Retail

DSO 0.6 ⇑

DIO 2.7 ⇑

DPO 1.6 ⇓

DWC 3.5 ⇑

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

Our sample of Retail companies delivered average revenue growth of 9% in 2019, with 85% reporting an increase. Growth within the subset of supermarket/food retailers was more modest. The uptick in revenues did not translate to a blanket improvement in EBITDA, with one in four of the sampled companies experiencing a contraction in earnings. This suggests that there continues to be pressure on margins and a limited ability for some retailers to pass on cost increases to consumers in a highly competitive environment.

The investment in working capital also increased in 2019, with the average DWC of the sampled retailers increasing by 3.5 days to 58.4 days. Of the sample, 55% reported an increase in DWC and over 66% of those companies took on more debt, at least in part, to manage the extra working capital load.

For most retailers, inventory remains the biggest driver of working capital performance. Across the sample, DIO increased by 2.7 days to 126.1 days (or over four months of inventory holdings), suggesting that retailers are still trying to adjust to changing purchasing behaviour and distribution models. Of particular note was that more than a third of the sampled retailers reported an increase in DIO of more than a week.

This is the second consecutive year that the length of the payment cycle shortened, with average DPO decreasing by 1.6 days to 49.1 days. Average DSO was relatively stable, with a reported increase of 0.6 days to 22.3 days.

The mix of participants and business models in the sector is broad, producing a wide spread of working capital cycles. Notably, the two major food retailers reported negative DWC. The biggest improver in 2019 was PWR Holdings, which reported a 13.9 day reduction in DWC. It was one of four retailers in our sample to report an improvement across all three metrics.