Unlocking Retail Success: The Power of Fresh Inventory and Financial Strategy

16 MAY-JUN 11

There is an old retail saying that goes something like this: “Increased sales volume cures all ills.” All retailers seem to breathe a little easier when sales are rising. Invoices are easier to pay expenses aren’t a problem credit lines are reduced or paid off and cash flow isn’t a concern. Positive sales growth is a retailer’s validation that he or she is doing a good job and is in control of the business. In other words it’s fun to go to work!

Top line revenue growth is the most vital component of a thriving retail business. A store can have great margins phenomenal stock turnover and an outstanding gross margin return on investment (GMROI) but if sales aren’t sufficient to cover normal operating expenses you’ve got a problem.

Review Financials First

When a store comes to me with this problem one of the first things I do is review the financial statements. It is important to get a baseline on the business. The profit and loss statement (P/L) helps ascertain that the cost of goods sold is within industry norms and that operating expenses are reasonable and typical for the type and location of the store in question.

The first portion of the P/L provides information relative to sales volume and the profitability of those sales. Look for a percentage change from one year to the next if available. The gross margin number shows how effective the operation is at selling merchandise at full price. A GM% that is too low would be an indication of excessive markdowns and/or an inadequate initial mark-up.

When evaluating operating expenses primarily focus on occupancy and payroll costs as those tend to consume the largest portion of the budget. Since the discussion is on sales growth or in this case the lack thereof a review of the sales and promotion expense is also in order.

With regard to the balance sheet look for three main things:

1. How much money does the store have available now?

2. How much money does the store owe?

3. Are there loan obligations that need to be met and if so how much?

Calculate Breakeven

Assuming that no major issues are discovered in the review process the next step is to determine the store’s breakeven point. This is the sales number that must be attained for the operation to be viable. There are two ways to get this number the long complicated way (probably your accountant’s way) and the quick simple way (my way). Let’s go with my way. To get a quick and accurate breakeven figure take your total annual operating expenses divided by the anticipated gross margin percentage.

Formula: total expenses/anticipated GM%

Example: $440000/47% = $936170

Why Aren’t Sales Growing?

If the financial statements are in reasonable shape the next determination to make is why sales aren’t growing. There are several factors that can come into play including:

• Location
• Overall economy
• Dollars per square foot
• Advertising and promotional activity including social media marketing
• Attitude and ability of sales associates
• Ownership and management involvement
• Assortment
• Pricing
• Most importantly the freshness of the merchandise

Let’s focus on inventory freshness. I will restate a question posed previously: what sells faster merchandise from past seasons or last year that you have carried over or fresh new products that have just arrived in time for the new season? Admittedly this seems to be a ridiculous question at least on the surface. That said I am amazed as to why so many retailers fall into the trap of not adequately clearing out seasonal goods. We are not dealing with wine or antiques here — this stuff doesn’t get any better with age. It just costs the business more money the longer it sits unsold on the store’s shelves (or worse yet in a box in the back room).

I recently worked with a women’s and…

Children’s Shoe Retailer Case Study

A children’s shoe retailer was experiencing some challenges. Business seemed reasonably fine on the surface but invoice payments were always running behind discounts were being missed and cash flow was usually tight. When reviewing the age of the merchandise by classification a very revealing discovery came to light: In three significant categories merchandise was very slow in turning. In fact the old 80/20 rule was in play with 80% of the sales coming from about 20% of the inventory—and it wasn’t the old stuff that was selling. Surprise surprise!

Fresh Inventory = More Sales

After a heart-to-heart discussion with the owner it was decided that anything over six months old would be liquidated as soon as possible. The initial misgivings regarding the impact on margins soon dissipated when the backroom was cleared out of all old goods the sale room was empty past due invoices were paid and money was in the bank instead of being tied up in product that in some cases had had not one but two birthdays. Another important side benefit was that this owner went to market with expanded open-to-buy dollars in these categories for fresh new inventory.

The end result is that overall inventory has been reduced significantly sales volume is stronger because the store has fresher merchandise and gross margin is healthier because now more product is being sold at full price.

The Moral of the Story

The moral of the story is that fresh inventory in the right quantity and the right classifications drives sales volume.

Ritchie Sayner is vice president of business development for RMSA a national retail consulting company specializing in sales and inventory forecasting. He can be reached at rsayner@rmsa.com or 816-505-7912.

Ritchie Sayner

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