GMROI explained

Last time we explained what GMROI is and why it is important. Now let’s take a look at the GMROI report for a store. We have left out the details. The first thing you want to look at is the totals for the store, usually the last line.

We are going to use this report even though the numbers might not be typical for the whole year of a retail store but let’s work with them.

  1. The current inventory level. Could be more or less than #9 as after the year we might stock up and inventory would be higher.

  2. Number of units left in stock today.

  3. The number of units we sold. This is important because of the previous line: In a year if you sold 7800 units, that’s all you’ll need if sales are expected to be the same. Notice here we sold 7800 and have 17,200. Almost 10,000 too many items!

  4. Cost of those sales we made.

  5. Sales for the whole season.

  6. This number is not important.

  7. The margin we made on those sales.

  8. Gross profit dollars from those sales.

  9. The amount of inventory we had “on average” during the past 6 months that allowed us to make those sales.

  10. Our turn. Funny number. To find out how many days our inventory stayed around until it was sold, divide the turn (“.40” by 365 days in a year) and you’ll see for this store inventory stays 912 days before it leaves. That’s 2.5 years! We pay for it in months and it stays for years before it sells!

  11. The Most Important Number. It reads 33.5%, but I’d rather talk in money. Move the decimal point to the left 2 digits and you have 33 cents (I’m ignoring the ½ cent). This number should be above $1.00 and this store is 33 cents. The probably have lots of debt and have a problem paying vendors.

The secret of having money in a retail store is Gross Profit dollars (#8) should be higher than Average Inventory (#9).

If you look at #7 this store has a 45.5% margin, very respectable in today’s retail market. Their problem is that the store has way too much inventory. Where is that inventory? Typically it hides in two places:

  1. Old inventory. “Old” is anything over a year old, and remember this store’s inventory doesn’t sell in 1 year (365 days). It takes 900 days to sell!

  2. In addition to old inventory typically there is also too much inventory in the higher price points.