Using Inventory to Measure Future Success
Gail P. is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.
As an investor, one of the things I look at as an indicator of strength in a particular company is its inventory. That is particularly true in companies with retail stores. The quicker they convert products in their stores and warehouses into money in the cash register, the stronger they?ll be. Home Furnishing Stores fall nicely into this category and today I?ll take a look at several companies within that industry. I?ll look at the inventory numbers for each, and whether Inventory turnover relates to an increase in stock price.
It?s easiest for me to think in DAYS Inventory Outstanding. I know then that if the result is 15, that it takes the company 15 days to turn their inventory into Sales. While theoretically I ?get? that a Turnover ratio of 15 means that Inventory gets completely sold and restocked 15 times during a year, it is easier for me to think in terms of Days. I calculate Days Inventory Outstanding as follows:
365 ÷ (COGS ÷ (Average Inventory))
Bed Bath & Beyond
Days Inventory Outstanding for Bed Bath & Beyond has been trending up from 132 in FY2011 to 140 on 8/24/12 (the MRQ). The stock is currently trading around $58 and has declined 17% in the past six months.
Haverty Furniture
Pier 1 Imports
Williams-Sonoma (NYSE: WSM)
Conclusion:
With the exception of Haverty, it appears that companies in the Home Furnishings Industry are holding on to their inventory longer and longer. However, there doesn?t appear to be a direct correlation between Inventory Turnover and stock price ? obviously other factors are in play. I will continue to use this ratio as a measure of overall strength and efficiencies, but will look at other ratios to predict future growth as well.
Source: http://feeds.fool.com/~r/usmf/foolwatch/~3/jsTR-4fMYDY/story01.htm
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