An Econometric Analysis of Inventory Turnover Performance in Retail Services

Inventory turnover varies widely across retailers and over time. This variation undermines the usefulness of inventory turnover in performance analysis, benchmarking and working capital management. We develop an empirical model using financial data for 311 public-listed retail firms for the years 1987-2000 to investigate the correlation of inventory turnover with gross margin, capital intensity and sales surprise (the ratio of actual sales to expected sales for the year). The model explains 66.7% of the within-firm variation and 97.2% of the total variation (across and within firms) in inventory turnover. It yields an alternative metric of inventory productivity, Adjusted Inventory Turnover, which empirically adjusts inventory turnover for changes in gross margin, capital intensity and sales surprise, and can be applied in performance analysis and managerial decision-making. We also compute time-trends in inventory turnover and Adjusted Inventory Turnover, and find that both have declined in retailing during 19872000. * Leonard N. Stern School of Business, New York University, 8-72, 44 West 4th St., New York, NY 10012, Ph: 212 998-0297, Fax: 212 995-4227, E-mail: [email protected]. † The Wharton School, University of Pennsylvania, Jon M. Huntsman Hall, 3730 Walnut St., Philadelphia, PA 19104-6366, Ph: 215 898-7721, Fax: 215 898-3664, E-mail: [email protected]. ‡ Harvard Business School, T-11, Morgan Hall, Soldiers Field, Boston, MA 02163, Ph: 617 495-6937, Fax: 617 496-4059, E-mail: [email protected]. 1