RETAIL METRICS FOR FURNITURE RETAILING

June 7, 2016  by in Financial Reports, Industry   

Last year the furniture industry finally exceeded the volume experienced in the pre-Recession years of 2006 and 2007 growing 5.2 percent to $92.1 million in furniture and bedding sales (Figure A).

Lacking new marketing strategies, the furniture industry has had to rely in part on sheer pent up demand to clear the hurdles in the past two years. Overall financial performance has improved among furniture retailers with much of it attributed to improved Cost of Goods Sold as a percent of Revenue.

This is the third HFB report Retail Metrics for Furniture Retailing providing a comprehensive look at financial performance in the home furnishings industry via comprehensive data collected throughout the year by HFB’s parent company, Impact Consulting Services. This data is collected through Impact’s FurnitureCore application, Best Practices, which provides an ongoing monthly measure of a retailer’s performance. This subscription-based online application allows retailers to compare themselves to other home furnishings retailers and devise a plan to better manage store operations. No individual retailer’s numbers are shared, only composite percentage results. (See Methodology for additional criteria used in the Retail Metrics report.)

The focus of this article’s financial comparisons is five-fold. Results are provided for All Participants and reflect the performance of the entire sample compared to last year. Two additional retailer segments are featured for performance comparisons based on revenues – Under $5 million and $5 million to $25 million.  For the two larger retailer segments -- $25 million to $100 million and over $100 million –only trend comments are provided due to the proprietary nature of their data.  It should be noted that retailers participating in FurnitureCore’s Best Practices application are retailers focused on improving their company’s performance and does not reflect the industry in total.

The sales ranges not only reflect size of retailer, but in turn the differing operational characteristics the company size brings to profitability. The Under $5 million retailers are the surviving Mom and Pops who have developed niches and strategies for staying in business. Retailers with sales $5 million to $25 million have often emerged from Mom and Pop stores and are usually very owner-focused in operations. The larger $25 to $100 retailers may also reflect similar ownership, but have also developed more tiered management operations adding professional managers, for example in warehousing/delivery functions. The largest sales group, the Over $100 million retailers have accounting practices are often driven by tax strategies.

For the two revenue segments featured for comparison, high performing groups selected by net income as a percent of revenue are featured. The Top Quartile includes the top 25 percent in performance, and the Best Performers represent the elite top 10 percent.

The overall financial performance of All Participants is shown in Table 1.

Overview of Key Performance Indicators

With the furniture industry showing ever-increasing signs of recovery, profitability among retailers is also up. The retailers as a group improved performance over last year in all key areas, except Store Sales Expense. These improvements resulted in Net Operating Income almost doubling over the previous year to 5.8 percent of revenue. Table 2 gives an overview of key indicators – Gross Profit, Sales Expense, General & Administrative Expense, Net Operating Income, and Credit Expense.

Selling Expense is consistent across the board with little variation. This category is comprised mostly of sales force compensation, advertising, and warehouse/delivery expense. What does vary are General and Administrative expenses. The biggest chunks of G&A are Occupancy costs (rent/lease) and Administrative costs, primarily administrative and managerial salaries.

Each segment of financial performance is presented in more detail in the below.

Above the Line Income

Total Revenue encompasses merchandise sales as well as returns, sales of fabric/leather protection, and delivery income (Figure B).

Returns: Merchandise Returns (Figure B) continue to represent about 3 percent to 4 percent of revenue. Smaller retailers tend to handle many of their returns outside of the tracking system with voided tickets and even exchanges. Meanwhile larger firms are more likely to document these transactions negatively reflecting on their performance.

Merchandise Protection: Merchandise Protection (Figure B) is an often an important profitability component to traditional retailers, with the exception of upper to premium dealers, who often consider it a negative. This income usually represents around 3 percent of total revenue and is down slightly from the previous year among All Participants.

Delivery Income: Free delivery (Figure B) has become the expectation of consumers in all retail outlets, and this is especially true for smaller retailers. The best performing companies have still been able to offset this expense as Delivery Income as a percent of revenue continues to decline. Larger retailers are able to offset this expense at nearly double the rate of smaller companies.

Cost of Goods Sold

The big improvement in the bottom line appears to be in the cost of goods relative to revenue. Either the retail is “buying better” or simply not having to discount its merchandise so heavily. For the total group, COGS was down 2.3 percentage point over the previous year to 52.1 percent of revenues with larger retailers outperforming their smaller counterparts. (Figure C)

Gross Profit

Alongside improved COGS, comes higher Gross Profit. For All Participants, Gross Profit increased 2.3 percentage points over last year to 47.9 percent of revenue. Best Performers among all sales ranges reached Gross Profits over 50 percent.

The furniture industry’s Gross Margin (Figure D) is the envy of many retail sectors. Some vertical furniture retailers enjoy higher margins due to their direct sourcing models while electronics and appliance margins can run in the teens. With such healthy margins, why does the furniture industry make so little profit? Tracking how much it the industry spends on selling the product and running the business brings these low profits into focus.

 

Selling Expense

A significant 23 percent to 24 percent of revenue is spent on Selling Expenses (Figure E), and this figure has remained constant last year over the previous. This is the cost of attracting the consumer to the store (Advertising), converting that consumer to a purchaser by trained personnel (Sales) and successfully delivering that product to the consumer’s home (Warehouse/Delivery).

Advertising Expense. The cost of promoting product is a significant percentage of revenue. Last year the industry as a whole spent 6 percent of revenue on Advertising, similar to the year before (Figure E). Best Performing retailers over $100 million spent the most on advertising as a percent of revenue, but not significantly more than other groups. While advertising channels may differ by size of retailer, the total percent of revenue varies only one or two percentage points. Larger retailers will use more broadcast/air channels while smaller retailers rely heavily on print mediums, but the cost results are similar. It is imperative that advertising’s effectiveness be measured on a weekly basis and the only measure is number of visits – or ups – to the store or the website.

Sales Expense: The largest component of selling expenses is the cost of the sales associates, along with the cost of managing and motivating of them. Included in Sales Expense (Figure E) is the sales associates’ commission, as well as sales management, bonuses/contests and similar activities. Overall, Sales Expenses run about 9.1 percent of sales. However, over the last year it appears the smaller the company, the more the cost of Sales as a percent of revenue.

Warehouse/Delivery/Service: The “after the sale” cost of Warehouse/Delivery/Service is also a significant cost to the retailer. Last year these expenses totaled 7 percent of revenue, which was down over one percentage point from last year (Figure E). Often a retailer’s upfront performance is negated by the backend if the retailer is unable to manage it correctly. As reported earlier, merchandise returns can total over 3 percent of sales. Warehouse and Delivery must be managed intelligently and if not, outsourcing should be considered.

Store Sales Expense: A small but important selling cost, Store Sales Expense, averages 0.5 percent to 2 percent of sales. The Best Performers in the largest companies do outperform their smaller counterparts, but not significantly (Figure E). Retail technologies exist to eliminate the sales counter which can cost one percent or more, but can negatively impact the consumer’s excitement for the furniture purchase.

General and Administrative Expense

While not directly touching the selling process, the final piece to profitability is the control of General and Administrative Expenses. General and administrative expenses are, for the most part, fixed expenses and must be controlled relative to the potential volume. Primary components include Occupancy costs – the place to conduct business and the costs to keep it open, the cost of the management team that develops and executes a strategy, and finally the technology and information systems that are essential in controlling the process. These expenses can be as much as the Selling Expense in some cases and generally vary significantly by the size of the retailer. (Figure F).

Information Systems: Technology costs are staying around 1 percent, and for the Best Performing retailers, is down to 0.5 percent to 0.6 percent, regardless of size (Figure F). The successful implementation and ongoing maintenance of systems necessary to run a business smoothly can be painful at times but are critical to profitability. The larger retailers investing more in information systems have achieved an advantage in processing the customer order after the sale, often by transferring the process to sales associates.

Occupancy: The Best Performing companies enjoy Occupancy costs around 6 percent, compared to 7 percent to 8 percent for All Participants (Figure F). Often these larger retailers have the upper hand with the ability to secure the best locations. Consumers are increasingly placing a priority on location wanting to shop closer to home or visit retailers along their normal shopping routes.

Administrative Expense: The largest chunk of Administrative Expense is management salaries along with bonuses, professional fees, and insurance. Overall Administrative fees can total 8 percent to 10 percent of revenue on average for all retailers. Larger retailers over $100 million saw significant increases in these expenses last year. The decision to hire managerial positions is a hard one for many companies, but can produce big results with the proper personnel.

Credit Income and Expense

Retailers acting as credit houses are disappearing and what was once a key area of profitability is now a crucial place to control costs. Net Credit Expense totals 2 percent to 4 percent of revenue for the Best Performers regardless of size and 2.8 percent for All Participants (Figure G). From our perspective, credit is a selling expense that has emerged as a perceived necessity to generate consumer traffic. In our experience, less than 30 percent of consumers opt for offered credit promotions.

Net Income Before Interest and Taxes (% of Revenue)

Last year saw a big improvement in Net Income Before Interest and Taxes. While the average participant saw Net Income increase to 3.4 percent of revenue from zero percent, Best Performers experienced double that at 7 to over 8 percent, regardless of size.

Summary

The growth in the furniture industry is reflected this year in the improved financial performance by furniture retailers. Keep in mind our numbers are only guidelines to stimulate thought and discussion of how to profitably run a retail operation. We caution any specific retail figures, to be comparable, must be compiled to conform to these classifications.

We believe an ongoing focus on a company’s statistics is the path to high performance. It is not achieved in a month, but is part of a continuing process. Such a process is greatly enhanced with membership in a retail performance group that allows for open and frank discussion with peers of the barriers to achieve certain objectives.

While the overall industry statistics are improving, many retailers are achieving exceptional results. We challenge you to be one of those. Home Furnishings Business is committed to providing input to your process.