What is the right level of working capital for a retailer to maintain? We’ve already discussed (refer to Blog -> 8 ideas to help retailers manage inventory range and categories) that retailers need to tread a fine line between keeping too much or too little inventory. The amount of inventory held by a retailer plays a significant factor in the overall levels of working capital. A healthy level of working capital provides the retailer with increased flexibility: flexibility to pursue new product lines; flexibility to invest; flexibility to react to market or consumer demands.
In the financial world, there are two measures that are used to gauge the short-term debt paying ability of a company, in other words the level of cash liquidity. These measures are the “Current Ratio”, calculated as Current Assets/Current Liabilities and “Quick Ratio” which is (Current Assets – Inventory) / Current Liabilities. The higher the ratios the more liquid the company.
Reviewing Australian retailers publically listed on the ASX currently (Jan 2012) shows the Retail Sector has a Current Ratio of 1.57 and a Quick Ratio of 0.51. Compared with the whole of the ASX market of 1.81 and 1.19 respectively we see that retailers generally have less liquidity that other publically listed companies.
The table below ranks 20 top retailers according to the level of working capital relative to their value of inventory. The lower the Current/Quick ratio to more working capital they have relative to the value of inventory.
|Name||Current Ratio||Quick Ratio||Current/Quick Ratio|
|Premier Investments Ltd||1.74||1.38||1.3|
|Harvey Norman Holdings Ltd||1.64||1.24||1.3|
|Breville Group Ltd||2.08||1.27||1.6|
|ARB Corporation ltd||3.01||1.79||1.7|
|Nick Scali Ltd||1.63||0.96||1.7|
|Pacific Brands Ltd||2.64||1.45||1.8|
|Automotive Holdings Grp Ltd||1.34||0.5||2.7|
|Country Road Ltd||1.44||0.44||3.3|
|AP Eagers Ltd||1.26||0.27||4.7|
|Fantastic Holdings Ltd||1.96||0.37||5.3|
|JB HI-FI Ltd||1.45||0.25||5.8|
|Speciality Fashion Group Ltd||0.76||0.13||5.8|
|Warehouse Group Ltd (The)||1.57||0.24||6.5|
|Myer Holdings Ltd||0.81||0.11||7.4|
|The Reject Shop Ltd||0.89||0.12||7.4|
|Super Retail Group Ltd||2.34||0.3||7.8|
|David Jones Ltd||1.23||0.12||10.3|
|Kathmandu Holdings Ltd||1.57||0.15||10.5|
It is interesting to compare say Harvey Norman with David Jones, two giants in the retail space. Harvey Norman has much greater access to working capital and hence greater flexibility and nimbleness than David Jones. It would suggest that Harvey Norman’s inventory management practices, requirements or challenges are better managed than those of David Jones.
Note: Source data taken from Morningstar Inc via Westpac Securities Limited