Department stores like Macy’s (M) are focusing on improving their inventory management so as to maintain the optimal level of inventory, bring down costs, and avoid stock-outs. Macy’s is a component of the SPDR S&P Retail ETF (XRT) and the First Trust Consumer Discretionary AlphaDEX Fund (FXD). The XRT and FXD ETFs have 0.95% and 0.72% of their portfolio holdings in Macy’s, respectively.
Scope for improvement
Macy’s inventory turnover ratio for 4Q14 was 3.05 compared to 3.08 in the corresponding quarter of last year. The inventory turnover ratio reflects how efficiently a company is moving its inventory. Another key metric in the industry is days inventory outstanding, which indicates the average days a company takes to convert inventory into sales. This metric for Macy’s also deteriorated to 119.5 in 4Q14 compared to 118.2 in 4Q13.
Do peers manage inventory better?
Leading off-price retailer TJX Companies (TJX) and high-end department store Nordstrom (JWN) turn their inventories at impressive rates. The inventory turnover ratio for TJX and JWN was 6.72 and 5.15, respectively, in the fourth quarter of the most recent fiscal year. Both Dillard’s (DDS) and Kohl’s (KSS) had an inventory ratio of 3.14 in 4Q14.
Macy’s inventory management strategies
Macy’s has been taking many initiatives to improve its inventory turnover. The company’s My Macy’s localization strategy ensures that the merchandise in the Macy’s stores is customized to the local preferences in terms of aspects like size and color. This helps in faster movement of inventory.
Also, through its fulfillment centers, the company can ship products that are ordered online or through other stores directly to its customers. This helps in generating more sales, as the company can fulfill product orders that aren’t available at a particular store or online, but can be shipped directly from another location. The company plans to have direct-to-consumer fulfillment capacity in each of the Macy’s and Bloomingdale’s stores and at the five existing dedicated fulfillment centers in Arizona, California, Connecticut, Tennessee, and West Virginia.