Does Inventory Productivity Predict Future Stock Returns? A Retailing Industry Perspective

We find that inventory productivity strongly predicts future stock returns among a sample of publicly listed U.S. retailers during the period from 1985 to 2010. A zero-cost portfolio investment strategy, which consists of buying from the two highest and selling from the two lowest quintiles formed on inventory turnover, earns more than 1% average monthly abnormal return benchmarked to the Fama–French–Carhart four-factor model. Our results are robust to different measures of inventory productivity, distinct from the well-known firm characteristics known to generate abnormal returns, and not driven by a particular subsample period. A longitudinal analysis of portfolio returns over longer holding periods shows that although inventory productivity is predictive of stock returns, its information dissipates about one to two years after release. This paper was accepted by Serguei Netessine, operations management.