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TODAY JUL-AUG 22
One of the most important and often misunderstood metrics in the retail business is the stock-to-sales ratio. This article will discuss what s/s ratios are how they are calculated how they are used and how they relate to inventory turnover.
A stock-to-sales ratio is exactly what the name implies a relationship or ratio between inventory and sales. It is calculated on a monthly basis and can be used for store department classification or even style planning. Turnover on the other hand is calculated seasonally or annually and tells us how quickly the average inventory is sold and replenished during the desired period. The calculation for turnover is net sales divided by average inventory @ retail. You might also see turnover defined as cost of goods sold divided by average inventory @ cost. It might help to remember that s/s ratios are the inverse of turnover. In other words if you have a s/s ratio of 4 every month for a year the inventory turnover will be 3X.
Stock-to-Sales Ratio Calculation
The following formula is how stock/sales ratios are calculated:
Stock/sales ratio = First of Month Inventory @ Retail ÷ Monthly Sales $
Let’s use the hosiery class as an example:
Inventory Planning and Stock-to-Sales Ratios
Assume that you would like to plan a 3X inventory turn for this category. Given the formula above if our First of Month (FOM) retail inventory is $60000 we would have to sell my keyword5000 worth of socks to achieve a stock-to-sales (s/s) ratio of 4. A stock-to-sales ratio can be looked at as the number of months of inventory to have on hand. In this example we have four months of supply.
If we had a four-month supply every month for the entire year the category would have a 3X inventory turn. In the real world when planning inventory levels using stock-to-sales ratios it wouldn’t be realistic or even practical to have exactly a four-month supply each month. During the slower months a retailer might end up with five months of supply but during the busier months for example the holiday season the s/s ratio could drop as low as 2-2.5. However since the monthly volume is generally higher at that time of year the amount of inventory would be sufficient to support the planned sales.
Understanding Stock-to-Sales Ratios
If the s/s ratio is 2 for example a merchant would need to sell half of his inventory in that particular month to be “on plan.” If the classification is turning too quickly the s/s ratios will be too low and the merchant might be in jeopardy of missing sales thus outperforming the inventory. If the turnover is planned too low the s/s ratio will be too high and the class could become overstocked leading to higher markdowns and a lower gross margin.
Case Study: Women’s Running Shoe Category
I currently work with a client that has a women’s running shoe category that does over one million dollars per year with an annual stock turn of 4+ times. Thanks to current supply chain interruptions deliveries until recently have been abysmal; everything from being late to incomplete shipments to downright cancellations. Additionally this merchant has been advised that if future orders aren’t placed through the end of the year there is a very good chance that the products will not be available.
Ness in This Important Classification
It was decided to overbuy the classification by approximately 60%. While on the surface this might seem irresponsible close attention is paid to the monthly stock-to-sales ratio. As long as the ratio stays within the range of the planned s/s the annual turn figure will be achieved. If business slows for some reason which is actually beginning to show signs of happening in this category orders can be modified or cancelled. The other positive is that the price of all of the future orders is locked in. Given the unique set of circumstances that the supply chain has handed us this strategy seems prudent at this time.
Understanding Stock-to-Sales Ratios
Ritchie Sayner
Ritchie Sayner continued on page 12
A stock-to-sales ratio is exactly what the name implies a relationship or ratio between inventory and sales. Turnover on the other hand is calculated seasonally or annually and tells us how quickly the average inventory is sold and replenished during the desired period. Published in the July/August 2022 issue of Shoe Retailing Today Copyright © 2022 National Shoe Retailers Association Tucson AZ www.nsra.org. All rights reserved.
Today Jul-Aug 22
Content quickly before the trend has passed. You’ll be joining a community conversation which will help get your video in front of a wider audience.
In addition to taking advantage of trending content use these tips for more views and engagement on your video content:
- Short form video is designed to be viewed vertically and full screen so always hold your phone vertically when filming video clips.
- Be sure the first few seconds of your video hooks the viewer and makes them want to watch more. Social media users quickly scroll through videos – so you’ll want to entice them right away so they don’t scroll past your content.
- Choose the cover of your video – the first
Choose Your … Wisely
The … someone will see and the … that will appear on your profile – wisely. You’ll want this key first … to automatically draw the viewer in.
Enhance Accessibility
If someone is speaking in your video add captions or transcribe their words on-screen to make your video accessible to a wider audience.
Engage Your Audience
Ask a question or ask viewers for their opinion to start a conversation. A key factor of what makes short form video content so popular is the conversation and engagement that happens in the video’s comment section.
Show Your Personality
Don’t be afraid to show your personality! Brands are using humor and authentic approachable voices through this type of content to better connect with their audience.
Include a Call to Action
Include a call to action whether through the speaking in your video on screen or in your video’s caption directing viewers to the link in your bio.
Craft a Compelling Caption
Write a compelling caption for your video and include 3-5 trending hashtags to increase visibility.
Engage with Comments
Respond to your audience when they comment on your videos.
Practice Makes Perfect
Remember the more you practice creating video content the easier it will get. If you’ve never done this before try creating a couple of videos just to create them – without the intention of posting them publicly. Social media platforms offer many features such as transitions stickers text transcription and more to make it easy for you to create videos and you might be surprised with how well your first video turns out!
As you start sharing pay attention to which types of content resonate with your audience to help guide your strategy moving forward. The time you put into short form video content will pay off when you start connecting with your customers and potential customers on a new level.
About the Author
Allie Horner is the founder of Brand Bloom LLC a digital marketing and social media firm rooted in Milwaukee. She can be reached at allie@brandbloomllc.com.
One Pair of Boots
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Contact Information
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Exercise
Try this exercise in any classification in your operation. Divide the first of month
Retail Inventory Management
Calculate retail inventory by the planned stock-to-sales ratio and compare the answer to your current sales forecast for that class. If you end up with a number way above your current planned sales you have too much inventory. This would be your clue to take action. Consider:
- Incentives to salespeople
- Remerchandising
- Stock balancing with vendors
- Markdowns on older goods
If this scenario becomes a recurring issue you either have an inaccurate merchandise plan or you’re an over-buyer. On the other hand if the number you get is way below your planned sales number and you don’t have a sufficient quantity of new goods landing in time to ensure achieving the sales target you could have a problem. On an extended basis you would end up starving the classification which would result in the class not hitting its true potential.
Conclusion
I hope this article sheds some light on how useful stock-to-sales ratios can be in merchandise planning. It all starts with a quality sales and inventory forecast. If the plan is wrong the results will be wrong. If you still have questions or would like to review your merchandise planning procedures I am happy to help.
Ritchie Sayner is with Advanced Retail Strategies LLC an affiliate of Management One. Sayner’s book Retail Revelations: Strategies for Improving Sales Margins and Turnover (2nd Ed.) is available on Amazon. He can be reached at advancedretailstrategies.com
Sayner continued from page 10
Kachorovska continued from page 9
Short Form Video continued from page 7
Summary
The article explores the stock-to-sales ratio a crucial yet often misunderstood metric in retail emphasizing its role in inventory management and its relationship with inventory turnover. It explains how this ratio is used to plan inventory levels highlighting its inverse relationship with turnover and discusses its application in real-world scenarios such as the women’s running shoe category facing supply chain issues. The article concludes with insights into how stock-to-sales ratios can guide merchandise planning effectively.
“A stock-to-sales ratio is exactly what the name implies a relationship or ratio between inventory and sales.”
Real-World Examples of Stock-to-Sales Ratios
The stock-to-sales ratio is a crucial metric in retail helping businesses manage inventory and optimize sales strategies. Here are some real-world examples illustrating its application:
- A clothing retailer plans for a 3X inventory turn for its summer collection. By calculating the stock-to-sales ratio they ensure they have enough inventory to meet demand during the peak season while avoiding overstock during slower months.
- A shoe store experiencing supply chain disruptions decides to overbuy its women’s running shoe category by 60%. By closely monitoring the stock-to-sales ratio they maintain inventory levels that align with sales forecasts ensuring they can meet customer demand despite supply challenges.
- An electronics retailer uses stock-to-sales ratios to adjust inventory levels for new product launches. By analyzing past sales data and calculating the ratio they optimize stock levels to prevent overstock and ensure sufficient supply during high-demand periods.
