Basics of Retail Math

Basics of Retail Math

… or what to know to ace the retail interview

& skills for your first day of job

• www.luxme.live

Contents:Intro of Key TermsMarkup and cost complement (MU, IMU)Cum Markup (CUM)Math of InventoryGross Margin (GM)Open-to-Buy (OTB)Comparisons & Operating ratiosRetail Math Example from InterviewCalculations Summary

*To download excel sheets – click on table

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IntroPurpose of this all: to develop the basic understanding of retail math and OTB process…. all of things that we acquire with time, education and, most of all, experience

Learn to calculate and navigate key math measures used in analyzing a retail business…on the fly

Intro of Key Terms:Sales – purchases done by customer• Gross Sales (Gross) - sales

before returns• Net Sales (Net) - sales after

returns

Point of Sales (POS) – register channel where final customer buys the merchandise

HOW much?

Intro of Key Terms:Markdowns –reductions to the selling price• POS – reductions taken at point

of sale over a certain time period (not reflected in inventory owned)

Perms – reductions taken on all merchandise (reflected in inventory owned)

Intro of Key Terms:Receipts – purchases added to the inventory

Average Unit Retail (AUR) – the average price of the merchandise (can be different for sales, inventory and receipts)

Items Sale $ Units AUR$

Tee $200 10 $20

Short $400 10 $40

Jean $300 3 $100

Total $900 23 $39

AUR can be calculated on item or category

Intro of Key Terms:Cost of Goods Sold (COG) – what it costs us to sell the product to our customers. How much we pay for ingredients to make final product

Gross Margin (Gross Profit) = Net Sales (after returns) - COG

Intro of Key Terms:Operating Expense – non merchandise costs including rent, salaries, overhead and so on…

Inventory – all goods and merchandise owned by the retailer/company in stores and warehouses (all calculated @ retail costs)

Intro of Key Terms:$ vs % – we need both for business valuation$ pay for running your business% are used for comparison

Intro of Key Terms:Example (from Amazon interview):We can buy 1000 units at $50 from seller, or given a discount of 30%, we can buy 2000 units. Should the sellers take our offer ?

REG. Price Discount New PriceUnits 1000 2000Seller Cost 50.00$ 30% 35.00$ Total Cost 50,000$ 70,000$ MSRP Amazon 100.00$ 100.00$

Total Retail Amazon $100,000 $200,000

Seller will take the discount offer if:• Need to sell more units is more

important than profit % goal (GM$ vs GM% goal)

• If seller’s cost is the same or even lower on producing +1000 more units

Markup and

Cost Complement (MU, IMU)

Markup MU$ & MU%, IMU

- Retailer Profit, or the difference between what is paid by the shopper i.e. final customer, and what retailer pays to its vendor for the item

Retail Price you pay

$100

Cost to store that sold it

$60

Markup = $100-$60 = $40MU$ = (Retail $- Cost $)

MU% = (Retail $- Cost $) / Retail $IMU – markup on initial individual purchase

Cost Complement:

Calculation that helps figure out other retail OTB key numbers… but not a stand alone metric

Cost Complement % = Cost$ / Retail$ = 100% - MU%Hence,

Retail Price = Cost $ / (100% - MU%)$100 = 60$ / (1-0.4)

But usually, retail price is set up ahead and everything else is calculated from that step on

Cum Markup (CUM)

CUM Markup Averaging approach to MU, also knows as Retail Method of AccountingGoods for sale are segmented into groups with common characteristics and markup % that are similar … shorts , tees, socks, shoes, belts…WHY CUM? - Primary driver of Profitability • Easier to track one category

business analysis then on an item level !

• Provides insights to the top level business, finance loves this for future forecast

• Provides with a stable average benchmark

Calculated over the entire financial season

CUM Markup Process of Averaging (or what we call a 5th grade math)IMU -> CUMRetailers usually negotiate on Cost & IMU%, and calculate Retail $ and CUM from there,Useful formula to know: Retail $ = Cost$ / (1-IMU%)

Receipts Cost $ Retail $ IMU % CUM %Spring $10,000.0 $19,500.0 48.72% 50.30%Summer $8,500.0 $17,500.0 51.43% 50.58%Fall $9,800.0 $19,000.0 48.42% 50.42%Winter $4,500.0 $10,000.0 55.00% 50.92%Total $32,800.00 $66,000.00 50.30%

* click on the table for excel formulas

Math of Inventory

InventoryKnown as STOCK, or On-Hand (OH)Most retailers manage their inventory in retail dollars rather than at cost

When planning the inventory levels:• Account for final price that

customers are willing to pay (historical WTP)

• Book value should be adjusted with each new purchase, discount, markdown, loss

• Shortages to the inventory are usually built into financial plans as % of total Sales for the season, but adjusted based on trend and actuals

InventoryInventory + / -(+) to Inventory (-) to InventoryReceipts SalesCustomer Returns

Markdowns

Markdown Reduction

Shortage i.e. theft, loss

Additional Markup

Returns to vendors

Other revisions Employee DiscountMarkup CancelationsOther revisions

InventoryMarkdowns are inventory reductionsMD$ = Price ($100) * Coupon (20% off) = $20MD% = Markdown $/Sales% = $20/$100 = 20%POS markdowns applied as inventory is sold• Such as promotion events &

coupons• Avoids hit to CUM and current

GM%Perms are applied immediately without waiting for the sale to happen• Clearance events and damages• Free up OTB $ to buy new

merchandise BOS – beginning of the season (inventory)EOS – ending of the season (inventory)

InventoryExample: calculating EOS inventory

* click on the table for excel formulas

BOS Inventory 100,000.0$ Sales 60,000.0$ subtractReceipts 50,000.0$ addMarkdowns 40,000.0$ subtractShortage 5,000.0$ subtractReturns from Customer 10,000.0$ addReturns to Seller 2,000.0$ subtractEOS Inventory 53,000.0$

Gross Margin

Gross MarginProfit on the sale of the merchandise before the operating costs are subtractedAlso known as VM, or vendor margin

CUM MU% plays a major part in calculationRetail GM%Quick Approximate calculation:GM% = CMU% - ((1- CMU%) * MD% )GM$ = GM% * Sales $

Low GM% in luxury is still high GM$ on high end items!

Gross MarginNatural Gross Margin vs. Final Gross Margin:

Giveback or known as Charge Back or Retail Help $ act as reduction (for vendor) or additions (for retailer) to the overall gross margin, and negotiated on each vendor level, and projected vm% goals. This is one tough cookie for both sides !!!

Natural GM – operates on Gross MDFinal GM (for retailer OTB math) – operates on Net MDNet MD = Gross MD – Chargeback

Gross MarginExample: Quick Retailer Seasonal SummarySALES $25,000.0

RETAIL RECEIPTS $5,000.0COST RECEIPTS $3,000.0GROSS IMU % 40.0%CUM NET MU % 42.5%RETAIL CB$ $99.1COST CB$ $57.0GROSS MD $ $400.0GROSS MD % 1.6%NET MD $ $300.9NET MD % 1.2%% Giveback 1.9%NATURAL VM% 41.6%VM $ / GM$ $10,452.00VM % / GM% 41.8%

• click on the table for excel formulas• Can copy and paste into your excel

Open-To-Buy(OTB)

OTBAlso known as Retail Bible that guides seasonal retail business and serves as financial vendor flashBased on LY trend, financial goals, market health, competitive issues and other company wide business factors, OTB is planned on seasonal basisEach moth’s figures are projected and then actualized ( Projections, Actuals vs Plan vs LY), and rolled up to quarter & season total, which in turn is rolled up to 1 YearMajor figures are: sales, inventory, markdowns, markup, gm, receipts & shortages

OTBSimple Annual OTB – all basics• click on the table for excel

formulas• Can copy and paste into your

excel

APR MAY JUN JULY TTL JULY AUG SEP OCTproj proj proj proj proj proj proj

4 4 5 4 4 5 4#DIV /0! #DIV /0! #DIV /0! #DIV /0! #DIV /0! #DIV /0! #DIV /0!

$0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0$0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0$0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

#DIV /0! #DIV /0! #DIV /0! #DIV /0! ly wkly sell %#DIV /0! #DIV /0! #DIV /0!#DIV/0! #DIV/0! #DIV/0! #DIV/0! TY #DIV/0! #DIV/0! #DIV/0!#DIV/0! #DIV/0! #DIV/0! #DIV/0! Plan #DIV/0! #DIV/0! #DIV/0!#DIV/0! #DIV/0! #DIV/0! #DIV/0! LY #DIV/0! #DIV/0! #DIV/0!#DIV /0! #DIV /0! #DIV /0! #DIV /0! ty wkly sell %#DIV /0! #DIV /0! #DIV /0!

$0.0$0.0$0.0

#DIV /0! #DIV /0! #DIV /0! #DIV /0! #DIV /0! to PL #DIV /0! #DIV /0! #DIV /0!#DIV /0! #DIV /0! #DIV /0! #DIV /0! #DIV /0! to LY #DIV /0! #DIV /0! #DIV /0!

CompanySPRING FALL

Comparisons &

Operating ratios

OTBCrystal Ball – or other ratios you need to know to ‘predict’ future more accurately…

Operating ratiosSales Trend – where do you see sales going this year , next year, vs. last years of business

Operating ratiosSales Trend %:TY vs LY = (TY Sales $ – LY Sales $) / LY Sales $ useful shortcut is = (TY Sales / LY Sales $) -1

For 2017, we might consider using sales trend of 12% on average, and project:2017 Sales = $3150 * (1+0.12) = $3,528

Sales Sales Change $ Trend %2012 $2,0002013 $2,221 $221 11.1%2014 $2,500 $279 12.6%2015 $2,800 $300 12.0%2016 $3,150 $350 12.5%

Operating ratios% of Business: % of category to total company • Calculates the relative

importance• Penetration % - contribution to

the total #

• Sweater A penetration : 10% of sales on 2% of inventory. Consider ordering more!

Operating ratiosSell-Thru% = Speed of Sale- % of inventory sold over a period of

time- = Sales / (sales + OH inventory)- OH inventory is only what is in stock +

the sales floor, not warehouse or on order

Usually, calculated off units!Weekly Sell-Thru % = Sales per week units / (sales per week units + end of week inventory units)

Style B is the best seller even if its AUR is high

Sales Units Sales $ AUR Sell-Thru% OH UnitsStyle A 100 $2,500 $25.00 3.8% 2500Style B 50 $2,000 $40.00 5.9% 800Style C 40 $800 $20.00 3.2% 1200

Operating ratiosInventory Turn - inventory productivity• High Turn leads to out of stock

issues• Low Turn signals worst sellerTurn = Sales / Inventory (can be in $ or units)

Average Inventory of Spring Season in OTB =(Feb BOM + Feb EOM + Mar EOM + Apr EOM + May EOM + Jun EOM + Jul EOM) / 7Although there are 6 months in season, we always need to include beginning of the season stock for full picture , hence for average we divide by 7

Operating ratiosWOS - weeks of supply, how long inventory will stay on sales floor• High WOS leads to overstock• Low WOS leads to out of stock• WOS is inverse of TurnWOS = Inventory OH units / Weekly Sales UnitsIn Retail, merchandise is planned to have a specific WOS that will stay at regular price (say 8 weeks), and if the sell-thru by the end of 8th week is not 80% (on avg.), heavy markdowns are initiated. Within those 8 weeks, there are POS events to move sales.This strategy ‘cleans’ the floor for new items

Operating ratiosAUR - Average Unit Retail, used in developing merchandise plans and financial projectionsAUR = Dollar Value of item / Units of ItemMerchandisers use AUR for item planFinance use AUR for business category plan

AUR is also used to see promotional activity on item performance across all stores:

Sales Units Sales $ AURStore 1 100 $2,500 $25.00Store 2 80 $2,000 $25.00Store 3 70 $800 $11.43Total Item : 250 $5,300 $21.20

If regular price is $25.00, then last week promotion on the item was: $21.20/$25.00-1 = 15%

Cost of Promotion was a loss in sales $: 250 units * (25.00 * 15%) = $938

Operating ratiosExample of Sales Report:click on the table for excel

WEEK ENDING:

DESCRIPTION

# WKS on the floor

WK of last

delivery WHLSSUGG RTL LW RTL TD RTL

LW MD %

$0.00 $0.00

CROP 22 XX - XX $17.00 $19.99 $12.35 $19.16 -38%

$12.35 $19.16

SLEEVELESS DRESS

22 XX - XX $14.50 $16.99 $7.55 $15.96 -56%

$7.55 $15.96

RETAIL SELLING

Example from InterviewJanuary 2017: 30 Min – 5 Questions




Time Yourself and see if you can do them on the go

For OTB PROS ONLY! How do you Plan OTB – all elements to

considerclick on the table for excel to download

PRO OTB Elements + Formulas

Calculations TY Actual - Monthly view TY Projections - Monthly view Plan - Monthly view Last Year - Monthly view

BOM STK (AVG STK)Previous Period Projected EOM (Fall BOS = Spring Projected EOS)

Sales

Net Sales. Includes back office markdowns and associate discounts. Plan or LY (User overtypes)

Net Sales. Includes back office markdowns and associate discounts.

Trend to Plan or LY(Actual Sales - Planned Sales) / Planned Sales

(Actual Sales - Planned Sales) / Planned Sales

Net MD $ Plan or LY (User overtypes)

Net MD % Net MD $ / Sales $ Net MD $ / Sales $ Net MD $ / Sales $ Net MD $ / Sales $

Gross Retail Receipts $ Plan or LY (User overtypes)

Addt'l MU $ Plan or LY (User overtypes)

Retail DM - MDA $

Plan or LY (User overtypes projected MDA$ and reduces Projected MD$ by the same amount)

(not available for other divisions)

Retail DM - RTV $ Plan or LY (User overtypes) (not available for other divisions)

Retail DM - Other $ Plan or LY (User overtypes)

Total Retail DM $Retail MDA $ + Retail RTV $ + Retail Other DM $

Retail MDA $ + Retail RTV $ + Retail Other DM $



Net Retail ReceiptsGross Receipts $ + Add MU $ + Total Retail DM $

Gross Receipts $ + Add MU $ + Total Retail DM $



Also Useful: http://www.retailformulas.com.au

Calculations Summary

Also Useful: http://www.retailformulas.com.au

Calculations Summary

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