Merchandise & Inventory Benchmark Ratios

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Gross Margin Percentage

= (Total Net Sales – Cost of Goods Sold) ÷ Total Net Sales x 100
What it is
Gross margin percentage is one of the most critical measures for a retailer. The gross margin is what remains after deducting the cost of goods from sales. For example, a 25% gross margin percentage means that each dollar of sales cost the store 75 cents and generates 25 cents gross margin. Merchants strive to increase the gross margin percentage.
Why it matters
Generally, a higher gross margin percentage will generate more profit. A low gross margin can mean less profit. A small change, plus or minus, in gross margin can have a significant effect on the bottom line. Gross margin is not your profit, as you must deduct all other operating expenses from gross margin to determine true profit.
Other ratios or actions to consider
Factors to consider for gross margin are inventory/product turn (turnover), excessive markdowns, abnormally high shrinkage, or selling a high number of low discounted products.
 
Gross Margin Return on Inventory (GMROI)
= Gross Margin ÷ Average Inventory at Cost
What it is
This benchmark measures how efficiently the store has invested in inventory, or the store’s ability to turn inventory into cash after deducting the cost of inventory. This ratio assists in evaluating whether a product’s gross margin is sufficient when compared to the required investment in inventory to generate those gross margin dollars. For example, say a store has a gross margin of $129,500 and an average inventory cost of $83,000. The GMROI is 1.56, which means the inventory earns revenues at 156% of cost.
Why it matters
A ratio higher than 1 means the store has gross margin dollars that were higher than its average inventory dollars. A ratio of 1 indicates gross margin dollars equal to average inventory. And a ratio lower than 1 means the store has gross margin dollars below average inventory dollars. Gross margin is not your profit, as you must deduct all other operating expenses from gross margin to determine true profit.
Other ratios or actions to consider
In order to make a profit, your GMROI must be high enough to cover personal, occupancy, and other operating cost associated with that inventory/product. Also consider freight cost, low markups, high vendor prices, high inventory levels, obsolete inventory, lengthy replenishment cycles, and ineffective policies regarding the markdown of slow-moving merchandise.
 
Markdown Percentage
= (Markdowns ÷ Gross Sales) x 100
What it is
The markdown ratio reflects the discount to the original merchandise price. Purchasing, advertising strategies, merchandise mix, and markdown policies affect this ratio.
Why it matters
A lower ratio indicates well-managed inventory levels, price points, and markdown strategy. A high ratio may indicate ordering too much stock, poor merchandising planning, or an inadequate markdown strategy.
Other ratios or actions to consider
Consider a review of merchandise turnover rates, merchandising planning strategies, and the store’s markdown strategies.
 
Inventory Turnover
= Cost of Goods Sold ÷ Average Inventory at Cost
What it is
Your merchandise inventory is your largest managed asset. The aim is to minimize inventory investment without sacrificing sales, selection, or service. Inventory turnover is the number of times per year that average inventory is “turned” into cash or receivables. It is common to assess the effectiveness of inventory management and the quality of the inventory.
Why it matters
A low turnover rate generally indicates excessive inventory, a poor product mix, and/or slowing sales. In certain circumstances, a high turnover can indicate potential out-of-stock situations resulting in lost sales. For fast moving and fashion items, a high turnover rate is preferable.
Other ratios or actions to consider
Factors to consider in analyzing the differences in turnover rates between stores should include the total sales volume, sales mix, markdown policies, timing of physical inventory, type of store, and returns.
 
Shrinkage
= (Journal Inventory – Acutal Physical Inventory) ÷ Net Sales x 100
What it is
This benchmark reflects the difference between inventory you should have versus what you actually have.
Why it matters
A low ratio is preferred. High shrinkage means you paid for inventory that you can not sell because it is no longer in your stock. Although conducting a physical inventory can seem time consuming, it is a critical ratio in identifing problems in pricing, record keeping, stocking, and loss prevention.
Other ratios or actions to consider
A high shrink ratio should prompt a review of internal and external security policies, paperwork processes, and employee training.

 

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