Specialty Retail Blog

When reviewing your financial statement there are several key elements that determine profit:

1. Net sales- the amount of sales during the reporting period. This amount reflects the total value of merchandise sold to your customers. Markdowns are subtracted and sales tax is not included in Net Sales. Some other caveats to remember is that gains or losses from investments or from charging customers for alterations are not included in Net Sales. This income is added below as Other Income. Also, Net Sales assume an accrual basis for accounting. For example, if an item is sold on a house charge that item is included in Net Sales even though the revenue has not been fully collected. Should the monies never be collected then that becomes an expense when it is determined uncollectable.
2. Cost of Goods Sold- this is sometimes referred to as Cost of Sales. Cost of Goods Sold is what it actually costs a retailer for the goods that he sold during a given period. The correct formula for determining Cost of Goods Sold for merchandise is:a.Beginning inventory at cost
   b.+Purchases at cost
   c.-Ending inventory at cost
   d.=Cost of good sold

   Accountants will also include freight-in, as Generally Accepted Accounting Principles requires that this expense directly related to bringing the merchandise available to sell be included. Cash discounts are often also reflected as a separate line item in the Cost of Goods section of the financial statement as a reduction in purchases. This is particularly true for retailers who include discounts when determining initial mark up. Generally Accepted Accounting Principles for publicly held companies requires that they be reflected as a credit expense or other income as a line item on the income statement. In smaller companies cash discounts and incentives are immaterial and their placement on the financial statement is at the discretion of the owner. It is important that whatever is included be consistent over time.

3. Gross Profit- Net Sales minus Cost of Goods Sold. This is the money that is available to pay other expenses, bills, salaries, taxes and profits.
4. Total Operating expenses- A list of all your expenses- occupancy, salaries, selling, general and administrative expenses. A dividend or distribution that the owner takes is not included in operating expenses.
5. Net Profit/(Loss)- Gross Profit minus operating expenses. This is what is available for dividends, debt reduction, or dollars to reinvest in the business.
   Inventory ValuationCut off procedures for purchases to collect all receiving within a given period

   Omission of purchases awaiting invoices from vendors

   Returns of merchandise to vendors or from customers not recorded or included.

   Net sales not recorded due to different procedures like lay-a-way and special orders.

   Unrecorded transactions for transfers of merchandise

   Unrecorded invoices for merchandise

   Overages, Shortages, or theft unrecorded

   Promotional sales not recorded when sold

   Gift certificates, payments in advance, or credit not posted or not recorded correctly.

   Damaged merchandise not reflected

   Sales tax included inaccurately.

Sometimes financial statements will calculate Cost of Goods Sold strictly as purchases for the period. It is not quite that simple. Cost of Goods Sold is based on goods available for sale during the period that is being reported. Goods available for sale includes beginning inventory as well as merchandise purchased during the period reviewed. Simply stating purchases instead of an accurate Cost of Goods Sold calculation does not take into account beginning and ending inventory. For example, merchandise theft impacts profits by raising Cost of Goods Sold. The merchant pays for goods whether they are stolen or given away. This is reflected in the difference of beginning and ending inventory and the accurate reflection of these transactions would boost the Costs of Goods Sold. Showing only purchases as Cost of Goods Sold distorts the profit and would result in decisions, like income taxes to pay on a less accurate measurement.

How inventory is valued with the different acceptable methods, like LIFO, FIFO, or Average Cost can have a direct impact on your financial statement. (We will examine this in greater detail in our November issue)

The accuracy of your financial statement’s Cost of Goods Sold should be gauged each time you review it by examining the related percentages in comparison to prior periods and your knowledge and experience. Reflecting Cost of Goods Sold accurately on a financial statement is critical to its overall accuracy.

The first litmus test on the accuracy of a financial statement is the Cost of Goods Sold. Its accuracy provides the level of confidence in the exactness of the overall bottom line.
Here is a short list that can go wrong:

This November we will be taking a look at inventory valuation in greater detail. The timing of this information comes at a critical time in management’s decisions to use correct valuation decisions for year-end statements that could benefit tax situations.

It has been estimated that up to 30% of retailers won’t make it through this recession in business. Almost every one of those failing retailers will have one characteristic in common. Prior to going out of business they will cut expenses. Some will cut more and faster than others but most, if not all of them, will cut expenses.

(more…)

Yesterday is gone.

How long has it been that you have had “change” thrown at you? (And I don’t mean coins). Now you realize, ‘I either change, or my business is one for the history books’. Change what? Change how? Is it too late? Is it worth the struggle?

This is a time of opportunity! Great change brings on new hope. Rules are being re- written and everyone has an opportunity for a fresh start. As you watch your competition melt away, your suppliers have become more flexible. Your creditors, landlords, and most of your other providers are demonstrating a willingness to change their rules. Contracts are being re-written, debts are being renegotiated and for many small businesses this can be one of a second chance. The doors around you are opening in a way you could never have imagined.

Can you seize this moment in history?

Consumers have not stopped spending; they may be looking for better deals and more value. When the economy bounces back, customer loyalty to those retailers that have responded will clearly remain intact.

Let’s address the elephant sitting in the room. What is the willingness of the consumer to spend? What is their ability to spend? These are significant issues as they are the crux of forecasting demand.

As demand diminishes so do prices. In step, supplies will also decrease until there is some equilibrium. Appropriate strategies need to be addressed and put in place and measured, as changes are occurring rapidly. For example; Coach, a luxury maker and retailer of expensive handbags, has identified that the right price to increase demand for their products is $300. Coach is one of 20 successful retailers that are doing well in the current economy. Yes a luxury retailer! They have responded and found the price where they can generate demand.

One strategy is to break key classes into price points. Some of our retailers have already addressed this issue. Denim, Woven’s, Dresses, Tops, Shoes, etc., above $XXX and below $XXX. Every retailer needs to rediscover where the demand exists and at what price.

This concept relates to Elasticity and is at the core of the theory of supply and demand. The measurement is to determine how price changes impact demand. Previously, when items stopped selling the retailer would generate a markdown or price reduction to force demand for a product where the real demand had either never transpired (a bad buy) or extinguished as fashion or a season may have changed.

However, now we must look at creating new value in what we sell and aligning that to price models until we recognize an increase in demand. The product mixes must include complement and substitute goods to replace goods that customers have lost interest in at their current price structure.

Part of what I believe is happening in the luxury market is an inverse relationship. For the past 15 years revenue was driven by the prestige of buying luxury and not necessarily in the product itself. As the price of that luxury item diminishes so does the prestige value and thus the demand, especially among the “aspirational” customer, who has evaporated in the current economy. This is called the Veblen effect and is named for the Economist Thorstein Veblen, who was the first to develop the theories of conspicuous consumption. Those customers will now seek more attractive alternatives.

This however opens the door of opportunity. This is a chance to bring in new alternatives at better terms, better markups and in reality to present your customers with more value. This means for the present circumstances, there is lagging interest in labels and increased interest in value. As the prestige element has been removed it needs to be replaced and done so swiftly.

Yesterday is gone, but tomorrow never dies for those who are prepared to seize the moment!

Marc Weiss-
April 09, 2009

Everywhere you look today you see retailers scrambling to turn excess
inventory into cash through heavy markdowns.  The definition of a  recession
is where there is an excess of capacity, inventory and labor in the
marketplace.  The danger for retailers, as it is with other businesses, is
slashing inventory, staff, marketing etc. without a plan. That uncontrolled
strategy will leave them struggling at best and without a business for many.

Retailers need three strategies now instead of just one. Strategy one is
the short term strategy that depends on an accurate sales forecast so you
can adjust the stock to sales ratio down to the new sales level.  Blowing
out merchandise through heavy markdows below that level will starve the
business of needed cash to buy into profitable sales later.

iA midterm strategy will guide buyers into the right levels of merchandise
to buy into as well as the right expense structure to retain in order to
maintain profitable business. There are many aspects to consider in this
crucial period. Negotiating tactics, the Margin Buying Service to provide a
greater margin, aggressive approaches to fixed expenses, aggressive
marketing and customer relationship management as well as a different
mindset for the entire staff are some of the considerations that are
important for success in this midterm approach.  Many shoppers are taking a
hiatus on shopping during this period of chaos and they will come back so
you must be ready.

The final strategy is the long term strategy that will grow your business to
new levels of profitability.  As many as 25% of the retailers will not
survive to join in this process but those that do stand to grow the business
to new levels.  Making that happen requires strategic planning, guidance
based on data and analysis and a team decision process that involves buyers,
sales, an accurate plan and an implementation process to make it work.

Your affiliate will be providing a break even analysis and plans that
reflect changes that serve as the foundation to this process.  Following
that plan is more important now than ever before.

Our Winning@Marketing team has been operating for 4 months now and working with these marketing experts has given me some real insights into many changes occurring all around us. I remember 45 years ago as a kid in my dad’s men’s store, most marketing was word of mouth and a weekly ad in the local paper. The strategy was to open a store, have merchandise available, put an ad in the local paper and wait on customers when they came in the shop. The world has turned upside down since then. Let’s look at a few of the changes that have affected or soon will affect your business future.

Advertising – THEN: Advertising used to be lofty claims and expensive fluff – jingles, sound bites or tag lines. NOW: Today information speaks to individuals. Successful businesses have a presence on the web. They engage in more cost effective marketing targeted to buyer personas and customized for their benefit. Blogs, article marketing, SEO, SEM and e-mail campaigns are replacing or at least augmenting traditional media advertising.

Promotion/Message Delivery – THEN: Retailers broadcasted their message by either advertisements in the newspaper or on radio or TV. Potential customers would see it, some of them would react and come into the store. NOW: With customers searching for everything on the internet, the broadcast has changed. It’s now the customers who broadcast what they want by searching the web, and it’s up to the retailers to “be there” when they are searching.

Wait on customers – THEN: People had limited choices and you knew your market and the competition. You got to know customers and you did not need a great effort to get them to come in; they came in anyway. Competition increased and businesses turned to direct mail and phone calls. NOW: Marketing is more about getting to know your customers than ever before. Getting to know them means what they do, what they like and who they really are. When they like you, they like your merchandise and like the buying process, they are loyal. People still buy from people who they like!

Hype – THEN: Marketing was about creating an external perception that was nirvana. “Drink our beer and the girls will flock to you!” “We offer the best service at the best price!” People have either become a lot smarter or are receiving a lot more choices. These ads don’t work. NOW: Reality matters. Teamwork and excellence are fundamental to your reputation and growing a business. Leadership needs to inspire staff and give direction. It’s all about what happens at the EAI (Employee Action Interface). When your marketing is about the truth, it creates buzz, word of mouth, loyalty and passion. The truth needs to be about creating partners of your customers and providing support as well as product.

Markdowns – THEN: Inventory that didn’t sell went on sale. What still remained was stored for next year. After three years if it didn’t sell, it went to the sidewalk sale. The bottom of the funnel was a charitable donation. NOW: Rising prices, expenses, competition and the internet have all put pressure on cash flow. Cash flow relies on not only buying the right goods but also the right amount. Measures and control of margins, maintained markup and sell through are critical. Budgeting, classification structure, inventory management and merchandise planning are fundamental to success today. Information, analysis and the right actions are no longer hallmarks of the best retailers, they are hallmarks of the survivors.

There are many other changes happening with the economy getting tougher every week. Winners will be the ones who move the market from people who shop with you to people who are passionate about your store. Winning@Business™ gets your team focused and effective, Winning@Retail™ increases cash flow and profits and Winning@Marketing™ drives new prospects to your door. Call Management One® to find out which processes work best for your business.

During it’s centennial year, Dick Hite of Norton Ditto decided to share one of the key aspects of his success. Since 1908 Norton Ditto has been the premier fashion retailer in Houston Texas. From the early days when the store’s typical customer arrived at the downtown store in a horse and buggy to the Texas oil boom of the eighties, Norton Ditto continued to grow. They opened a second store on Post Oak Blvd in the prestigious Galleria area, Houston’s shopping Mecca. Even with the growth in sales, like so many traditional retailers, Norton Ditto struggled to remain profitable and experienced some tough times. Mr. Dick Hite, the nephew of Ben and Sarah Ditto learned the retail business while working in the store from 1969 – 1984. In 1994 when he returned to the store, he became the principle owner and CEO, and took on the challenge to restore Norton Ditto to profitability and success to become today’s quintessential Men’s Clothier in Houston. Mr. Hite shares with us some important lessons that have contributed to Norton Ditto’s success.

Though well experienced in the retail industry as well as his experience in sales and marketing (he was a frequent speaker for the PGA), Mr. Hite looked outside his already strong staff for additional assistance to develop a management plan. One of the most important relationships he developed was with Management One®, one of today’s best retail management consulting groups, to develop a rapid ROI (Return On Investment) strategy to maximize the two largest assets of Norton Ditto: their people and inventory. Mr. Hite admits that while he and his staff had previously used management and merchandising plans from other consultants, the key to their success was “that Management One® not only provided better plans, but they were also able to motivate us to follow the plan. ”

It is no news that retailing is a cash flow business that must maximize sales and turn rates. By increasing turn rates, a retailer will improve cash flow, reduce markdowns, increase margins, and indirectly increase sales. Management One’s focus is unique in that it’s not solely directed toward tightening the belt (Open to Buy) to maximize turn rates. The focus is also on helping the retailer develop opportunities to expand the business by re-investing dollars that were previously overcommitted in non-performing classes into new lines and classifications with growth opportunities. Breaking out classifications so that growth can be tracked more effectively results in inventory dollars spent with a much better return.

As examples, Mr. Hite points to his neckwear and belt classifications that were performing poorly and are now very profitable classes with neckwear selling through at 85% (and trust this author who has been in his store – he still has a fabulous selection of ties!) Yet he acknowledges that sometimes the raw numbers don’t tell the whole story. He admits that if he looked at the numbers only he wouldn’t be carrying Oxxford suits, but he knows his market: one can’t be the premier haberdasher of Houston and not carry Oxxford suits. “It’s all about the right balance of merchandise,” explains Mr. Hite.

Marc Weiss, one of the principles of Management One®, calls Norton Ditto a “text book example” of what good controls and discipline can do for a retailer. Evan Wise, the other principle of Management One®, emphasizes that a key turning point is when a retailer deals with issues they can influence rather than making excuses due to circumstances beyond the retailer’s control. Inventory planning, balance and the right OTB at market is one area that every retailer must control. Mr. Hite applauds the responsiveness of Ed Scott, his Management One® consultant: “It’s much more than a monthly review of our merchandising plans; it’s the daily support that makes their service so valuable. Moreover, Management One® is in tune with and truly understands the retail business.”

In 2007 Smyth Retail became part of the Norton Ditto partnership by providing the underlying information system which effectively manages daily transactions and provides important reporting and analysis tools, including a direct interface to the Management One® “Winning @Retail” merchandising planning system. The entire Smyth organization was so committed to helping their POS customers get the most from the data their system collects, they provided the direct interface to Management One at no added charge to customers. That interface makes it easy for Norton Ditto to send the information to Management One quickly, accurately and easily over the Internet. Management One processes the information and the report can be returned over the Internet as well. This seamless and efficient process provides Norton Ditto with timely and accurate analysis of their business. Mr. Hite affirms there is “no doubt that the timeliness and accuracy of better reporting tools provide the information to quantify and qualify management’s decisions. ” The ability to get a snapshot of the status at any time during the month using Management One’s Plan-On-Demand (POD) feature is important to helping us reach the planned goals established for the month.”

Mr. Hite sums it up best: “There is no doubt that through effective planning and execution that we have increased turn rates, margins and sales.”

And it usually isn’t. Special offers, dating, and incentives tied to minimums appear to be good on the front side but in reality they typically sound better than they are. Vendors make these offers, not because they are good for the retailer, but because they are good for the vendor. That in itself should be a sign of trouble!

Let’s start with invoice dating. In some industries and with some seasonal products dating can be an advantage. However you can be fooled into overbuying knowing that you do not have to pay for these goods for 6 months or more. Here, merchandise planning can make a huge difference, as you will only commit to what you can sell profitably. If you have carry over inventory that is still viable for the next season; are you deducting that inventory against your future open- to-buy? The bigger question is why do you even have carry over inventory?

Dating typically causes retailers to overbuy and then as the season unfolds they have limited or no dollars to spend on new goods. Dating can cause you to over commit to one vendor. If that vendor is not selling and another vendor is selling, you have managed to box yourself into a corner. It is always important to leave yourself open- to- buys, especially in key classifications.

Dating can create a false sense of security. You will eventually have to pay for those goods; if they do not sell it would be a shame to pay those invoices on the profits of other vendors. If you do use dating, especially on seasonal goods that arrive early, it would be prudent to set aside the cost of goods on each item as it is sold and keep it in a separate account, possibly interest bearing. Some banks have great business accounts that allow you to keep an almost zero balance in your checking account and a savings account attached. . When the invoice is due you have the money saved, with interest! Simply sweep the funds necessary to cover the invoice from savings to checking.

Incentives tied to minimums. If the minimums force you to overbuy then don’t do it! The 10 or 15% will not be enough to counter the markdowns you will take to unload an overbuy. When you go to an all you can eat buffet, you eat more than you need and then it is diet time. If you hate dieting then pass on the buffet. However in your store a diet can mean markdowns and thus loss of profit. It also creates a squeeze on cash because those markdown goods will need to be replaced by stock that you can sell at full retail. Incentives tied to minimums must fulfill your needs and not the Vendor’s.

There are other incentives where the vendor offers discounts on reorders based on an upfront commitment. This can work if the open to buy dollars for that vendor match your overall assortment plan. Otherwise take a pass.

If you decide to get involved with Vendor incentives, that does not preclude you from negotiating your own terms, conditions and discounts. Hot vendors do not need to give anything away. Merchandise that is sold with pre season incentives may mean the vendor is in a position to negotiate. Remember, as the buyer, you have great leverage. Do not be afraid to use it. Smaller retailers need to remember that they are important; as they typically are the most profitable business a vendor can write. Small retailers do not beat up vendors for price incentives and discounts like larger companies.

The best incentives you can get are the ones you negotiate on your own terms. The first rule my father taught me in negotiating was, “There are 3 prices: The line price, the incentive price, and the price you pay. Make sure the price you pay is the lowest you can get, then go back and lower it again.

Copyright Management One® 2007 Written by Marc Weiss

Top Down Bottom Up Interactive

These are three different types of inventory planning that retail business can engage in. The first is top down planning. In this scenario decisions are made at a high level and drilled down in to the planning process. The downside to this is that planning is driven based on management’™s expectations or even the desired profits needed to show stakeholders. Hopefully it would be guided in some measure on past performance. Forced increases or planned decreases are not necessarily driven by market conditions. Decisions are made at a high level where there may be significant distance between the decision maker and the customer.

The second option for planning is bottom up or planning that is dictated by how the customer votes with his/her purchases. This planning reacts to current and past customer demand and is more reflective of current market trends. The downside to this type of planning is that it can miss opportunities that the market has not yet seen. It omits the art side of the buy enabling merchants to take necessary risks to grow their business.

The third form of planning is interactive. It is a blend of top down and bottom up planning. Bottom up planning is at the core of this but it also allows for some guidance from management to make top down decisions. Management One™ believes in a “high tech” “high touch” approach to planning that more closely resembles interactive planning.

How interactive planning works at Management One™

The High Tech ‘“ High Touch approach to Inventory Planning

• Bottom up planning is based on both short term and long term trends.
• Analysis is based on opening up opportunities. Forecasting logic reacts to current trends and drives revenue forecasts to feed opportunities and starve problems.
• Trained planners utilize national and regional trends to impact decision making.
• Affiliates and clients feedback valuable information to planners to help maximize opportunities.
• ‘What if’™ scenarios are developed for risk-taking to grow specific areas of the business.
• Proper balance of inventory is achieved through an effective classification structure
• Local events that are strong enough to influence the business are considered. For example the strength of a football schedule in a college town can have a dramatic impact on the plan.
• Turn rates for clients are based on location, type of class, assortments, cash flow considerations, volume and profit potential.
• Markdowns are considered as a healthy part of planning.
• Gross Margin and Gross margin dollars are considered as part of a holistic approach to planning. Profit potential that exists in every store is carefully protected so that classes that are essential to the maintenance of the business are not sacrificed.
• Inventory flow is based on peaking inventories at the right time and maintaining a fresh flow of inventory to ensure customer demand.
• Flow and balance are key ingredients in growing sales and generating profitable cash flow.
• Reporting that allows users to make decisions on inventory performance, cash flow planning and to develop meaningful merchandise strategies.
• Sales forecasting that is dependable and allows management the ability to budget effectively.