“Turn” Your Merchandise Into Profit
Fall selling is well underway and one factor that can help make it a profitable season is how well you turn your inventory. Remember that merchandise turn, or turnover, equates to weeks or months of supply, so keep your sales projections in mind and make sure not to over order.
For our purpose let’s use the example of having a store that sells $2.4 million with an initial markup of 50%. If you turn your inventory twice per year, your investment in the inventory is $1,200,000 at retail and $600,000 at cost. If you turn the merchandise 3 times per year, then your inventory investment at cost would drop to $400,000, and if you are able to turn your merchandise 4 times in a year your investment at cost would be down to $300,000.
In our example our margin is $1.2 million and if we are turning the goods twice per year the gross margin return on investment is 2.0. If your turn is 3, your inventory drops to $400,000 and therefore your return is raised to 3.0. If you can turn the merchandise 4 times in a year, your Gross Margin Return on your Investment (GMROI) would be up to 4.0. As you can see, keeping the margin the same, but being able to turn your merchandise quicker enables you to be more profitable.
As a rule of thumb, you need to have a GMROI (Gross Margin Return On Investment) of approximately 1.9 to 2.0 in order to breakeven, depending on how high your expenses are. There is 1 to 1 relationship to pay for your inventory and your expenses take up the other .9 to 1.0. After that, the leftover is the profit for that sector of your business. When doing your planning it is always best to use a bottom up method. Plan at the class level and then roll up to the department and then to the total store. Planning from the top down will prove to be a much more difficult task and not as accurate. At Blacks we look at each classification as its own “profit center”. We calculate GMROI for every Class, Department & the total Store.
The other driver of GMROI is obviously the margin on your sales. Be careful here. Many retailers sometimes fall in love with their buys and don’t want to take markdowns. Don’t fall into that trap. History tells us that merchandise left on your floor for more than 60 days has considerably slower sell thru rates. Many times it’s best to mark it down, sell it and have the cash to invest in new product. Don’t let stale merchandise clog up your inventory and your Open to Receive Dollars. In many cases, slower turning merchandise requires higher markdowns in order to finally sell it. Slower turn and a lower margin is a double hit on the GMROI.
For more information on GMROI, or if you have any other retail inquiries, please feel free to contact Allan Marks at firstname.lastname@example.org or call (732) 246-1672.