History of the P&L Study - Part 3

History of the P&L Study - Part 3

by Tim Quebedeaux

Last time we left off with the premise that we can avoid the wearing of the red if we manage our inventory better. Inventory management can be “graded” by two important KPI’s: Turns and GMROII (Gross Margin Return on Inventory Management). Those two KPI’s are driven by three metrics, COGS, Margin Dollars, and Average Inventory. Average Inventory is a key component when analyzing these KPI’s.

Let’s start with reviewing what happened with Cost of Goods Sold and how that is related to Margin.

In this graph we put together COGS and Margin. We can do this, because they are reciprocals, meaning they add up to be 1. For example, in the Asterisks year of 2020, COGS was an amazing 42.9% which means Margin is 1-42.9%, 57.1%. Sorry for the math speak, I do consider myself a nerd, proudly I do! Getting back to the data, in this graph it is hard to actually see the changes over the years, let’s change the aspect ratio on the side and get a better look.

So now you can see some changes over the years. As mentioned before our worst margin or highest COGS was in 2011. During this time many centers realized they had too much inventory and not enough sales to move it… Turning that inventory meant discounting.
This will negatively affect those KPI’s. One of our best margin/COGS years was from that low in 2011 thru 2013, and then even better in 2020 and 2021. From 2011 to 2013 enough of the ‘bad’ or old inventory had been liquidated and newer inventory was coming as revenues spiked that year. That combination led to an improvement in margin/COGS. In 2020 we all remember how much inventory was flying off the shelves, tables, ground, and even the trucks as you were unloading them! No discounting was needed for sure!

Let’s now dig deeper into those two-time frames, 2011 and 2020. What was happening in regards to Turns and GMROII? To do that, let’s see how Turns and GMROII’s are calculated. The formula for both is as follows:

Turns = COGS DIVIDED BY Average Inventory
GMROII = Margin Dollars DIVIDED BY Average Inventory

Both of these KPI’s have Average Inventory as part of their calculation. What is Average Inventory, it is the average amount of inventory on hand… simply put. Calculated by taking the average of the End of the Month Inventory valuation at cost for 13 months. Why 13? Remember the definition of COGS? Beginning Inventory plus Purchases minus ending inventory. The 13, or actually the 1st month takes into account the Beginning Inventory figure.

So, looking into 2011 and 2020, what was happening with the Average Inventory? From 2011 to 2012, average inventory dropped 33K and from 2019 to 2020 it dropped 22K. These two years gave us the biggest improvement in profitability 2.1 pts, and 9.6 pts respectively, even though in one we saw declining revenues and the other revenues were increasing. So, despite decreasing revenues from 2011 to 2012, profitability increased!

Let’s see how Average Inventory relates to Increasing or Decreasing Revenues.

We can see in this graph the trends of Average Inventory… It was decreasing (below the 0% line) from 2009 to 2012. Then from 2013 to 2018 (minus 2014) it was increasing, before 2019 and 2020 where it dropped again. Then the huge increase I have been discussing this year in 2021. Average Inventory can and should increase as revenues increase if you are at a “good” inventory level. I would want turns in the 7 plus range and GMROII also above $7 to be in this category.

How did Turns and GMROII grade our Inventory management through the History of the P&L? We will discuss in Part 4... coming soon!


Got questions or need more information about The Group's the Annual P&L Study or the Weekly Department Review (WDR)? Give Tim a call or email.

Tim Quebedeaux
Cell: 770.355.6249

Tim Quebedeaux, RetailKPI Consulting, is a service provider for The Garden Center Group and manages all Group financial sharing programs. The Weekly Department Review (WDR) and The Annual P&L Study are industry exclusives developed by The Garden Center Group and are included in your retainer!

REMEMBER: Your interaction (by phone and email) with Group Service Providers such as Tim Quebedeaux, Sid Raisch, Jean Seawright, John Kennedy, and of course Danny Summers are included in your retainer! So what are you waiting for? Take advantage of all that The Group has to offer and give them a call or send an email now!

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