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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
Key Performance Indicators (Cont’d)
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
Key Performance Indicators (Cont’d)
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.
Description of Goals
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.
Description of Goals
Selling higher % of new arrivals:
This will keep customer experience fresh and also shows that salesforce is knowledgeable about new products.
Description of Goals
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