Adidas Lowers Forecast (Once More) due to Inventory Accumulation

Adidas Lowers Forecast (Once More) due to Inventory Accumulation

In the competitive world of athletic wear, companies like Adidas and Nike are grappling with significant inventory management issues that have impacted their profit margins and overall financial performance.

Adidas has recently launched a cost-cutting program aimed at addressing inflation in its value chain and unfavourable currency rates. The program is a response to a reduction in the company's forecast for the fiscal year, which is largely due to a significant inventory build-up in major Western markets since September and a traffic drop-off in the China market.

Similarly, Nike is experiencing elevated inventory levels, particularly in North America, causing pressure on full-price sales and leading to increased discounting to clear excess stock. This oversupply situation has contributed to margin compression and reduced profitability, with Nike's gross margin falling from 44.7% in 2019 to 42.7% recently.

The complexity of inventory and demand forecasting has increased with Nike's strategic shift from a predominantly wholesale model to a direct-to-consumer approach. This transition has led to forecasting errors and product placement issues, resulting in stock surpluses. To address this, Nike has invested in demand sensing and inventory management technologies but still faces challenges maintaining optimal inventory levels without hurting brand perception through discounting.

The inventory buildup has forced Nike to increase promotional activity, which harms gross margins and encumbers capital tied up in unsold inventory. Additionally, the consignment model emerging among retailers further complicates margins for retail partners since added intermediaries dilute profitability and affect pricing strategies.

Adidas, while not detailed as extensively in the latest reports, operates in the same competitive environment and is similarly exposed to volatile raw material prices and supply chain costs, which inflate production costs and squeeze margins across the market. The Athletic Footwear Market as a whole is contending with input cost volatility—such as rising raw material prices—which affects profit margins industry-wide.

Target's CEO, Brian Cornell, has stated that the alternative scenario to inventory rightsizing efforts would have entailed costs to store the inventory, cluttered sales floors, and burdened store and supply chain teams with managing excess inventory. Adidas has revised its estimate for operating margin to around 4%, down from its prior forecast of 7%. The discounting hurts margins but is necessary to get rid of slow-moving inventory.

For the period ending Aug. 31, Nike's inventory was up 65% and its gross margin fell by 220 basis points. Adidas' net income in Q3 fell by more than half compared to last year. Adidas now anticipates a gross margin of 47.5% for the year, down from its previous forecast of 49%.

Nike's Q3 report showed that it is working aggressively to clear inventory that consumers did not want to buy without discounts. A significant portion of Adidas' Q3 financial hit was due to one-time costs, including the wind-down of its business in Russia.

The near-term issues in the athletic industry are now out in the open, providing clarity, according to Wedbush analysts. The discounting by companies like Nike, Target, and department stores is prevalent and aimed at refreshing stock for the holiday season and beyond. Adidas expects more discounting for the rest of the year due to the inventory excess.

In summary, inventory management difficulties in the athletic industry, particularly for Nike, have significantly impacted profit margins, financial performance, and competitive positioning in recent years. The cost-cutting program by Adidas is meant to "safeguard the company's profitability in 2023."

1. Despite implementing a cost-cutting program, Adidas' forecast for the fiscal year has reduced, attributable to inventory build-up in major markets and a decline in the China market.
2. Nike's shift to a direct-to-consumer approach has led to forecasting errors, product placement issues, and stock surpluses, resulting in margins compression and reduced profitability.
3. Oversupply and increased discounting to clear excess stock have led to margin compression for Nike, with its gross margin falling from 44.7% in 2019 to 42.7% recently.
4. The consignment model utilized among retailers further complicates marginal profitability for retail partners, as added intermediaries dilute profitability and affect pricing strategies.
5. In an effort to overcome inventory management issues, Nike has invested in demand sensing and inventory management technologies, but still faces challenges maintaining optimal inventory levels without hurting brand perception through discounting.

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