Monday, November 27, 2017

Like many other Americans, we here at Calcbench spent Thanksgiving weekend clawing our way over other Americans at Black Friday sales down at the local mall. Sure, we scored some sweet home entertainment goodies, but the experience also got us thinking—how’s the retail sector doing these days, anyway?

Calcbench customers can answer questions like that in a few ways. First, always feel free to check the Calcbench Research page to see if we have an industry sector report listing key metrics such as overall revenue, operating income, expenses, and the like.

For the retail sector specifically, however, it appears that we don’t have a recent sector report. Hmmm, so how could we pull together a sense of what’s going on?

First, we need a group of retail companies to examine. You can do that with the Select a Peer Group function that Calcbench offers, and we have .

For our purposes today, we picked 43 major retailers (Amazon, Macy’s, JC Penney, Dick’s Sporting Goods, Staples, GameStop, and so forth) and entered their ticker symbols manually into a group we named “Major Retailers.”

Then we visited the Data Query Tool, and scrolled to the bottom of the page. There, you can see a series of liquidity ratios. Among them are several that are particularly useful for the retail sector: average inventory turnover, cash-to-cash cycle, days inventory held, and days sales outstanding.

So we checked all those boxes, and then pulled the numbers for all four rations on a quarterly basis, from Q3 2015 to Q2 2017. (We would have pulled Q3 2017, too, but so far only about half of our 43 retailers have filed third-quarter reports.)

The results are as follows.

Obviously these ratios are quite volatile, especially in the fourth quarter. That’s no surprise, given how much of a retailer’s operation happens in Q4. Still, you can see from the trendlines (on each chart in red) that three of the four are going upward. What does that mean?

Days sales outstanding measures how long a company takes to collect the cash after a sale is made. The higher the DSO ratio is, the more a retailer is selling goods on credit and taking more time to collect the money.

Days inventory held measures how long a company holds its inventory before turning it into cash (by selling it). While that ratio can vary greatly from one industry to the next, over time you want that number to trend lower—that is, you’re selling goods more quickly.

Average inventory turnover measures how many times a company’s inventory is sold in a given period of time. That is, you burn through four shipments of widgets in spring, but 10 shipments in the holiday season. Here you want that number to trend upward, which means you’re cycling through more piles of inventory more quickly.

Cash-to-cash cycle measures the amount of time that passes from when you pay cash for raw materials (say, widgets) until you process them into final goods (the iWidget Pro), sell them, and collect money from the customer. Again, you want this one to be trending downward.

So we have one metric, days sales outstanding, trending in the wrong direction. Cash-to-cash cycle is effectively flat, while average inventory turnover and days inventory held are moving in the right direction.

We here don’t necessarily know what that means. But Calcbench does offer the tools to help you find those answers (this whole exercise took us less than 90 minutes, from picking 43 retailers to writing this post), and take your analysis to the next level—benchmarking specific companies against their peers, or correlating these ratios to other indicators of financial health like Return on Assets or revenue growth over time.

Now if you’ll excuse us, it’s Cyber Monday and we need to do some online shopping.

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