WWD.com/beauty-industry-news/financial/profiting-from-fast-turns-698655/

NEW YORK — Apparel retailers’ top-line results may depend on the kindness of consumers, but that doesn’t mean they are helpless when its comes to boosting gross margins.

Aided by increasingly sophisticated inventory management tools, retailers kept leaner shelves while also being quicker at getting merchandise out the door, which leads to more margin-building, full-price selling.

An analysis by WWD of retail inventory turns for the first half of the year showed higher average gross margin rates on improved average inventory turns. Retailers such as J. Crew, Nordstrom and Neiman Marcus were some of the companies that delivered substantial gross margin rate gains during the period.

In the WWD analysis, the department store channel, on average, turned over its entire inventory 4.7 days faster and enjoyed a 106 basis-point expansion in gross margin. In the specialty channel, inventories moved faster by 3.7 days, while margin improved 222 basis points. Among the discounters and mass merchants, inventories turned on average 2.5 days faster and gross margin expanded 83 basis points.

It’s noteworthy that holding or advancing the gross margin line — the very foundation of a company’s cost structure — is especially critical now that record oil prices and economic uncertainty have made future revenues more difficult to plan.

“In light of a potential slower pace of consumer spending,” said Steve Neimeth, a portfolio manager at AIG SunAmerica Mutual Funds, “it is ever more important today to get your inventory light and capture the most margin in your product.”

Although improved consumer confidence levels this year versus depressed year-ago levels gave some succor to gross margins over 2003, “it doesn’t seem that revenues are up much more than last year, which means the consumer isn’t spending more,” Neimeth said.

What contributed to gross margin improvements in the first half of this year was a keen focus on inventory management, which made inventory turns more frequent. At the same time, retailers were more disciplined in merchandising their stores, keeping fewer goods on shelves at any given time. Consequently, consumers no longer have reason to believe that a desired sweater, for example, will be on sale in two weeks; instead, they are pushed into buying the item sooner rather than later.

This story first appeared in the September 29, 2004 issue of WWD.  Subscribe Today.

Jacksonville, Fla.-based Stein Mart Inc. significantly improved inventory turns, which kicked up its gross margin rate by 231 basis points in the first half. The retailer also hasn’t seen comps decline since November 2003.

“Stein Mart targeted better inventory management beginning more than two years ago as part of a stated goal to improve store productivity,” said a company spokesman. “In pursuit of that goal, management reformatted certain areas of the store, giving more space to areas with greater profit opportunity. Management also purposefully reduced the overall level of inventory in the store, resulting in 10 percent lower inventory levels in an average store than were in place at the end of 2001.”

Another case study in margin improvement is Guess Inc., which posted a remarkable 604 basis-point gain in gross margin. Although its inventory turn slipped by half a day in the last two quarters, the overall trend has been one of inventory management fueling whopping margin growth.

Inventory management “is the most exciting part of the business because this is what makes the business work,” said Carlos Alberini, Guess’ president and chief operating officer.

Guess implemented several initiatives in the last couple of years: inventory and production tracking software, allocation distribution software, tight gross margin management at the store level, supply chain management, and higher initial markups, Alberini said.

As a result, average inventory at cost on hand in the first six months of 2004 was 8 percent less than in the 2003 period, while revenues were up 13 percent and total square footage was up 7 percent, said Alberini. Guess ended fiscal year 2003 with $83.5 million in inventory at cost, which compared with $144 million at the end of fiscal year 2000.

One initiative Guess started was motivating its stores to liquidate excess inventory, rather than sell the merchandise to off-price retailers at a loss. If one of the company’s business units generates excess inventory, the company penalizes their gross margins to reflect the excess, said Alberini, who called this “gross margin accountability.”

On the supply chain, Guess tested its reorder process to help turnover and sales. “We bring in a style and do some testing before we commit to huge quantities,” said Alberini.

The company also paid more attention to how it could end the season with a better initial markup. “This is something that involved a lot of tedious work going style by style to meet certain gross margin expectations,” said Alberini.

Guess’ disciplined approach to its supply chain has freed up time for the company to get closer to the needs of its customers.

“Being dependent so much on the design of the line, the closer we can be to the development of the product line, closer to the time it’s going to be delivered, the more accurate we can be with those designs,” Alberini added.

Less inventory on the shelves has been one main driver to the company’s improved gross margins, Alberini said, in part because it makes the shopping experience more exclusive.

“We have a very nice presentation on the floor. It feels more like a boutique,” said Alberini.

Quicker Turns, Thicker Margins
Retailers Clear Inventories Faster, See Improved Gross Margins
 
First Half
Inventory Clear Days
Prior Period
Inventory Clear Days
Inventory Clear Days
Faster/(Slower)
First Half
Gross Margin Rate
Prior Period
Gross Margin Rate
Basis Point
Change
DEPARTMENT STORES
Nordstrom Inc.
82.90
90.10
7.10
0.36
0.33
236.00
Neiman Marcus Stores Group Inc.
116.90
126.70
9.80
0.34
0.32
201.00
Kohl’s Corp.
101.90
101.30
(0.50)
0.36
0.34
186.00
Dillard’s Inc.
135.20
130.50
(4.70)
0.34
0.32
166.00
J.C. Penney Co. Inc.
127.60
133.40
5.90
0.39
0.38
116.00
May Department Stores Co.
132.60
128.10
(4.50)
0.29
0.28
91.00
Saks Inc.
143.40
147.90
4.50
0.38
0.37
82.00
Federated Department Stores Inc.
147.30
160.40
13 .0
0.41
0.40
49.00
Sears, Roebuck & Co.
84.00
83.10
(0.90)
0.27
0.27
18.00
Stage Stores Inc.
109.20
124.90
15.70
0.30
0.30
14.00
Gottschalks Inc.
165.60
172.40
6.70
0.35
0.35
12.00
AVERAGE
 
 
4.70
 
 
106.00
MEDIAN
 
 
5.90
 
 
91.00
 
SPECIALTY STORES
J. Crew Group Inc.
82.00
92.80
10.80
0.38
0.30
876.00
American Eagle Outfitters Inc.
66.60
68.00
1.50
0.41
0.35
660.00
Dress Barn Inc.
94.90
93.50
(1.50)
0.42
0.36
612.00
Guess Inc.
89.10
88.70
(0.50)
0.31
0.25
604.00
Coldwater Creek Inc.
84.60
94.00
9.30
0.43
0.38
531.00
Wilsons the Leather Experts Inc.
134.20
176.70
42.50
0.19
0.14
488.00
Bebe Stores Inc.
49.30
51.40
2.10
0.47
0.42
476.00
Urban Outfitters Inc.
65.20
70.40
5.20
0.41
0.36
448.00
Abercrombie & Fitch Co.
77.80
80.30
2.40
0.43
0.39
389.00
Gap Inc.
90.60
89.50
(1.10)
0.41
0.37
374.00
Buckle Inc.
130.40
128.90
(1.50)
0.32
0.28
325.00
Cache Inc.
73.70
71.80
(1.90)
0.46
0.43
287.00
Ann Taylor Stores Inc.
84.70
87.80
3.00
0.56
0.53
279.00
Aeropostale Inc.
68.40
96.60
28.20
0.30
0.27
277.00
J. Jill Group Inc.
40.60
49.90
9.30
0.37
0.35
271.00
Deb Shops Inc.
60.80
64.30
3.50
0.31
0.28
218.00
Too Inc.
64.80
59.00
(5.80)
0.32
0.31
173.00
Charming Shoppes Inc.
67.30
68.00
0.70
0.31
0.30
149.00
Barneys New York Inc.
109.10
117.50
8.30
0.46
0.45
116.00
Pacific Sunwear of California Inc.
106.50
106.80
0.30
0.34
0.33
110.00
Limited Brands Inc.
73.60
77.50
3.90
0.35
0.34
110.00
Cato Corp.
56.40
58.30
1.90
0.33
0.33
62.00
Goody’s Family Clothing Inc.
100.10
96.10
(4.00)
0.30
0.30
51.00
Chico’s FAS Inc.
52.00
62.40
10.40
0.62
0.62
0.00
Talbots Inc.
66.00
62.60
(3.50)
0.38
0.38
0.00
United Retail Group Inc.
54.10
57.70
3.60
0.21
0.21
(26.00)
Mothers Work Inc.
128.90
128.00
(0.80)
0.55
0.55
(68.00)
Hot Topic Inc.
76.10
74.70
(1.40)
0.35
0.36
(122.00)
Christopher & Banks Corp.
56.50
50.10
(6.30)
0.41
0.45
(400.00)
Wet Seal Inc.
49.60
42.00
(7.60)
0.12
0.18
(623.00)
AVERAGE
 
3.70
 
 
222.00
MEDIAN
 
 
2.00
 
 
245.00
 
DISCOUNTERS/MASS MERCHANTS
Retail Ventures Inc.
119.30
110.00
(9.30)
0.41
0.38
264.00
Stein Mart Inc.
102.60
119.80
17.20
0.27
0.25
231.00
Loehmanns Holdings Inc.
101.40
92.20
(9.20)
0.40
0.38
204.00
Syms Corp.
179.50
192.40
12.90
0.39
0.38
177.00
Target Corp.
59.50
63.40
3.90
0.32
0.31
72.00
Burlington Coat Factory Warehouse Inc. (1)
114.80
118.20
3.40
0.38
0.38
44.00
Wal-Mart Stores Inc.
47.30
49.40
2.10
0.23
0.23
30.00
TJX Cos. Inc.
74.90
77.70
2.80
0.24
0.24
4.00
ShopKo Stores Inc.
97.10
100.00
3.00
0.26
0.26
(48.00)
Ross Stores Inc.
102.30
101.00
(1.30)
0.24
0.25
(149.00)
AVERAGE
 
2.50
 
 
83.00
MEDIAN
 
 
2.90
 
 
58.00
(1) FULL Q1 RESULTS N/A UNTIL OCT 5. Q4 + Q3 USED INSTEAD. BON-TON STORES INC. EXCLUDED AS ACQUISITION OF ELDER-BEERMAN STORES CORP. CREATED NON-COMPARABLE RESULTS. INVENTORY CLEAR DAYS ARE THE NUMBER OF DAYS WITHIN A PERIOD A RETAILER CLEARS ITS STORE OF INVENTORY. FOR DATA AVAILABLE AS OF SEPT. 22. SOURCE: COMPANY REPORTS.