U.S. furniture retailers have seen a material increase in their average number of inventory days in recent years, according to recent data on privately held companies from Sageworks, a financial information company.
Private furniture stores, on average, had 142 days of inventory on hand in 2013, based on preliminary estimates. That's nearly a week more in inventory than furniture stores had in 2011 and 18 days more than the industry's average in 2006.
While the right age of inventory can vary by company and by industry, in general, it's better to have lower inventory days, according to Sageworks analyst Jenna Weaver. Inventory levels should be sufficient to serve customers' needs but not so high that the retailer carries unnecessary costs to store and maintain the inventory, or runs the risk of the product becoming obsolete.
Retailers preparing to visit the industry's semi-annual furniture trade show in High Point, N.C., in April will undoubtedly be reviewing their own stores' inventory ages before placing orders to buy new inventory. When cash is tied up in inventory, retailers have lower thresholds for the amount of new inventory they will add, or they may consider offering discounts to move aging inventory.
"In the furniture industry in particular, sales are very influenced by tastes and trends and even seasonality, so it's important to make sure existing inventory is fitting the current tastes and trends of the market," Weaver said.
Inventory days are calculated by dividing inventory by cost of goods sold and multiplying the result by 365. Inventory days can increase when the costs of goods decline or when the amount of inventory rises, Weaver said.
Costs of goods sold, relative to sales, have actually been fairly flat to lower since 2006 for the furniture retailers in Sageworks' database. Companies can value their inventory using different methods (such as last in, first out, or first in, first out), so it's difficult to determine whether inventory units have increased. Furniture retailers' sales have improved since 2008 and 2009, when sales dropped. But Weaver said it's possible sales haven't been matching retailers' expectations, if store owners were expecting to see a larger rebound tied to the housing market's recovery.
"We can't necessarily pinpoint why; all we can really see for sure is that the inventory days have increased," she said.
As furniture retailers look to better manage their inventory, they can work with suppliers so that goods are delivered just in time to meet the customer's needs, Weaver said. "They can inspect their existing inventory to liquidate any surplus or obsolete inventory, and there are solutions, like inventory management systems, to help retailers evaluate what product lines do and don't work for them."
"Keeping a close eye on what they have and what is and isn't selling is key," she added.
One bright note for furniture retailers? Profitability has improved, Weaver noted.
"Since 2008, the profitability of the industry has increased drastically," she said. "Furniture retailers went from a 0.07 percent net profit margin in 2008 to 4.3 percent in 2013, which is a significant improvement. Sales growth would help fuel profitability, as would cutting costs."
Through its cooperative data model, Sageworks collects financial statements for private companies from accounting firms, banks and credit unions, and aggregates the data at an approximate rate of 1,000 statements a day. Net profit margin has been adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries. These adjustments are commonly made to private company financials in order to provide a more accurate picture of the companies' operational performance.