Feature: Compare Your Performance

Are you content just to be profitable, or would you like to improve your performance and profitability? Bob Vereen reports from the US…

To improve, one must first compare one’s performance with that of other retailers, including some of the most successful, to see what is being achieved by them and then decide what elements of one’s own business need attention.

The accompanying spreadsheet provides an opportunity for readers to compare themselves against some of the largest publicly-owned firms in the United States and the world, as well as the performance of better-than-average smaller retailers compiled by the North American Retail Hardware Association, whose annual Cost-of-Doing-Business survey provides average as well as high-profit industry averages for hardware stores, home centers and lumberyards. The data on the spreadsheet is for high-profit retailers. (NRHA data in the accompanying spreadsheet is for 2004 sales; data for publicly-owned chains is based on 2005 sales. Another difference in the data is that net profit and return-on-assets for the NRHA groups is before taxes. For the public companies, data is shown after taxes.)

While he was recently criticised for how poorly he handled the company’s recent annual meeting, CEO Bob Nardelli is racking up some very impressive numbers for Home Depot. Its net profit at 7.2% is the highest of any listed chain, as is return-on-assets at 13%. In fact, Depot’s earnings percentage is remarkably high for any retailer.

Its major home center competitor, Lowes, is today’s stock market darling, with a price-earnings ratio much higher than that of Depot, but it lags Depot’s performance by most yardsticks, though it is performing very well. Its net at 6.4% is considerably higher than that of any of the other public chains and its return-on-assets is an impressive 11%.

Depot and Lowes are generating high volume per retail outlet, both over $35 million average per store. Lowes does generate a somewhat higher average sale than Depot and enjoys a slightly higher average gross margin, but lags in sales per square foot and sales per employee, as well as GRMROI (gross margin return on inventory.) Depot’s stores now average about 105,000 sq ft in size, whereas Lowes are about 113,000 sq ft.

Both chains are consistently increasing gross margins, with Lowes now exceeding 34% and Depot approaching that number. When Depot began, its margins were much less.

It is interesting to see how different types of retailers mark up their products and manipulate other controllable factors. Wal*Mart, for example, as the world’s largest retailer, generates a most impressive $449 in sales per square foot and more than $50 million per retail unit, which includes the smaller international stores, smaller discount units and its Neighborhood Market food stores. Its supercenters alone would have a much higher sales-per-unit, probably near or above $100 million per unit.

Fulfilling its promise to offer “always low prices”, its gross margin is well below that of its biggest competitor, Target – 23.1% compared to 31.9%. Part of the difference is probably attributable to its greater presence in food. Target, in its current annual report, said it is adding more food to its regular discount stores “as a customer convenience” and also plans to open more Super Targets, which stock food and are comparable to Wal*Mart supercenters.

Dollar General is a smaller discounter catering more to low-income families. Its stores are much smaller – 8,000-10,000 sq ft – serving as a “convenience outlet”, often occupying second-use locations. Price-points are generally under $10. Average sales per store are just over $1million and sales-per-square foot are well below those of Wal*Mart and Target, as are sales-per-employee, but its return on assets is the highest. Its gross margin of 28.7% keeps prices low for its lower-income consumers.

America’s two drug chains were included because their stores are smaller (up to 15,000 sq ft) and because they have so many units today selling many of the same items as hardware stores. Overall, they operate with lower margins, but this is due to the percentage of prescription sales compared to front-end merchandise. However, with their concentration on high priced, high-turnover drugs, they lead in GMROI and perform well in ROA. Their so-called front-end merchandise includes limited assortments of hand tools, hardware, housewares, decorating products, electrical items and even some plumbing items. They also feature seasonal categories such as lawn care products, outdoor living and Christmas decorations. Those two chains, now with more than 10,000 units, become serious “convenience” challenges for local hardware stores.

GMROI is perhaps the most important and easy measurement of one’s retailing or wholesaling skills. To determine it, a retailer or wholesaler simply divides inventory into sales, then multiplies that ratio by one’s gross margin. A high GMROI can be achieved with high stockturns and low margins (like the drug chains or Wal*Mart) or by a low sales-to-inventory ratio but a higher gross margin, like the high profit home centers. The problem with independent hardware stores in the US, even the high-profit ones, is that they are simply not turning their inventories fast enough, even though they are enjoying a very substantial gross margin. Last year, hardware stores had a stockturn of only 1.9 times, whereas NRHA’s high-profit home centers averaged 3.8 times. It has always been so with US hardware stores, unfortunately. The low average sale for hardware stores indicates their role is that of a “convenience” outlet, not generally as a destination store for consumers. In contrast, the high average for lumberyards reflects their contractor/builder sales.

What can one learn from this spreadsheet? One should try to have the equivalent of US$200,000 in sales-per-employee; a GMROI of 175 or more, and ROA of 10% or more. Hardware store sales-per-sq ft should be $200; home centers, $300. And one should strive for as a high gross margin as competition will allow.

 

RETAILER SALES IN BILL. # STORES SALES/ST NET INC. MARGIN AV. SALE SALES/FT PER/EMP SALES/INV GMROI ROA
DEPOT $81.5 billion 2042 $39.9 million 7.20% 33.50% $57.98 $379 $26,232.00 7.15 239.5 13%
LOWES $43.2 billion 1234 $35 million 6.40% 34.23% $67.67 $308 $233,350.00 6.45 221 11%
WMT $312.4 billion 6141 $50.8 million 3.60% 23.10% NOT AVAIL $449 $173,333.00 9.70 224 8.10%
TARGET $52.62 billion 1387 $37.9 million 4.70% 31.90% NOT AVAIL $307 $175,333.00 8.78 280 6.90%
DOL GEN $8.58 billion 7929 $1.08 million 4.00% 28.70% NOT AVAIL $156 $133,054.00 5.82 168 11.70%
WALG $42.2 billion 4953 $8.5 million 3.70% 27.90% $95.91 $747 $236,000.00 13.25 370 10.70%
CVS $37 billion 5471 $6.7 million 3.30% 26.80% NOT AVAIL NOT AVAIL $250,000.00 15.40 413 8%
BED/BATH $5.8 billion 809 $7.1 million 9.80% 42.80% NOT AVAIL $227 $175,700.00 4.46 191 5.80%
BEST BUY $30.8 billion 924 $33.4 million 3.70% 25.00% NOT AVAIL $941 $280,000** 10.80 270 10.41
*HDWE Average $1.1 million 7.8% 46.30% $14 $160 $142,613.00 150 16.70%
*HOME Average $5 million 6.20% 30.90% $58 $359 $245,084.00 168 18.70%
*LBR YD Average $6.5 million 5.60% 24.40% $183 $671 $318,1684.00 195 18%
*YOURS __________ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____
*Net income and return-on-assets for retailers marked with * are pre-tax, while figures for other retailers are after-tax.
**Estimated sales/employee based on data found in annual report; might be understated.