After several years of turning over inventory more quickly, U.S. retailers are experiencing slower-moving stock, according to preliminary data from Sageworks, a financial information company.
The trend, combined with receivables that are aging at a slightly faster rate than are payables, paints a picture of retailers' cash being tied up about 12 percent longer than it was two years ago, Sageworks' financial statement analysis shows.
Privately held retailers, on average, in 2014 had a cash conversion cycle (CCC) of nearly 87 days, up from 79 days in 2013 and 77 in 2012. The cash conversion cycle indicates how many days funds are tied up in the process of obtaining inventory (or producing it, if the company is a manufacturer), selling it and receiving cash from customers for the sales.
"This data is incomplete at the moment, but it's always better if this cycle is shorter, so this probably is not the best trend right now," said Sageworks analyst James Noe. "When the number is smaller, it just means retailers are selling things at a faster pace, are receiving payments from customers at a faster pace and are taking longer to pay their own vendors, which is good because then the retailers can utilize that cash longer."
Noe said that there's no indication that the longer cash conversion cycle for retailers has crimped either sales or profitability at this point. In fact, privately held retailers have continued to post annual sales growth, and profitability has improved, according to Sageworks' data. And recent surveys of business owners have found fewer concerns about cash reserves than a year ago.
Analysts have been expecting that consumer spending would strengthen as the improving jobs picture, lower gasoline prices, easier credit and positive consumer sentiment pointed to a rebound, so it's possible that retailers' inventories and their credit policies with vendors have reflected that optimism.
Nevertheless, trends in inventory, receivables and payables are something to watch, Noe said.
"The longer the cash conversion cycle is, the longer your capital is stuck in the process of selling something, whether that capital is what you need to buy new products to generate more sales or to be able to continue to pay expenses while you wait to receive payments from your customers," Noe said. "There are multiple ways you could use that capital, but if it's tied up, it can't be utilized."
The metric can vary widely among industries or even among companies within a specific industry, so it's best to compare similar companies and compare them over a long period of time.
For example, Walmart Stores Inc. (WMT), generally recognized as aggressive in its management of vendor payments and inventory control, has a cash conversion cycle of 13.8 (based on the three months ended January as measured by GuruFocus.com). Given that the retailing giant has a substantial online presence and sells a lot of food and grocery items that move quickly off the shelves, it's not surprising that the ratio is well below that of a big-ticket-item retailer like furniture chain Haverty's (HVT), where sofas may sit on the showroom floor for months. Haverty's higher average inventory days drives up the cash conversion cycle to nearly 74 (based on three months ended December), even though its average receivables days actually is lower than Walmart's, according to GuruFocus.com's data.
Sageworks' data show that the main driver in retailers' longer cash conversion cycle in 2014 was inventory. After average inventory days decreased each year between 2009 and 2012, retailers had an estimated 98 days of inventory on hand in 2014, compared with 89 days in 2013 and 88 days in 2012, according to an analysis of financial statements for each year. Inventory days, also known as days inventory outstanding, provide an indication of how quickly a company is turning inventory into sales, showing on average how many days' worth of sales are held in inventory. It is calculated by dividing the dollar amount of inventory (including work in progress) by the cost of goods sold and multiplying the result by 365.
The average age of private retailers' accounts receivable examined by Sageworks was about 21 days in 2014, compared with 17 in 2013 and 15 in 2012. The average age of retailers' payables has not risen as quickly as receivables. Accounts payable on average were about 32 days in 2014, compared with 27 in 2013 and 26 in 2012.
Through its cooperative data model, Sageworks collects and aggregates financial statements for private companies from accounting firms, banks and credit unions.
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