Apparel and footwear: At what point is missed sales better than excess inventory?

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In adidas’s recent earnings call, CEO Kasper Rorsted warned that adidas would miss its 2019 growth target because its supply chain was unable to meet the huge demand for its mid-priced apparel, especially in North America. adidas expected this to result in a one to two percentage point drop in its revenue growth, translating to a drop in revenue between €100 and €200 million. For a company operating at almost 52 percent gross margin, that’s not an insignificant amount.  The CEO went on to imply that losing sales was preferable to building excess inventory. Perhaps he was reminding us of Nike’s perils with excess inventory in October 2017, when Goldman Sachs downgraded Nike to neutral from buy, citing “persistent excess inventory sitting at Nike's brick and mortar retail partners and the high visibility this markdown product gets as it is funneled online via Amazon and other platforms”, resulting in a 1.2 percent drop in stock price the following day.

What was CEO Rorsted thinking?

Shouldn’t it be ok to build inventory in anticipation of demand surges, and then apply promotions to work through the excess? Shouldn’t a 50 percent gross margin be enough to absorb those holding and excess and obsolescence costs, without causing operating margin compression? Was he concerned about brand image, as Goldman Sachs implied about Nike in 2017? If so, for a mid-priced range of apparel, is brand image worth lost sales, lowered growth and possible market share loss? To all the apparel / footwear gurus – I know you’re out there – let me know what you think in the comments below!

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