# 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.

Retail Turnover = Annual Retail Sales/Average Retail Inventory
Cost Turnover = Cost of Goods Sold/ Average Cost Inventory
Unit Turnover = Unit Sales/ Average Unit Inventory

Example:

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.

# Retail Math & the Class Syllabus

It’s getting closer to the start of the Fall semester, and I’ve begun thinking about classes again.  For me, that means putting together my syllabi and class calendars.  Since I don’t make homework assignments part of my syllabi and I keep the class points fairly vague, my various syllabi don’t change too much from semester to semester.  The fact is, most of my changes revolve around my class calendar.

When it comes to adding retail math into a traditional Retail Strategy class calendar, I’ve found that there are two typical approaches.  The first is to approach retail math as a separate module, covering all of the topics in a 2-3 week span.  This is the approach I tend to use, and I fit the retail math topics into my class calendar right after merchandising.  I find that it works best for me to cover all of the math at once, allowing me to more easily explanation the inter-connectedness of the different measurements.

Excerpt from my class calendar:
Week 9
Customer Relationship Management
Private Labels
Week 10
Merchandise Management
Week 11
Category Management
Exam 3
Week 12
Retail Math – Volume Bucket
Retail Math – Profit Bucket
Week 13
Retail Math – Profit Bucket continued
Retail Math – Asset Efficiency Bucket
Week 14
Retail Math – Scorecards

My co-author, Charles Halliburton, favors the second approach.  He prefers spreading the retail math measurements throughout the semester utilizing them to illustrate how different marketing and merchandising decisions impact the company in a financial way.  With his background in retail merchandising and finance, he is able to use multiple real life examples to tie the topics together.

Both approaches are equally valid, and valuable.  If you’re willing to share, I would love to hear how you approach fitting this information into your semester.

# Average Initial Margin (Part II)

I’m often asked how to calculate initial margin for a category (i.e. average initial margin.)  The best way I’ve found to explain this is to create a “what if” scenario with numbers, and work it out.

The pricing question posed in my last post (Orbitz, Pricing, & Average Initial Margin) can be analyzed through an average initial margin calculation.  It is a question of a retailer having one cost, but wanting to charge two different retail prices.

To apply numbers to this scenario, we could assume the following:
Cost = \$10
Desired retail = \$15 and \$20
Desired average initial margin = 35%

Calculations:
1.  Determine how many products we must sell at each price to achieve a 35% IMU.  Start by finding what the retail price would be if we were to sell the product for only one price instead of two.
R = C/(1-IMU)
R = 10/.65
R = \$15.38

2.  But, we want to use two prices.  So, how many units must be priced for \$15 and how many for \$20 in order to hit a 35% IMU?  Knowing that the items I price at \$15.00 will fall \$0.38 short of the target, and those priced at \$20.00 will go \$4.62 over the target.  To balance these amounts, I must price:**

• 462 units, or 92.4% of the products (462/(462 + 38),)at \$15.00
• 38 units, or 7.6% of the units (38/(462 + 38),) at \$20.00

** 462 units * \$0.38 = 38 units * \$4.62

3.  What happens to the average initial margin if we change the unit balances up a little?  If, instead of the above percentages, we believe that we should price the products as follows:

• 80% of the units at \$15.00
• 20% of the units at \$20.00

Total Cost
Product A            80 units * \$10 cost = \$800
Product B            20 units * \$10 cost = \$200
Total cost = \$1000

Total Retail
Product A            80 units * \$15 retail = \$1200
Product B            20 units * \$20 retail = \$400
Total retail = \$1600

Average IMU = (1600-1000)/1600 = 37.5%

4.  The initial margin percentage didn’t change a great deal, but what happens to the dollar amounts?  That depends on the number of units sold.

Begin by calculating dollar initial margin at the original price of \$15.38.  If we project this based on 100 units, the dollar initial margin would be:

R – C = IMU\$
\$1538 – \$1000 = \$538

Now, what would the dollar initial margin be if we were to price 80 units for \$15 and 20 for \$20?  Using the same formula:

\$1600 – \$1000 = \$600

Under this pricing scheme, we make an extra \$62.

But, what if instead of purchasing 100 units, we purchased 10,000 units?  Working the numbers out just as we did above, you will see that using the two-tiered pricing scheme will earn the retailer an extra \$6,200.

Please comment, or send me an email, if you have any suggestions or questions.

# Retail Math Books

Over the years I have had to do some real digging to come up with good retail math books.  There are several out there, and I thought I’d list a few of my favorites.  Some of them are out of print now, but the mathematical information in them is as good as ever.   This is by no means a comprehensive list, rather it is a listing of those books I tend to use for reference purposes in teaching my classes.  (The below are in no particular order.)

1.  Retail Merchandise Management by Wingate, Schaller & Miller – This is my all-time favorite.  The version I use was given to me by one of my professors (thank you Dr. Ashton!)  It never wanders too far from my desk.  While many parts of the book are dated, the math concepts are as solid as ever.  And, the many examples it offers are extremely valuable.  The best part of this book is the extreme breadth and depth of coverage it gives to retail math concepts and formulas.   (Note:  this book is out of print, but can be found on www.amazon.com.)    Wingate, J.W., Schaller, E.O., & Miller, F.L.  (1972).  Retail Merchandise Management.  Englewood Cliffs, N.J.:  Prentice-Hall, Inc.

2.  Problems in Retail Merchandising, 6th edition by Wingate, Schaller & Bell – Dr. Ashton gave this workbook to me also.  It was written as a compliment to Retail Merchandise Management, covering the same concepts but giving many more examples and homework problems.  I have found these problems and examples to be very helpful when I need to go deeper into retail math for my graduate level classes.  (Note:  this book is out of print, but can be found on www.amazon.com)    Wingate, J.W., Schaller, E.O., & Bell, R.W.  (1973).  Problems in Retail Merchandising, 6th Edition.  Englewood Cliffs, NJ:  Prentice-Hall, Inc.

3.  The Buyer’s Manual by the Merchandising Division of the National Retail Merchants Association – There are many versions of this particular book.  The one I use is from 1965.  I have tried some of the later versions and have not found them to be as helpful in their coverage of math concepts.   Much like Retail Merchandise Management, this book is dated concerning other concepts, but I have found many parts of it to be helpful in understanding how math principles and formulas apply to analyzing a retail operation.    National Retail Merchants Association.  (1965).  The Buyer’s Manual, Revised Edition.  New York, NY:  The Merchandising Division of the National Retail Merchants Association.

4.  Math for Merchandising by Moore – I really like the way Moore takes a section of each chapter to explain industry jargon to students.  This is something that I often overlook doing in class.  This text also does a very nice job explaining profit measures.  However, I feel it lacks in the areas of asset efficiency.    Moore, E.  (2005).  Math for Merchandising, Third Edition.  Upper Saddle River, NJ:  Pearson Education, Inc.

5.  Merchandising Math by Kincade, Gibson & Woodard – Like most books about retail math, this one has a distinct fashion orientation.  The book includes an interesting chapter on fashion forecasting where it looks at some of the more qualitative aspects of this task.  From a math perspective, I found the book to have good coverage of pricing and P&L statements.    Kincade, D.H., Gibson, F.Y., Woodard, G.A.  (2004).  Merchandising Math:  a managerial approach.  Upper Saddle River, NJ:  Pearson Education, Inc.

6.  Mathematics for Retail Buying by Tepper – This book has been around for some time and has gone through many editions.  It is a favorite in many apparel studies programs.  I appreciate the author’s simple explanations and many examples throughout the book.    Tepper, B.K.  (2008).  Mathematics for Retail Buying, 6th Edition.  New York, NY:  Fairchild Books, Inc.

7. & 8.  I really can’t end up this post without mentioning Retailing Management by Levy & Weitz  and Retail Management by Berman & Evans.  Both of these books are good general retailing texts and have begun to include more and more retail math with each edition.  I have used each as the main retail textbook for my classes at different points in time.

**Please note that I have cited the edition of each book that I have on my shelves, newer editions may be available in several cases.

# Topshop Brings Fast Fashion to Nordstrom

The idea of combining fast fashion with traditional department stores has intrigued me ever since JCPenney went into partnership with Mango few years ago.  I can’t help but be fascinated by the concept of fashion clothing that is meant to be frequently replaced by consumers, and therefore must be updated weekly in stores (just think of the supply chain implications, not to mention the labor involved in changing a sales floor weekly.)  Bringing this high-turnover merchandising concept to stores known for carrying high margin/low turn merchandise is, well, fascinating.

It seems that the latest duet to try this concept is Nordstrom and Topshop, and this particular combination looks like a winner to me.  Whether it will be successful in the long run is always a matter of debate, but it’s an interesting concept from a three bucket perspective.  After all, Nordstrom is gaining not only the Topshop brand image, but also a fashion oriented product with a high turn rate (and great asset efficiency.)  On Topshop’s side of the table, they gain a large increase in distribution and an accompanying increase in volume.  (Sources:  Nordstrom Dresses British With Topshop to Win Back Women: RetailTopshop is Coming to Nordstrom)

Speaking of interesting partnerships, I’ve been reading several articles about how Neiman Marcus and Target are teaming up to create a limited edition of holiday merchandise (designed by top names such as Oscar de la Renta and Tory Burch) to be sold in both of their stores this coming December.  The partnership even has its own logo – an exclamation point with a Target’s bulls eye as the dot.  I understand what Target is getting out of this, but can anyone explain to me the benefit to Neiman Marcus???  (Sources:  Neiman Marcus and Target join forces to create holiday gifts; Retail’s New Odd Couple)

# Credit Card Swipe Fees and the Profit Equation

While I don’t typically cover P&L statements in my classes, I do feel it is important that students have a basic understanding of how various costs and expenses (i.e. labor, taxes, utilities) can impact a retailer’s net profit.  Credit card swipe fees are one of the expenses that should be included in that list.

Some interesting classroom discussions can be held concerning credit card fees.  Most of my students seem to realize that they exist, but don’t realize exactly how much money retailers have to pay credit card companies monthly.  Once we start messing around with dollar figures, the situation becomes much more concrete and interesting for them.

An article by Emily Maltby appeared in the Wall Street Journal on July 11 that gave an excellent explanation of the credit card fee situation. (see “Bank Fees Squeeze Retailers,” Wall Street Journal, July 11, 2012.)

The article also reported that there might be a settlement reached in the lawsuits between retailers and banks and credit card networks this fall.  Whatever comes from this settlement could have some interesting implications for retailers.  This is especially true when you consider how the changes resulting from this settlement might impact both small and large retailers approaches to setting prices.