Inventory turn rate – How often you replenish inventory given its cost. The impact of this metric is to show efficiently inventory is managed. Dependent on the business, a low inventory turn rate can result in markdowns. For example, if you only turn over inventory once per year in a high fashion business, chances are some of that inventory will no longer be in style by the end of the period. This will result in the merchandise being sold as clearance, and a corresponding loss.
A higher inventory turn rate normally lowers the risk of carrying obsolete merchandise, and also frees up cash to be used for other things. The risk is that you have too little in inventory to meet customer demand, resulting in poor customer service.
Inventory turns are calculated by the following:
COGS / Average inventory. If you don’t have access to average inventory, simply take the preceding period from the financial statements. It should be noted that given the two dials, how COGS is calculated has a large impact on this metric. For example, Abercrombie and Fitch calculates COGS without including stores. EXPRESS does include this account in COGS. As such, Abercrombie’s inventory turns appear lower than many other retailers.
Open to buy –
“You want the right amount of the right stuff at the right time”.
The calculation is roughly as follows:
Desired end of month inventory – (start of period inventory – (projected sales + markdowns))
If you hear a comment such as “We have more open to buy dollars later this year”, that can only mean one of two things:
1) You have a higher desired end of period inventory
2) You expect more sales
As such, if you expect sales of $20,000,000, last period’s inventory turn rate was 5, and gross margins are 40%, you want $2.4 million in inventory.
AUR – Average Unit Retail, which is an aggregate of sales $ / # units sold. This is a very high level indicator which I have never found particularly useful. It is definitely dependent on your business. For example, AUR will be much higher for Boeing than it is for Krogers. It is something that should be observed over time, as declines in this metric is indicative of pricing pressures and a highly promotional environment.
AUC – Average Unit Cost, COGS / # units sold
Much like AUR, this is dependent on your business.
Go to market –
This is just how we will engage our customers. My guess is an MBA was paid a large bonus to come up with this.
Redline –
Generally refers to an item that has been marked down to its lowest price.