In some cases, dramatic changes in the way a few key players were managing their balance sheets helped entire sectors to look good. Multiline retailers were a top-performing industry group, for example, in part because some big companies in that group decided to sell their credit-card operations and the receivables associated with them, dramatically paring their days sales outstanding. When $27 billion Federated Department Stores sold its credit-card accounts and related receivables to Citibank between October 2005 and July 2006, for example, it drove its DSO figure to 0 from 33. Similarly, $15.5 billion Kohl's Corp.'s sale of its private-label credit-card accounts and outstanding receivables to JPMorgan Chase in April 2006 helped the retailer pare its DSO figure to 0 from 45.

Going forward, opportunities for such dramatic gains in that industry group will diminish. Already, of the 16 companies in the group, only 7 show a DSO figure above 0, led by $59.5 billion Target Corp., which has a DSO of 38, and $8.6 billion Nordstrom Inc., with a DSO of 26; both still operate their own credit-card programs. While they do sell their associated receivables through a securitization program, REL's methodology factors securitized receivables into the DSO calculation.

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.

REL analysts attribute Europe's better performance last year in part to currency and outsourcing trends. Many European firms have been quicker than their U.S. counterparts to source low-cost goods from Eastern Europe and Asia, says REL analyst Karlo Bustos. That has driven down the value of inventories on their books (thanks in part to faster transit times than U.S. firms experience). So has the strength of the euro against the U.S. dollar, since goods sourced in Asia are typically priced and sold in dollars. All that helps to explain why last year, the largest 1,000 companies in Europe, excluding automakers, reduced their days inventory outstanding by 4.6 percent, versus a 2.1 percent increase for their U.S. counterparts. — R.M.

• « previous
• 1
• 2
• 3
• next »