I used to ask that people not use my tutorials to make items to sell, but I realized that not only could I not control that, I was happier if I didn’t worry about it. And like you said- a bag is a bag. And a hoodie is a hoodie. I’m not teaching people anything they couldn’t go buy a pattern for or figure out themselves in some way, so pretending I have some sort of monopoly on a hoodie (or whatever) is silly and arrogant. (In my oh-so-humble opinion.)

If you don’t remove your item, they will likely file a formal complaint with Etsy. Then Etsy will remove your item. That’s if you’re lucky. Others have had their shops closed permanently. It’s been suggested that the first complaint like this is your “warning” and that any subsequent complaint is grounds for them to close your shop, but I wouldn’t risk the “warning”, personally.

I’ve removed all licensed stuff from my Etsy shop for this very reason.

In terms of whether or not a company has the right to forbid you from selling an item with their pattern embroidered on it… it’s another trip into murky territory.
On the one hand, they’re giving you the means to reproduce their design. Can they tell you what you can and can’t do with it after you’ve made an embroidery piece?
On the other hand, you could think of it as being similar to licensing deals that companies make with manufacturers. For example, Hello Kitty might go to a manufacturer and say, “We want you to make 5000 Hello Kitty stuffies for us.” Does the manufacturer have carte blanche to make another 2000 Hello Kitty stuffies to sell for themselves? Certainly not. The deal was that they had permission to use the trademarked design to make 5000 stuffies for the Hello Kitty license holder. Likewise, perhaps a design company should (and perhaps does) have the right to sell you the means to reproduce a design, but stipulate that it is for personal use only and NOT for sale.