locker expects its inventory growth to slow in H2 but remain up at year-end because of the diversification of its brand assortment. The retailer’s biggest inventory problem was apparel pieces that didn’t arrive in time to sell, along with a related footwear launch. It says its promotional environment is close to where it was in 2019.
• Wolverine Worldwide revised its annual guidance at Q2 end because of higher promotional activity and “challenges related to moving inventory” through its wholesale channels. The parent of Saucony and Merrell was hurt by order postponements from certain U.S. retailers in June.
• VF Corp., whose portfolio includes Timberland, Vans and The North Face, has changed its inventory strategy, now taking ownership at the point of shipment rather than at destination arrival. It told analysts that its overall position on Sep. 30 was probably better than it was two years ago. An inventory increase of 26 percent at end of the most recent quarter (in-transit goods excluded) was planned to support on-time shipping of complete assortments. Vans’ inventory was said to be “a little high in a few places” at the period end but not unmanageable. The North Face’s and Timberland’s inventory positions were described as “relatively well positioned.”
• On Holdings, one of the few companies to post double-digit declines in inventory levels for the six-month and one-year comparisons, had a warehouse shuttered in China for six weeks until May 15, with its five market stores (four in Shanghai, one in Beijing) closed and unable to restock inventory. It admits that its key accounts have started to pay more attention to their in-store inventory levels but adds that “sellout numbers for On have stayed consistently strong.”
• Under Armour is running leaner inventory levels because of its constraint model and proactive cancellations of orders over Covid-related supply chain challenges. Still, the company had elevated inventories heading into H2. Inventory levels at the current FY end are projected to be up 10 percent from three years ago, versus a 20+ percent improvement in sales over the same 36 months.
• Macy’s, the U.S. retail department store chain, said it had observed all U.S. retailers working to shed excess inventory in Q2, “setting the [retail] industry up for higher permanent markdowns and promotional levels.” Supply chain pressures continued to ease as Q2 progressed. In order to align inventory levels with consumer demand, Macy’s has slowed receipts of market brands where it has more flexibility than with private label products.