Growing Problems: The 2007 Working Capital Survey

Focused on growth and more reliant on overseas suppliers, companies have let inventories swell.

As it happens, few industries have been affected by global sourcing more than the retail industry; just think about how long it’s been since you picked up a piece of clothing with “Made in the USA” on the label or bought an electronic device that didn’t come from Asia. That this is not a new development in the retail sector may help to explain why the multiline retail industry was among the 13 industry groups, out of 56 total, that managed to improve DIO last year, with a median reduction of 7 percent. Among the top performers, Federated reduced its DIO by 18 percent, $6.4 billion Family Dollar Stores reduced its DIO by 13 percent, and $4 billion Dollar Tree Stores reduced its DIO by 10 percent.

Specialty retailers weren’t as successful on the inventory front; the median DIO in that group rose 3 percent last year. However, with a median DIO of 57 days, they are working from a lower base than their multiline counterparts, where the median was 63 days. And the specialty retailers aren’t content with their inventory performance either. Clothier Abercrombie & Fitch is spending money on information-technology systems intended, it says, to help it become more scalable, efficient, and accurate in the production and delivery of product to its stores. Last year, the $3.3 billion company’s DIO declined a modest 1 percent, to 47 days, but that was after ballooning to 48 days in 2005 from 38 in 2004. Similarly, $2.8 billion clothier American Eagle Outfitters has invested in systems designed to help it mark down prices on aging inventory more strategically, and thereby better manage inventory levels. With days inventory outstanding of 34, it’s already among the best in its industry group on that score. And $5.3 billion video-game retailer GameStop Corp. has developed a proprietary inventory-management system that it pairs with point-of-sale technology to allow it to see its daily sales and in-store stock by title, by store. That lets each GameStop location carry merchandise tailored to its own sales mix and rate of sales. Last year, the company shaved its DIO figure to 46 from 71 en route to posting the best DWC figure in its industry group, –2 days.

While performances like that are encouraging, Payne expresses surprise that more companies haven’t been aggressive in searching out ways to liberate some of the cash they have tied up in working capital. “Running a successful business is all about cash flow,” concurs REL’s Bustos. “You can do well on the top line and well on the bottom line, but if you’re not generating true cash, you’re not running the business to its full potential.”

In an age when private-equity investors are all too eager to help underachievers extract cash from their businesses, that’s a mistake few firms will want to make.

Randy Myers is a contributing editor of CFO.

United States vs. Europe

Despite making no headway in improving their working-capital performance as a group last year, big U.S. companies remain ahead of their European counterparts in doing more with less — though the gap is narrowing. Excluding automakers, the biggest companies in Europe had 45.2 days of working capital on their books at year-end 2006, versus just 38.8 for the biggest companies in the United States. However, the average European company reduced its days working capital by 6.6 percent last year, while the average U.S. company saw its DWC increase 0.1 percent.


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