EXEC: Active Lifestyle Industry Grapples With Elevated Inventories

Last week Nike, Inc. warned that it would have to aggressively promote in the coming months as inventories in its latest quarter ballooned 44 percent year-over-year due mainly due to pandemic-driven supply chain disruptions. Other retailers in the active lifestyle space likewise face inventory surges, although they are hopeful of avoiding excessive markdowns.

Below, retailers outline how they are handling the inventory glut.

Academy Sports Inventory Up 17 Percent
Academy Sports and Outdoors’ inventories were up 17 percent at the end of the second quarter ended July 30. Sales were down 5.8 percent in the second quarter. Compared to Q2 of 2019, inventory dollars were up 8.4 percent, and units declined by 12 percent on a sales increase of 36 percent.

The primary driver of the delta between inventory dollars and units versus 2019 is the increase in bigger ticket hard goods categories as part of its inventory and sales mix as many hard goods categories saw accelerated growth over the pandemic.

Michael Mullican, EVP and CFO, said on an analyst call, “Our planning and allocation initiatives have ensured that we are properly stocked with the best value and assortment across all categories for the fall season.”

Steve Lawrence, EVP and chief merchandising officer, added that inventories are much better balanced across various businesses with in-stock improvements across every category.

“Additionally, the overall quality of our inventory is in a much better position this year,” said Lawrence, noting late arrivals the prior year from key brands such as Nike, Adidas, Under Armour and Yeti. He said, “Many of our fall holiday receipts last year landed 30 days to 90 days later than we would have liked. We moved the initial sets for these businesses back to the traditional timeframes. When you walk our stores, you will see that we’re ready to take advantage of the natural fall traffic will come in shopping for hunting and tailgating along with polar categories such as outerwear, fleece and fire pits.”

Academy expects the second half of the year to be more promotional than the first half with its guidance accounting for increased discounting. Lawrence said, “That said, we expect to maintain most of the margin gains for the past couple of years, and we’re confident that our everyday value pricing, coupled with our promotional strategy, makes us very competitive and allows us to maintain our position as the value leader in our space.”

Big 5’s Inventory Increases 26.8 Percent
Big 5 Sporting Goods’ inventories were up 26.8 percent year over year at the close of its second quarter ending June 30, primarily reflecting more normalized inventory levels following the significant sell-through in the prior-year period. To a lesser extent, the higher inventory reflects the carryover of winter-related inventory following unseasonably warm and dry winter weather in the first quarter. Compared to the end of the second quarter in the 2019 second quarter, inventory this year increased only 1.5 percent and was well below 2019 levels, excluding the carryover winter product.

Same-store sales in the second quarter were down 22.3 percent year-over-year but up 3.9 percent against the 2019 second quarter.

“Our inventory is current, so we are well positioned to use promotions strategically rather than relying upon them to drive sales or clear excess inventory,” said Steve Miller, president and CEO, on an analyst call. “While we have been more promotional in certain categories, we’ve been able to do so without meaningfully impacting our planned merchandise margins which, in turn, helped us achieve our earnings plan for the second quarter.”

Miller said Big 5 had evolved its promotional model over the course of the pandemic to become much less reliant on chainwide print advertising, enabling the chain to reduce the inventory depth and breadth it has historically needed to support planned promotions. Miller said, “In the second quarter of 2022, the gross margin dollars we generated relative to our inventory dollar investment was higher than in any pre-pandemic second quarter in our history as a publicly traded company.” 

Dick’s Sporting Goods Inventory Climbs 49 Percent
Dick’s Sporting Goods’ inventory levels at the end of the quarter ended July 30 increased 49 percent compared to Q2 of last year while sales were down 5.0 percent.

Navdeep Gupta, CFO, noted that Dick’s was chasing inventory last year amid significant supply chain disruptions. Compared to the second quarter of 2019, inventories were up 40 percent, relatively in line with the chain’s 38 percent increase in sales over that period.

Gupta said, “Our inventory is healthy and well positioned. We are excited about the assortment we have in place for the important back-to-school season, and we are prepared to continue navigating a dynamic global supply chain environment through the rest of the year.”

Asked about promotions, Lauren Hobart, president and CEO, said Dick’s expects “some normalization” because inventory scarcity was a primary reason it was minimal the past few years. She added, “That said, it’s a guarantee that it will not be anywhere close to what it was before. What you might have seen in 2019 or before is ‘X percent’ or ‘dollars off’ the website for the day or a storewide promotion or promotion around a whole category. That is not what we are expecting. Maybe around the holiday. But this is going to be much more surgical, much more strategic in terms of whom we want to offer the discounting to. And it’ll be based on what’s right for us and what’s right for the marketplace. But we’re not going anywhere back to what 2019 was like.”

Foot Locker Inventory Up 52 Percent
Foot Locker, Inc.’s inventories at the end of the second quarter ended July 30, were up 52 percent above last year and up 34 percent compared to 2019. Total sales in the latest quarter decreased 9.2 percent compared to the record year-ago levels but were up 16.4 percent compared to 2019. The elevated stock levels partly reflect an improved flow of product delivery following delays in recent quarters, particularly in apparel.

Andrew Page, EVP and CFO, said, “We feel good about our inventory in terms of quality and newness and think it puts us in position for a strong back-to-school season, but we do have to compete in the more promotional environment.”

Foot Locker expects gross margins for the year to decline 320 basis points to 330 basis points, down from previous guidance of 360 basis points to 380 basis points, as expected improvement in supply chain costs for the balance of the year partially offsets a pickup in the promotional environment.

Page added, “We expect inventory growth to slow from here but remain up at the end of the year as we diversify our assortment.”

Foot Locker this year has been accelerating efforts to amplify assortments of non-Nike brands, including Adidas, Vans, Crocs, New Balance and Puma, as Nike has reduced allocations to the chain as part of a marketplace reset. 

Genesco Inventory Increases 55 Percent 
Genesco’s inventories at the end of the second quarter ended July 30, were up 55 percent year over year and ahead 14 percent versus the 2019 second quarter. Sales in the quarter were down 4 percent from last year and up 10 percent over the 2019 second quarter.

The year-over-year inventory level hike reflected the outsized stimulus demand and supply chain limitations resulting in “extremely low” inventory last year. The increase also reflected late-arriving spring inventory, back-to-school product, core carryover product and vendor cost increases.

Tom George, CFO, said on an analyst call, “Part of the increase at Journeys is we elected to receive and carry over some winter product, which was late in arriving as it consists of core inline styles that will give us a head start on back-to-school and holiday sales. We are pleased with the quality and level of inventory except for J&M (Johnston & Murphy), where much of the increases in transit we are still chasing product.”

Genesco said it continues to expect gross margins to be down versus last year by 60 basis points to 80 basis points, mainly due to increased markdown activity compared to essentially no markdown in promotional activity last year. George added, “At this time, we are not expecting any additional incremental markdowns in total as we expect to align our inventory levels consistent with our reduced sales levels.”  

Hibbett Inventory Up 69 Percent 
Hibbett’s inventory as of July 30 was ahead 68.9 percent compared to the prior year’s second quarter and up 65.5 percent from the beginning of the year. Sales were down 6.3 percent in the second quarter. Compared to the second quarter of 2019, inventory levels were up 35 percent at the end of the quarter, more balanced with Hibbett’s 54 percent sales gain over those three years.

The sporting goods chain raised its second-half comparable sales guidance due to improved inventories and favorable sales trends for the back-to-school shopping season.

“We’re confident with our inventory position,” said Jared Briskin, EVP, merchandising, on an analyst call. “The increased inventory levels are largely attributed to a better in-stock position of key franchises in footwear and are appropriate for the results we were seeing during back-to-school.”

Briskin said the inventory increase is primarily due to the positive impacts of its mix of footwear inventory as well as price inflation. Compared to the second quarter of 2019, unit inventory levels were up about 10 percent. Said Briskin, “Our results in the second quarter combined with our strong quarter-end inventory position continue to give us confidence that our toe-to-head merchandising strategy is working and elevated in how we serve our consumers.”

Lululemon Inventory Surges 85 Percent 
Inventory grew 85 percent at the end of the second quarter ended July 31 versus last year, partly reflecting the higher costs related to the use of airfreight on a dollar basis. Sales in the second quarter were up 29 percent. On a three-year CAGR (compound annual growth rate) basis, unit inventory increased 38 percent relative to 2019, more closely aligned with the total second-quarter revenue increase of 28 percent on a three-year CAGR basis. Core assortment comprises approximately 45 percent of inventory.

Calvin McDonald, CEO, said, “In terms of inventory, we remain comfortable with both our quality and quantity, and we are well-positioned for the fall season. As you recall, for much of last year, we were under-inventoried and not able to fully maximize our business. This year, we are in a much better position to deliver product innovation to our guests wherever and however they shop with us.”

Looking forward, on a one-year dollar basis, the inventory growth rate at the end of Q3 is projected to be slightly higher than the levels before the growth rate moderates to 50 percent to 60 percent at the end of Q4. Lululemon said better on-time performance at our vendors is leading to products arriving sooner than initially expected, enabling the company to use less airfreight. 

Nike Inventory Surges 44 Percent 
Nike’s inventories at the end of the first quarter ending August 31 ran ahead 44 percent year-over-year, including 65 percent in North America, its largest market. Nike’s sales were up 4 percent in the first quarter.

The inventory hike was attributed to elevated in-transit inventory from ongoing supply chain volatility.

On an analyst call, CFO Matt Friend said earlier orders from retailers driven by consumer demand and less predictable delivery timelines led to broad, elevated inventory levels across retail.

“Then transit times began to rapidly improve with signals that further improvement may be coming,” added Friend. “At the same time, consumers are facing greater economic uncertainty, and promotional activity across the marketplace is accelerating, especially in apparel. As a result, we faced a new degree of complexity.”

The 65 percent surge in North America inventory included 85 percent in in-transit inventory, reflecting a combination of late delivery for the past two seasons, plus early holiday orders on target to arrive earlier than planned and a prior year impacted by factory closures in Vietnam and Indonesia.

“As a result, we are taking decisive action to clear excess inventory, focusing on specific pockets of seasonally late products, predominantly in apparel,” said Friend. “While we expect this to have a transitory impact on gross margins this fiscal year, we believe this cost will be far outweighed by the benefit of clearing marketplace capacity to align seasonally relevant product, storytelling and retail experiences for the consumer.”

Gross margins for the year are now expected to decline between 200-to- 250 basis points, down from negative 50 basis points to flat previously.

Sportsman’s Warehouse Inventory Up 19.1 Percent 
Sportsman’s Warehouse’s inventories at the close of the second quarter ended July 30 were up 19.1 percent year over year. Sales in the second quarter sales were down 3 percent as new store openings were offset by a 9.4 percent decline in same-store sales as demand weakened due to inflationary pressures. The decline also reflects challenging year-over-year comps.

The hunt & fish retailer said it had slowed inventory receipts in response to softening consumer demand and its level of reserves as an overall percentage of gross inventory remains consistent to where it has run historically.

Jon Barker, CEO, said on an analyst call, “While many large retailers have communicated elevated inventories causing significant markdowns within certain categories, we are comfortable with the overall health of our inventory. Although we are not 100 percent insulated, a large portion of what we carry are hard goods that are not exposed to seasonal trends or at risk of going out of fashion. The team has done a great job of managing our supply chain to keep our in-stock positions healthy in key product categories while managing inventory levels to meet changing consumer demand trends.”

Photo courtesy Nike