Retail Math Made Simple Pres.

Retail Math Made Simple

Presentation

Presenter Matt Parmaks

Senior ConsultantDMSRetail

Agenda

Profitability MeasurementsKey Performance IndicatorsCommonly Used FormulasOpen to BuySell Thru ScenariosBalanced ScorecardsOperating StatementQ&A

Fundamental Business Equation

Profit = Sales - Expenses

Gross Margin (GM)

Gross Margin (GM) $ = Selling $ - Cost $Or

Gross Margin (GM) % = (Selling Price – Cost) x 100 / Selling Price

Example:

Selling Price of an Item: $60.00

Cost of an Item : $40.00

Then

GM% = (60 – 40) x100 / 60 = 33.33%

Typical Gross Margin ValuesWomen’s Shoes: 44.2%Men’s Shoes: 44.6%Women’s Sportswear: 47.3%All Women’s Apparel: 43.6%All Men’s Apparel: 42.3Cosmetics & Drug: 38.6%Luggage: 48.1%Sporting Goods: 32.2%Furniture: 43.1%Electronics: 20.8%

Markup

Markup = (Selling Price – Cost) / CostOr

Markup % = (Selling Price – Cost) x 100 / Cost

Using the Same Example:

Markup % = (60 – 40) x 100 / 40 = 50%

Weeks of Stock

Weeks of Stock : Value of Inventory (at Retail) / Average Weekly Sales

Example:

Inventory level: $8,000.00 Total sales of product for the past 6 weeks is: $12,000.00

Average weekly sales = 12,000 / 6 = of $2,000.00

Weeks Stock = $8,000.00 / $2,000.00 = 4

This means that if you did not replenish your inventory and sales continued at the same pace, you would deplete your inventory of that product to zero within 4 weeks.

Inventory TurnsUsually expressed in annualized terms

Inventory Turns = Sales / Average Inventory

Example:

Annual Sales: $12,000,000

Average Inventory throughout the year: $3,000,000

Inventory Turns = 12,000,000 / 3,000,000 = 4

Typical Inventory Turn ValuesWomen’s Shoes: 4.1Men’s Shoes: 2.5Women’s Sportswear: 6.0All Women’s Apparel: 7.1All Men’s Apparel: 4.4Cosmetics & Drug: 3.9Luggage: 7.3Sporting Goods: 3.7Furniture: 3.3Electronics: 3.5

Gross Margin Return on Inventory Investment (GMROII)

GMROII = GM% x (Sales / Avg. Inventory)

Example:

Still using the same numbers from Gross Margin calculation, assume that the store's net sales over a period of 12 months is 24M and during this time it carries an average inventory of 4M. Then:

GMROII % = 33.33 x (24 / 4) = 199.98%

Other Gross Margin Return on Investment Calculations

GMROF (Gross Margin Return on Sq.Ft)GMROF = GM% x (Sales* / Sq.Ft.)

GMROL (Gross Margin Return on Payroll)GMROL = GM% x (Sales* / Labor Costs)

* Sales amounts correspond to particular space or labor force in equation.

Key Performance IndicatorsSales compared to last year (or any other period):

Actual sales $ for a given period / actual sales $ for the period you want to compare to

Sales compared to budget-target:Actual sales $ / budget-target sales $

Sales per Square Foot:Actual sales $ for a given period (usually a month or a year) /

the total floor area (in sq.ft.) of the store.

There are variants of this indicator in terms of sales per square foot of merchandisable area of choice (like walls and display units.)

Key Performance Indicators (Cont’d)

Sales per Hour (for store or associate) – selling hours only:

Actual sales $ for the store / # of selling* hours during the same period

*selling hours are used here rather than total labor hours

Sales per Hour (for store or associate) – total labor hours:

Actual sales $ for the store / # of labor hours used during the same period

Average Sale per Customer/Transaction:Total sales $ / # of customers or transactions


Units per Customer/Transaction:Total number of units sold / # of customers or

transactions

Conversion rate:# of transactions / # of customers who entered the

store

Wage Cost:Actual wage $ paid / by actual sales $ achieved


Average Wait Time at CashProfessionalism of Sales AssociatesCritical Error RateCustomer Satisfaction LevelCustomer ComplaintsSelf Service RatioStore Expenses/Sales RatioShrinkage/Sales Ratio

Open to Buy (OTB)

Inventory purchase budget based on sales plan (Target)Usually done at the category level, if necessary, you can drill down to sub-levels even down to SKU level

OTB Formula

Desired End of Month (EOM) inventoryPlus sales and markdownsMinus Beginning of the Month (BOM) inventory and on order and receipts Equals Open To Buy

Desired EOM+ Sales

108,000 (Aug BOM)

+ Mark Downs= Inv. Required– BOM Inventory= Open To Rec.– On Order= Open To Buy

32,000 (Jul Plan)

2,000 (Jul Plan)

142,00072,000 (Jul BOM)

70,00040,000 (Jul On Order)

30,000

Open To Buy: July

Sell Thru

Velocity with which inventory is being soldLeading indicator for tracking inventory performanceUseful for predicting outcomes

Example of Sell Thru Scenario

A Typical Mark Down / Sell Thru CycleFor a Promotional Product

Sell Thru Scenario for the Previous Cycle

8,172.0026,166.160017,99431.23

-2,736.0682.8610011411429.99-80.05.9959.99Days 110+

-288.001,151.52304816229.99-20.023.9959.99Days 91-110

1,296.004,534.924010827029.9928.541.9959.99Days 61-90

9,900.0019,796.805533060029.9950.059.9959.99Days 1-60

TotalMargin $

Total Sales$

Sell-Thru%

UnitsSold

Units Left

CostMargin%

Sell Price

Full Price

Mark-DownTimeline

To Obtain Different Scenarios, Try Changing MD Amount

Balanced Score Cards

For

Retail Management

View of the Store

The Financial PerspectiveThe Customer PerspectiveThe Business Process PerspectiveThe Learning and Growth Perspective

Why Use Balanced Scorecards

To translate strategy into actionCommunicate strategy to staffMeasure and report on KPI’sMonitor progress

How to Build Balanced Scorecards

Create goals and objectivesDescribe metrics around goals and objectivesAssign target valuesAssign weights to each goal and objectiveReport the outcome

Strategy

Objectives Measures Targets Initiatives

Financial Increase GrossMargin Increase in $ Profit 45% Decrease Markdowns

Customer Reduce CustomerComplaints # of Complaints Decrease by 20% Add More Value

Internal BusinessProcesses Better Hiring Performance and

RetentionIncrease Retention

by 6 Months Develop a Profile

Learning & Growth Conduct CustomerService Training # of Complaints Decrease by 50% Acquire a Training

Program

ACME Retail Company Inc.

Example

Customer Related Goals of Your Store:–Fast checkout–Appropriate attention given to customer–Sell new arrivals to existing customers–Build loyalty

Description of Goals

Fast Checkout:

We want to make sure we are not wasting our customers time by prolonged checkout process.


Appropriate attention to the Customer:

It means each and every customer is helped and sold to, making sure that customers are looked after and maximizing our selling efficiency.


Selling higher % of new arrivals:

This will keep customer experience fresh and also shows that salesforce is knowledgeable about new products.


Loyalty:

We want to make sure we have more repeat customers, and we want to reward our loyal customers.

Metrics for the Example

Fast Checkout: Measure the average time it takes to process a customer at the cash.Attention: Measure units per sale and average $ per sale.New Arrivals: Measure the % of total sales in new arrivals.Build Loyalty: Measure % of customers that hold your loyalty card.

Target Values

Fast Checkout: 2 minutes.Attention: UPT: 2, ASPC: $75.New Arrivals: 40% of sales should be new merchandise.Loyalty: 80% of customers should have our loyalty cards.

Weighing Your Goals

Fast Checkout: 1Attention: 4New Arrivals: 2Loyalty: 3

20.2x18.6%80.0%1.9%11.6%Aeropostale(NYSE: ARO)

16.1x(6.5%)4.8%(3.0%)15.0%Abercrombie &

Fitch(NYSE: ANF)

17.6x(1.2%)(48.0%)3.0%11.0%Limited(NYSE: LTD)

21.5x(3.2%)(21.5%)(4.0%)1.0%Gap(NYSE: GPS)

18.5x2.5%(13.2%)(4.7%)2.4%Ann Taylor(NYSE: ANN)

TTM PEYTD Stock

Price Change

EPS Growth

YTD SalesGrowth Comp

YTD SalesGrowth Total

Mid – Year Performance

End

Thank You

Retail Math Made Simple Pres.

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