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Planning is Key When Mitigating the Effects of Harsh Winter Weather

May 21, 2014, 07:00 AM

For those veterans of the retail industry, the use of the “W” word to explain bad business was taboo; however, the winter weather most of the country endured in 2014 may finally be the exception to the rule. The weather over the past 90 days (especially in the Midwest, Mid-Atlantic and Northeast) has delayed consumer demand for many categories of product including spring apparel and accessories. This in concert with a challenging fourth quarter has put a strain on sales, margins and liquidity.

From a lender’s perspective, what should be expected of retailers in this environment?

At a minimum, retailers should already be planning their business at a departmental level. They should have monthly plans for sales, inventory dollars, and open-to-buy that is reviewed weekly. If companies are not doing this already, they are behind the eight ball in a normal retail environment. Add to this the effects of extreme weather and they are even further behind. Given the current environment, there are a number of further planning levels that should be utilized to provide companies with the ability to monitor results at a more granular level.

Retailers should have tools in place that allow them to monitor classifications of product at the sales, inventory dollars and open-to-buy levels.  These plans should roll up to the departmental level plans, as well the company’s overall sales, inventory and liquidity plans. Drilling down to the classification level is vital when monitoring the trends of each business and identifying potential areas of concern before they balloon out of control.

As discussed earlier, tied into classification planning should be a classification open-to-buy. Once again, reviewing the open-to-buy at the departmental level is important.  However, to really understand the trends of the business, tactically reviewing the open-to-buy by classification is a window into a company’s opportunities and shortfalls. It allows the retailer to adjust, push, or cancel orders according to the trends of the business. This is especially important for seasonal goods and goods with short shelf lives.

The final segment of planning is establishing merchandise “ladder plans” for seasonal products. Clearly, weather is the unpredictable factor in this process. Lenders should not only be concerned with the overall quality of the inventory, but the status of truly seasonal inventory items (i.e., swimwear, coats, suntan products, pool supplies, etc.). Ladder plans should be focused and reviewed weekly for seasonal businesses. Their focus should be on dollar and unit sales, inventory, and receipts; average unit sales and inventory; and weekly markdowns and margins.

Using ladder plans allows the retailer to forecast, sell through, and determine if receipts should be accelerated, delayed or cancelled. This is a critical factor in managing liquidity. The retailer can also use these plans to determine the markdown cadence needed to maintain a rate of sale or accelerate those rates based on a slower than expected sell through.

Lenders should not be solely focused on the total inventory of a retailer. Their focus should be segmented with a keen eye on the status and potential upside and downside of the seasonal segment of the inventory and its potential impact on liquidity. The lender should understand the retailer’s planning process and the ability of the retailer to trend their business in the face of unpredictable factors such as weather.

Although weather may be a reason for bad business in 2014, retailers can mitigate the impact by good planning processes. Planning inventory at the class level provides a more detailed view of where issues are occurring before they become overblown. Classification level open-to-buy plans allow for adjusting purchases to address issues identified in the inventory plan. Ladder plans provide visibility into the other side of the inventory equation, sales, along with margin. Overall, this ability to plan and forecast the impact of current conditions and react to that forecast quickly and appropriately will separate the retail winners from the losers.

Paul Davies
Partner | Clear Thinking Group LLC
Paul Davies has been a consultant for the past five years, and has over 35 years of experience in both public and private consumer product and retail companies. His expertise includes operations, logistics, human resources, merchandising and profit structure of both national and regional organizations. Davies has also spent considerable time in the Asian markets and is well versed in the international sourcing process.

Prior to Clear Thinking Group he held the positions of EVP at Value City Department Stores, President and COO of a hardware consumer product line, President and CEO of Garden Ridge, President and CEO of Champs Sports, President and CEO of Woolworth’s, President and CEO of Waccamaw, SVP and General Merchandising Manager of Marshalls, Interim Chief Merchandising Officer of Kay-Bee Toy & Hobby, and SVP of Famous Barr Department Stores (a division of May Department Stores).
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