“Hey Look! Real Retailer Numbers!” What’s to Learn From Them?

For a while now, I’ve been carrying around in my back pocket the National Sporting Goods Association’s 2004-2005 Cost of Doing Business Survey.

I have no idea why they call it that since it obviously doesn’t contain any numbers from either 2004 or 2005.
 
Well, never mind. They do it every other year and collect actual financial date from sporting goods retailers of various types and sizes. They got 314 responses to their survey. 226 of these responses were from what they called “specialty” stores. 217 (not all “specialty”) were from retailers with only one storefront. Now, these aren’t skate shops. They are bike, ski, camping, and exercise/fitness stores. Look, I’m sorry and if any of you know of a detailed survey of the financial performance of skate shops you should by all means write an article about it.
 
But as I’ve argued on a number of occasions in, uhh, well, another magazine…….. Ohhhh, I feel pangs of guilt.  I’ll get over it.
 
Anyway, I’ve argued that the problems of specialty retailers in sporting goods are more the same than they are different at this point so deal or do your own survey. Based on the survey, here are some things you might want to think about as you manage your shop.
 
Earn 4% With No Risk!
 
That’s the current pretax yield on 10 year U.S. Government treasury securities. Generally that’s considered to be a risk free investment. Junk bond funds, according to one source, typically yield about 8% higher than Treasuries, or around 12% currently.
 
For all 314 of the surveyed retailers, not all of which are specialty, the before tax return on net worth  (which is a lot like yield) was reported to have declined from 15.8% in the 1993-94 survey to 9.2% in this survey. That’s a decline of 42% and brings us well under the junk bond fund yield I’ve included for comparison purposes.
 
For non financial people, the word “junk” can have a negative, almost personal, connotation. But it’s just a low rated bond that has a greater chance of default than an investment grade security. Those of you have had to borrow money to run your shops and could only do it with a personal guarantee know that however your risk compares with a junk bond fund, the lender didn’t consider the risk low.
 
The survey also shows that, over the same period, the before tax return on assets for all 314 respondents fell from 5.7 to 3.9 percent. In the intervening surveys it fluctuated at higher levels of from 6.4 to 9.9 percent, but 3.9% is where we are in the latest one. The return on asset number is not necessarily comparable to a yield, but you can see that the trend is the same.
 
Net profit before tax as a percent of total revenue fell during the same period from 3.0 to 1.8 percent, though it was higher in the intervening surveys.
 
On the positive side, gross margin rose from 36.4 to 40.8%. That’s an indication, I think, of increased sales of shoes, apparel and other soft goods. I’m not prepared to believe that hard goods margins have increased. Inventory turnover improved from 2.4 to 2.7 times.
 
Wait a minute- if gross margin is up and inventory turns improved, how come profitability is shot to shit? You don’t have to be Sherlock Holmes to deduce that the cost of running a retail store has gone through the roof. But you already know that, don’t you?
 
The survey only supplies these kinds of time series numbers for the complete sample- and they don’t supply balance sheet numbers across time. But I will tell you that the risk associated with running a shop has grown. You’ve watched as people open fewer shops and more close and you know the same thing.
 
So, higher risk and lower returns. That risk free 4% return is starting to look sort of interesting. What can you do about this?
 
Grow, Damn It.
 
Just to get right to the heart of the matter, below is a chart you should look at with data taken from the analysis of the 226 specialty shops in the survey.
 
Store Revenue
Owner Comp. & Profit to Revenue
Total Debt to Total Assets
Less Than
$500,000
7.6%
79.7%
Greater Than
$2,000,000
8.8%
56.2%
 
 
In percentage terms, bigger stores earn more and take less financial risk. Their profit margin is almost 16% higher and their leverage is 29% lower. Be bigger. And recognize that it’s hard to see a financial model that makes sense for very small stores. For those of you who are small and are making it, I’d love to hear from you to find out how. That would be worth an article.
 
Be Important to Suppliers
 
I suspect most shops get a big chunk of their sales from a relatively small number of brands. Those brands are critical to your shop’s success. Bluntly speaking, you can’t survive without most of them. But as they grow, and as their distribution widens, the financial importance of your sales to their success inevitably declines. You can’t differentiate yourself with your numbers, but you can with your input.
 
Tell them what’s selling or not selling and why. Give them insights into trends. Send them a list of comments kids have made about their brand- or about other brands. Don’t just wait for the rep to come in. Go right to the sales manager, or higher in the organization, and tell them. Don’t do just what they expect or what they ask for. Do more. Surprise them. I bet it’s not really much work because not that many retailers do it.
 
Oh, and pay your bills on time. If you don’t, your credibility is shot to hell no matter what you do and you’re just another problem. By the way, my definition of “on time” is that the check arrives at the supplier on the due date.
 
Tell the brand what you’re doing to support it. Be perceived by the brand to be important to its success in your local area. Become the shop the senior managers want to visit when they are in town. In turn you can expect?  Well, what would you like? Ask for it. Now, you have the credibility to get it.
 
Not for a moment am I suggesting that this can, by itself, overcome the apparent financial disadvantage of being a small retailer. Indeed, it probably only helps once you are well established.
 
Live the Numbers
 
I recognize it’s inconvenient when some pencil pushing, number crunching, calculator carrying, green eyeshaded SOB like me comes along to present you with inconvenient facts. If you feel like it, shoot the messenger. Lord knows, I’ve been shot often enough. I await your slings and arrows.
 
It’s difficult, I suppose, to deal with some of this stuff because we didn’t get into this industry as a clever shortcut to becoming accountants. Still you need to be one now more than ever. Look dispassionately at your numbers. How does your business compare to the NSGA numbers? If the industry, and the retail environment, continues to evolve as it is now, and the financial trends in the NSGA report continue, how, to put it bluntly, will you survive and prosper? You can, you know. And the industry needs you to. But you have to plan for it.
 
The NSGA can help you. So can the Board Retailers’ Association and the Retail Owners Institute. Don’t sit on your ass and wait to be swallowed by the whale (hell of an accidental analogy) like Queequeg in Moby Dick.
 
About the Numbers
 
It’s my personal belief that it’s the retailers who are doing fairly well, and who have the systems to provide the requested numbers without too much work, who are likely to respond to surveys. If so, it skews the numbers towards showing better performance. Also remember that in small businesses, the owner’s financial position and the business’s are synonymous. Return on investment may look lousy only because the owner is taking a bunch of money out. That’s why I used owner’s compensation plus profit to revenue in the table above. Finally, beware of small sample size. 314 retailers may sound like a big sample, but once you start dividing them up into full line and specialty, by store size, by revenue, by type of store, some of the group sizes can begin to get a bit small. That’s why the NSGA has used the median, rather than the mean in its calculations. The mean can be distorted by a couple of extreme values- especially as sample sizes get smaller. The median doesn’t have this problem.