Interpreting Turn Numbers – Part 2

In a previous post I discussed the reasons why a larger turn number is not always considered agrocery-store-2119702_640 healthier turn number.  The first reason involved negative profit margins.  The second reason was high out of stocks.

There is a close relationship between turnover and inventory levels.  Turnover is essentially a measure of how efficiently a retailer is utilizing their inventory in creating sales.  Looking at the turnover equation (Annual Sales/Average Inventory – see Inventory Turnover:  Retail, Cost, or Unit?), it is easy to see that there are only two ways for a retailer to improve their turn numbers.  They can increase sales or lower inventory.  For now, let’s concentrate on the latter.

Smart merchants spend a great deal of time studying their category’s in-stock (aka on-shelf availability) levels.  These numbers tell the retailer whether any particular product is in inventory.  When an item is 95% in-stock, the retailer may assume that 95% of the time that product was in the store and available for the customer to purchase.

Retailers typically lower their inventory levels (and improve their turn numbers) in healthy ways, by cutting excess inventory or dropping SKU’s for which there is little demand.  These changes should not impact the products in-stock levels.

However, when a product’s both a product’s inventory level and in-stock level drops, this is a bigger concern.  This means that for whatever reason – the retailer is not able to keep enough inventory on hand to satisfy customer demand.  In other words, products are not being replaced when they sell out.

The resulting increase in turnover rate is considered unhealthy for two reasons:

  1. If the product had been in-stock, customers could have purchased it and sales would have been higher.
  2. If customers wanted the product but couldn’t find it, they may have decided to purchase it at the competition instead.


Interpreting Turn Numbers

No Retail Math number is useful unless you are able to interpret it, 24607796422_e5979e3304_q
and this is just as true for inventory turnover rates as it is for sales or profit figures.

In general, retailers prefer high inventory turnover numbers.  The higher the inventory turnover, the more times the retailer has sold their average inventory.  This means that a higher turnover rate normally correlates with higher levels of sales and profits.

Let’s Calculate!
Retailer #1 carries an average retail inventory of $300,000 and has annual sales of $900,000.  This gives them an inventory turnover of 3.0 ($900,000/$300,000).  If Retailer #1 has no markdowns and a maintain margin of 10%, then they will achieve a profit of $90,000 ($900,000 * 10%).

Retailer #2 carries the same average retail inventory of $300,000, but manage their inventory more efficiently, turning it 4.0 times that year.  This gives Retailer B annual sales of $1,200,000 ($300,000 * 4.0).   If they also have no markdowns and a maintain margin of 10%, they will earn an annual profit of $120,000 ($1,200,000 * 10%).

Is it always true that a bigger turn number is better?  While retailers do generally prefer that their inventory turnover rates increase, there are 2 exceptions to this rule.

The first is when dealing with a loss leader.  If a retailer has a negative initial margin for a particular item, then they may not wish to drive their turnover numbers higher.

The second is when the retailer’s out of stock levels are high.  This situation is one which will be covered in a future post.

photo credit: danielfoster437 <a href=”″>Fresh Produce</a> via <a href=””>photopin</a> <a href=””>(license)</a>

Inventory Turnover: Retail, Cost, or Unit?

Periodically I have students who are confused by the idea that there is not one, but three different ways to calculate inventory turnover.  What really confuses them is that when using all three formulas to calculate inventory turnover (turn) for a retailer, each formula provides a different answer.  And, that this happens even though each formula has the same two basic components:  Sales and Average Inventory.

Let’s start with the formulas:
Retail Turnover = Annual Retail Sales/Average Retail Inventory
Cost Turnover = Cost of Goods Sold/ Average Cost Inventory
Unit Turnover = Unit Sales/ Average Unit Inventory


Retailer Z’s Financials Show:

Total Retail Sales $2,000,000
Cost of Goods Sold $1,200,000
Unit Sales 180,000
Avg. Inventory at Retail $400,000
Avg. Inventory at Cost $220,000
Avg. Inventory in Units 30,000

Let’s Calculate!
Retail Turnover = Average Retail Sales/Average Retail Inventory
= $2,000,000/$400,000  = 5.0

Cost Turnover = Cost of Goods Sold/ Average Cost Inventory
= $1,200,000/$220,000 = 5.5

Unit Turnover = Unit Sales / Average Unit Inventory
= 90,000/ 15,000 = 6.0

While the inputs are similar, they are not identical, due to each one utilizing a different method of measurement.  Typically Retail Turnover will provide you with the most conservative estimate of your turn rate out of the three calculations.  This is due to the fact that the Retail Sales and Average Retail Inventory numbers both have initial margin (or markups) built into them.

Next time we’ll look at interpreting and using these numbers.

Gross Profit vs. Gross Margin vs. Gross Profit Margin

meadow-680607_640Some time ago Mame asked me the difference between gross profit and gross margin. As this is a question that crops up regularly in my classes, I thought it might be a good idea to tackle it here.

The truth is, there really isn’t a difference. Some retailers prefer to say gross margin, other retailers prefer to say gross profit. (Although some will use the term gross margin when referring to gross profit as a percentage of net sales.) Both terms refer to the difference between net sales and total cost of goods sold.

Much like the term gross margin, a few use gross profit margin to refer to gross profit dollars as a percentage of sales.

What is retail math?

I must admit that it never occurred to me that this term might need defined until I had a student ask about it in class.  Sometimes you work in and around an industry for so long you forget that has a language of its own that might be unfamiliar to those outside of (or brand new to) the industry.

As Valerie Lipow states in her article at, “Math is used at every level of retailing, from the part-time sales clerk to the executive suite… And the higher up in retailing you go, the more math skills you need.”

The term retail math refers to those ratios and equations used by retailers in quantifying their performance.  Most of these equations utilize basic math skills that are no more complicated than high school algebra.  It is through the use of retail math that retail buyers and managers determine how fast their inventory is selling, whether or not they are making a profit, what their return on investment is, and whether or not they have cash available to spend.  On the Formula Sheet page of this blog you will find a listing of some of the most common retail math formulas used by retailers, wholesalers and manufacturers.  And in the Beginner’s Guide category you will find explanations of some of the more common retail math measurements.

Students often ask me how important it is for them to learn retail math.  My answer is that it depends.  It depends on how high you wish to go in the retail organization you are planning on working for.  The better you understand the meaning of each measurement, and the relationships between those measurements, the better you will be able to do your job – and the higher you will rise within your chosen profession.

If you would like to read more about how retail math is defined, I recommend Retail Math by Valerie Lipow at

photo credit: <a href=””>Eleaf</a> via <a href=””>photopin</a> <a href=””>cc</a>

5 best retail math articles from Summer 2012

Over the past few months there have been several good articles written concerning both retailing and retail math analysis.  What follows are 5 of my favorites.  Enjoy.

  • Basics of managing Retail Business Performance”  by applythinking.  This post provides an insightful analysis of how retailers must use both turn and gmroi to analyze their overall performance.
  • How Much Does Your Beer Really Cost?” by Scott Metzger.  This cost analysis article was originally posted in The New Brewer back in February, but I didn’t see it until it hit C-Store News in June – so I’m counting it as a summer article.  The cost analysis is thoughtful, and provides helpful explanations of the various methods as well as recommendations on how best to use the information (even if you sell something other than beer.)
  • 6 Tips to Drive Inventory Turnover” by Ted Hurlbut at the “All Things Retail” blog.  While this isn’t exactly an article on mathematical analysis, it is an excellent explanation of how a retailer can improve their inventory turnover.  You will also find a short Youtube video giving highlights from the article.
  • The Mathematics of Bookselling” parts one and two by Dave Sheets at Lessons from the Saddle.  Dave takes the reader through a thoughtful analysis of gross margin percentage and inventory turnover in the bookselling industry.  His examples are clear and easy to follow, and could be applied to any retail sector.  He also has a 5 minute video covering some of the same material.
  • Sales, Stock, and Inventory, Oh My! How to Use POS Data to Improve Retail Operations” by Scott Kreisberg at The Point of Sale News.  This article is a helpful explanation of the 5 key retail math measurements that should be used when assessing the performance of your inventory.

There you have it.  The top 5 articles of the summer – in my humble opinion.  Please leave a comment if you feel there are others that should have been added to the list.

photo credit: <a href=””>Michael | Ruiz</a> via <a href=””>photo pin</a> <a href=””>cc</a>