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Turnover is Key for Competitive Inventory Management

Retail Dive recently reported that in recent quarters the department store sector has not only been successful at creating more experiential retail environments but also financials have improved from better management of inventory. The article cites a Moody's report indicating that the improvements in the sector have been led by Kohl's, Macy's and Nordstrom's strategies for sales increases using strategically lowered volumes of inventory. According to Moody's, inventory levels for the whole sector decreased by 2.5% in Q4, 3.7% in Q1 and 1.6% in Q2.

Part of a comprehensive inventory lowering strategy is increased inventory turnover. Digging deeper into actual inventory turnover rates compared to optimal inventory turnover rates for the firms' cited reveals interesting trends. For the latest quarter reported, Kohl's actual turnover shows .8x with and optimal turnover of 2.9x, while Macy's shows an actual turnover of .6x compared to an optimal of 2.7x. Nordstrom brought in a higher actual turnover at 1.2x, however, their optimal turnover for the period is 3.6x.

While the variance gap from actual to optimal will ultimately close over time for all three retailers, particularly as holiday sales come into play, the actual inventory turnover for the retailers still appears somewhat sluggish. Lowering inventory levels can be an integral part of a competitive strategy, but if turnover does not improve cash flow could tighten-up and selling excess inventory during sale season may not come soon enough.

For more information on the importance of inventory turnover, check out our insight in theABL Advisor.

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