Inventory – An ongoing battle for major retailers

Inventory remains the major, controllable balance sheet item for retailers with average Days Inventory Outstanding (DIO) of 110.5 days in 2017 as reported in McGrathNicol’s Working Capital Report. Retailers that are able to improve their inventory management (or working capital management more generally) have a competitive advantage on their peers by releasing capital that can be directed to support their strategic objectives.

Given the level of resources tied up in inventory are heavily influenced by categories and business models (varying between 6.2 days for Collins Foods – restaurant operator and 351.3 for Michael Hill – jewellery) we must look to year-on-year movements to understand how well retailers have been managing their inventory, rather than just balances.

Unfortunately, inventory management by the listed operators sampled deteriorated. DIO increased for listed retail operators sampled in 2017, despite a 2.0 day improvement in average Days Working Capital driven by improvements in both days sales and days payables outstanding (showing DSO and DPO can’t be ignored when looking at working capital in retail as some might suggest).

While the average deterioration was a modest 0.9 days, the results at a category level were mixed. The average increase in DIO across household goods retailers was 5.4 days, with five of the six sampled reporting a deterioration. The best performing category was auto and related retailers which improved an average 5.2 days.

Apparel and general retailers were a mixed bag with many operators recording double digit movements. Big movements in these categories are often indicative of getting ranging, pricing or demand forecasting wrong and deep discounts are often required to clear this excess stock out of season, which puts pressure on profitability (or results in impairments in the longer term if not cleared through).

Oroton Group reported the largest deterioration of 44.3 days and we saw how that played out – so let that be a warning for other retailers to get their house in order.

For the results for specific retailers – refer to the full report.