Under the current COGS ratio, in order to reach an optimal turnover level, Sears would have to either decrease their current inventory by $1,616 or have sales of $37,407. For a typical retailer 3.8x inventory turns would be healthy but not with 78.8% COGS. Identification can help with markup strategy planning, foresight of future cash flow tightening, and a potential need to sell off excess merchandise.Īs the chart reveals, whereas Walmart and Amazon both exceed their optimal turnover, Sears does not come close. It can be used as a benchmark to determine variances from actual turnover.

Optimal turnover is a metric isolated by a retailer’s current COGS ratio as related to its Gross Profit ratio. The last line of the chart represents the Optimal Inventory Turnover rate of the respective retailers. Using Optimal Inventory Turnover to Adapt and Compete Guided by the metrics presented, their only chance of survival is to increase prices and sales to drive down the cost of goods, or else purge a significant amount of inventory and increase turnover. With a 26.2% inventory-to-COGS, what this reveals is that Sears is overloaded with too much inventory for their current pricing model and turnover rate. What is notable, for instance, is that while Sears’ COGS is only 4.4% in variance of Walmart, Walmart generated 4.5x more inventory turns. When comparing both retailers’ success to the downfall of Sears, other factors are excluded. Under this controlled diminished-profitability model, in conjunction with tight budgeting and strict break-even management, Walmart and Amazon will remain profitable and invariably beat any competitors on price. What this shows is that to drive dollar value profit, Walmart and Amazon focus their operating models on turning inventory as rapidly as possible over a given cycle by constantly adjusting pricing strategies. What is particularly revealing, however, is the low net margin. Walmart and Amazon both had inventory turn rates of 8.3x and 8.1x respectively while maintaining relatively high COGS with efficient inventory levels. These figures paint a striking picture of the operational strategy differences of these retailers and where their focus arguably lies. Take note of the inventory turn rates of each retailer, particularly in conjunction with their inventory-to-COGS efficiency and net profitability. The financial snapshot below outlines the comparative financial health and inventory metrics of Walmart, Amazon and Sears, as of earnings reported in January 2017. This view can distort the more effective strategy that drives the success of Walmart and Amazon. While it is prudent for retailers to take a holistic approach to managing operational metrics, oftentimes the myopic focus remains on the bottom line. Inventory Turnover and the Value of Controlling Operational Metrics

But for those bankable retailers open to changing structural and operating strategies, their chances of survival in an evolving landscape remain strong. For retailers with overleveraged balance sheets, their downfall may look like dominoes falling over the next decade.

The outcome of their aggressive pricing strategies is making it increasingly more difficult for competitors to survive under their current operating models, even those expected to be around forever. Not only do Walmart and Amazon dominate the retail landscape, but both have become recognized for leading the massive disruption in customer buying patterns and altering the value-versus-price dynamic. Even current headlines are highlighting department-store stabilization, yet there is little focus on their in-line counterparts that are quietly foregoing lease renewals. Retailers that are now flush with cash are shifting strategies into omni-channel development and experiential retail, while others are assessing the cost of bankruptcy. Competing reports outline strong holiday sales, while others maintain apocalyptic predictions. Despite the recent record setting bull market, slower growth is becoming the new normal for a large portion of the retail sector.

Inventory turns chart