From Home Furnishing Business
Editor's Letter: What Does This Mean to Me?
By Bob George,
Our annual issue, Performance Metrics, is included. The industry has returned to a historical safe zone of 3.3-4.0% of sales. While not as good as other business sectors at this level, retailers can build balance sheet reserves that will allow survival when the inevitable downturn occurs.
Obviously the best asset on the balance sheet to sustain a company is cash or cash equivalents. Inventory does not fall into that asset category. Interestingly, as the performance of retailers has improved since the 2008 Great Recession, INVENTORY TURNS have declined. In 2017, the average inventory turn was 3.4x. In terms of financial performance (profit/loss) the only impact is interest expense. However, the return on investment is impacted. Currently RETURN ON INVESTMENT is at 10.4%, there are other investments that return more with less risk.
These discussions are what the owner is subjected to in the annual CPA review. More important is, “What do the performance metrics mean in managing the business going forward?”
The graphic illustrates an analysis of the impact of a net reduction in sales that would result in a breakeven performance. Currently, the average company can sustain an 11% loss in sales before moving into a loss category. From a performance perspective, what does that mean?
- A loss in traffic of 10-11%
- A reduction in close rate of 2-3 percentage points
- A loss of 10% in average ticket
What are the factors that are impacting these metrics? The major discussion at market was traffic or the lack thereof. The impact of shopping fewer stores is a reality. A loss of 10% traffic in 2017 was not a surprise but more of a norm.
A positive attitude is that the better researched consumer is ready to buy. However, close rates and average tickets are not making up for the differential for many retailers.