Retail

Lengthening of the working capital cycle driven by an increase in inventory (DIO).

While 91% of sampled retailers managed to grow revenue at a faster pace than industry benchmarks and delivered average revenue growth of 4.6%, many retailers struggled to deliver the same growth in EBITDA. This suggests some revenue was achieved through discounting and a limited ability to pass on rising costs to consumers in a highly competitive environment.

The average DWC of the sampled companies increased marginally by 0.8 days (to 46.8 days) in 2018. This was primarily driven by a slower turnover of inventory.

As inventory is the biggest driver of the cash conversion cycle, this remains an area with the greatest opportunity for retailers to release cash. However, it also presents the greatest challenge due to changes in the industry such as the ongoing shift online (with online sales growth in 2018 the highest it has been in the past five years) and an increase in consumers’ expectations as to the availability of stock.

The average DIO increased by 2.1 days (to 103.7 days), with 25% of the retailers sampled reporting an average increase in inventory of 10 days or more. This suggests that retailers continue to struggle to optimise their range and supply chain / distribution models for online, with investment in these areas continuing to be significant for many companies. The companies that are getting it right are seeing this translate into material improvements in DIO.

Suppliers were paid 0.8 days slower in 2018 (higher DPO), which helped to offset the impacts of increasing DIO. Of the retailers that experienced slower stock turnover, 81% extended payment cycles to suppliers (by 7.7 days on average).

The mix of participants and business models in the retail sector is broad, producing a wide range of DSO (from 1.3 days to 132.7 days). We believe this remains an area of potential improvement in the sector.

Of the sampled companies, 31% were able to achieve DSO and DIO improvements, however only two companies were able to deliver improvements across all three metrics. Of these, PWR Holdings achieved the highest working capital improvement in 2018 with a DWC reduction of 12.3 days that was the result of a 4.5 day reduction in DSO, 14.7 day improvement in DIO and 5.6 day lengthening of payment cycles (DPO).