Retailers’ Financial Cycle Times: The Hare Beats the Tortoise

A new ranking of corporate speed and agility shows why some brick-and-mortar retailers, especially Macy's, are ailing.
Joe PerfettiJanuary 10, 2019
Retailers’ Financial Cycle Times: The Hare Beats the Tortoise

In today’s connected world, where every company has access to similar information and resources, agility becomes a key source of competitive advantage. Acting faster and working smarter have replaced, at least in part, unique products and services, particularly in retail.

My colleagues and I have produced a metric ranking of corporate speed and agility. Called financial cycle time (FCT), it measures how long, on average, it takes a company to turn investment into sales.

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To measure a company’s cycle time, take total invested capital and divide it by annual revenue. That shows the percentage of the year that the company is tying up capital. Then multiply by 365 to translate the metric into days. The result represents how often, on average, it takes a company to turn invested capital into revenue.

(For purposes of the calculation, invested capital is defined as operating working capital [adjusted for non operating items and excess cash] + net property, plant and equipment + capitalized leases.)

A shorter financial cycle time is a decided competitive advantage. Imagine that two companies in the same industry with very similar market focuses and financials generate a profit margin of 8%. But the first company makes that margin every 365 days, the second company makes that every 183 days. Annually, that translates to 16 cents of cash for investors in the faster company compared with eight cents of cash for investors in the slower company. The more productive and efficient company wins financially.

To show how FCT works, we measured the FCT of key retailers based on full-year 2017 data. Firms with the shortest FCT, such as Amazon (32 days) and Michaels (51 days), generally hold less inventory and have better utilization of assets.

Based on the data, Macy’s FCT (108) is longer than almost every other retailer. (Except for troubled JC Penney [152 days], which this week announced a 3.5% decline in same-store sales for the nine-week holiday shopping season that ended Jan. 5.)

It took Macy’s 108 days to turn an investment into a sale — more than 3 times longer than Amazon. If Macy’s doesn’t speed up this time, it won’t be able to attract the attention of shoppers or investors.

Financial Impact

So, what does it mean if you are the slowest runner in this race? How large is your competitive disadvantage? According to FCT, Macy’s is a tortoise in a race full of hares.

Macy’s average investment capital tied up per day is $70 million. If its FCT were 32 days (like Amazon’s) instead of 108 days, it would have another $5.3 billion of cash on hand (108 – 32 days X $70 million).

Imagine all the ways Macy’s could improve the the customer experience if it had Amazon’s FCT. An additional $5.3 billion would support some remarkable state-of-the art renovations.

In fact, Macy’s is already working to attack some of these problems. A November 2018 article in the Wall Street Journal highlighted Macy’s plans to shrink the size of some slower-performing stores to reduce staffing costs and inventory.

Whom to Emulate

Our findings show that this lesson is not limited to Macy’s. Nor does it apply only to U.S. firms.

For instance, British department store Marks & Spencer is in an even more troubling situation with an FCT of 142 days and Takashimaya in Japan has the highest FCT (269 days) of any multiline retailer in our study. Hennes & Mauritz, a popular specialty retailer known as H&M, has an FCT of 112 days.

Any of these companies would be smart to look at the retailers who are “doing it right” such as Dollar General, which has the best FCT of any multiline retailer at 67 days. Big Lots is also impressive at 69 days and specialty retailer TJX (Marshalls) is even better – just 52 days.

Here’s the bottom line. The 21st century is all about speed and the fastest companies will win.

As the employer of a well-known clothing designer said at a recent conference I attended, “It is not a question [of whether] we will still be wearing clothing in 20 years, but who we will buy them from and how we will purchase them.”

In other words, demand is not disappearing. However, traditional business models are. Established retailers like Macy’s don’t have to disappear either. They just need to speed up their FCT. It’s a gift that keeps on giving throughout the year.

Joe Perfetti teaches equity analysis at the University of Maryland and is an innovation fellow with Duke Corporate Education.

Photo: Getty Images