![]() If we are not successful at predicting our sales trends and adjusting our purchases, we may have excess inventory, which would result in additional markdowns and reduce our operating performance. We make decisions regarding inventory purchases well in advance of the season in which it will be sold. Nordstrom’s Inventory Management Disclosure, 2009 We strive to ensure the merchandise we offer remains fresh and compelling to our customers. The below disclosure exemplifies the retail sector’s fine balance of monitoring appropriate inventory levels throughout the year. Holding inventories too long in the retail industry risks inventory write-downs, since seasonality and new product lines could quickly create lower demand and slower sales for older inventories. The retail sector generally has a higher inventory turnover than other industries, as products are less expensive and turnover more quickly. The company has more accurately forecasted demand while keeping inventory at an acceptable level with sales. ![]() It also means that Sunny Sunglasses is more in line with higher industry averages than its closest competitor. This indicates that Sunny’s main competitor, Luxottica, may have products that are too expensive, or management may not have correctly estimated demand. Inventory turnover for Sunny Sunglasses is about five times greater than that of its closest and largest competitor, Sunglasses Hut Int. The next step is to add meaning to this number by comparing it with the industry average: Company Financial Statement Analysis Industry Ratios: Inventory Turnover This means that Sunny Sunglasses Shop is turning over inventory 15.36 times per year. Plugging the numbers into the formula, we get inventory turnover of 15.36.Īverage Inventory ($0 + $5,625)/2 = $2,812.50 Sunny knows that his ending inventory in 2010 is $5,625, and cost of goods sold for the year equals $43,200. Since Sunny Sunglasses Shop started business in January of 2010, there is no beginning inventory balance. Let’s see how Sunny Sunglasses compares with its industry and competition: The financial ratio should be compared with competitors and the industry average. Grocery stores and retailers of perishable goods have the highest inventory turnover, where profit margins are lower but sales are made in larger volumes. The inventory of equipment and machinery will turn over much less frequently, but will have a higher profit margin per product. Inventory turnover is generally higher in the retail industry. Inventory turnover represents the number of times the inventory “turned over” during the period we are measuring. ![]() Inventory Turnover = Cost of Goods Sold/Average Inventory How to Calculate Inventory Turnover Average Inventory = (Beginning Inventory + Ending Inventory)/2 Financial Statement Analysis and Inventory Turnover Inventory turnover is used to determine whether or not a business is maintaining adequate levels of inventory.
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