The Relationship Between Abnormal Inventory Growth and Future Earnings for U.S. Public Retailers

I this paper we examine the relationship between inventory levels and one-year-ahead earnings of retailers using publicly available financial data. We use benchmarking metrics obtained from operations management literature to demonstrate an inverted-U relationship between abnormal inventory growth and one-year-ahead earnings per share for retailers. We also find that equity analysts do not fully incorporate the information contained in retailers’ abnormal inventory growth in their earnings forecasts, resulting in systematic biases. Finally, we show that an investment strategy based on abnormal inventory growth yields significant abnormal stock market returns.