The big inventory overhang

As more and more companies report to the market, it’s becoming clear that many of them have a huge inventory overhang. Far from ideal when the global economy looks to be turning south.

The first to hit the headlines were big retailers such as Walmart & Target. Demand was so high when supply was so restricted or delayed that it was really hard for companies to plan their inventories. Anecdotally, some let the software take care of it, others extrapolated the current demand levels.

It’s easy to criticise, but times have been highly uncertain, and the end result is the same. Lots of companies have too much stuff, and they might need to shift it at a discount.

Levi Strauss was the latest apparel company to cut its full-year profit forecast. The company missed third-quarter revenue targets, and warned that softening demand and a strengthening U.S. dollar adds to worries alongside higher costs.

Chip Bergh, president and chief executive officer of Levi Strauss & Co. was naturally optimistic even as he acknowledged the unpredictable environment ahead:

“While we expect the macroeconomic backdrop to remain unpredictable over the next few quarters, our strong brands, diversified business model and proven team position us to deliver on our long-term objectives. We have separated ourselves from the competition by making the right moves in challenging times, and this environment is no different. We will operate with discipline and lean into our strengths to further expand our lead for the years to come.”

The stock initially fell by 6% in after hours trade.

They’re far from the only company suffering with this. Nike shares tanked after their latest earnings report, gapping down by over 10%. The report revealed a huge inventory overhang.

Shares have traded higher since although the gap still hasn’t quite been closed.

Morgan Stanley analysts published a note explaining how all of Nike’s problems had come at once, especially in North America where inventory levels increased by +65% in 1Q23. The analysts point to delayed deliveries from the previous supply chain problems, combining with Nike’s ‘early-ordering’ for the holiday season. Like buses, they all came at once.

The analysts added:

“Nike now plans to aggressively clear excess inventory, which will result in gross margin pressures for the remainder of the year… the company believes that only about 10% of its inventory will be subject to clearance-driving markdowns.”

Is this realistic and what will the earnings impact be?

We’ve followed Micron’s chip excesses over the past few months. Micron’s problems are far from unique, but they were the first to warn of the problems ahead.

AMD was the latest chipmaker to announce their struggles, pre-announcing that third-quarter earnings would miss estimates by a whopping $1 billion.

AMD Chief Executive Lisa Su blamed PC demand and inventory oversupply:

“Macroeconomic conditions drove lower-than-expected PC demand and a significant inventory correction across the PC supply chain. As we navigate the current market conditions, we are pleased with the performance of our data center.”

Inventory situations and demand conditions are likely to appear more frequently as earnings seasons heats up in the coming weeks.