PERSPECTIVES

From The Co-Founders

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Tips, Tactics & Strategic Insights and Commentary
from The ROI Co-Founders, Pat Johnson and Dick Outcalt
Outcalt & Johnson: Retail Strategists LLC; Retail Turnaround Experts

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The Clock Is Ticking. Watch Out!

One of the real killers of a retail business can be debt. But, how much is too much?

Debt can be quite stealthy as it grows. 

  • Seemingly small expense increases add up in the aggregate – maintenance costs, security, advertising, utilities, payroll, e-commerce charges, etc. 
  • Vendors may be eager to offer terms, but that too is more debt. Whether or not you pay interest on it, you still are obligated to pay. And vendors would rather have an accounts receivable from you – it's an asset for them – and a debt for you.

Especially in these times of increasing interest rates, creeping expansion of debt can quickly snowball into a much larger problem.

From the Benchmark pages on The ROI site, we have selected four retail verticals whose Debt-to-Worth ratio shows a frightening situation. The technical term we would use is "spooky, real spooky."

(click on each chart to see all key ratios for that vertical)

Pharmacies & Drug StoresFlorists

Office Supplies & Statiionery StoresPet & Pet Supplies Stores

Let's keep it simple: the rule of thumb is that a Debt-to-Worth ratio of 2 to 1 (or 2.0) is generally "bankable." That is, lower than 2.0 is considered financially strong. Above 2.0 is considered financially weaker, especially when the trend of the Debt-to-Worth ratio is going up, like in the 4 retail segments shown above. 

Remember, on your Balance Sheet, "debt" is OPM - other people's money. And "worth" is Owner's money. It works just like the mortgage and equity on your home. 

Now is the time - mid-2022 - to be monitoring your Debt-to-Worth ratio every single month. It only takes 12 seconds – or less! Don't let it become "spooky."

Here's the formula: 

  • On your Balance Sheet, first add up all of your liabilities, all of the current liabilities and all of the long-term liabilities.
  • Divide that Total Liabilities number by the dollar amount of the Net Worth or Equity in the business. 

That resulting number is your Debt-to-Worth ratio. 

Now, look below at another 4 retail segments. They have quite a different story to tell.

Each of these verticals, given the downward trend of their Debt-to-Worth ratios, appear to begetting financially stronger. 

Womens Apparel StoresTire Dealers

Furniture StoresHardware Stores

For all the 54 retail segments tracked on The ROI site, the average for 2021 was 2.1; the median (half above, half below) was 1.9. 

That's interesting, but not really significant.

What does matter? Your Debt-to-Worth ratio, and the trend of it. Are you getting financially stronger, or weaker?

All it takes is 12 seconds, once a month. 

Related Articles

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    The Digital Clock Is Ticking. Time to Catch Up!

    For retailers, the uncertainties caused by the impacts of the Covid-19 pandemic are unrelenting. 

    • "'It seems that social distancing mandates won’t be the only thing keeping crowds down at businesses moving forward,' said Ted Rossman, industry analyst at CreditCards.com. 'A significant number of Americans plan to stay away on their own accord.'” 1

    So, what should we do with this additional "found time," waiting for the customers? That's a question we CAN answer!

    As you are sorting out how best to reopen, we encourage you to be bold about embracing technology. Not just a POS system upgrade with better e-commerce capability. There's much more that warrants your attention. 

    There's a whole alphabet of resources out there, already being embraced by many: ML (machine learning); AI (artificial intelligence); AR (augmented reality), QR (Quick Response matrix barcodes). All enabling chatbots, robots, digital displays and much else to become "smarter" and more applicable. 

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    Ready or Not, New Retail Clock Is Here

    As the global efforts to "flatten the curve" of the coronavirus pandemic continue, there is another curve that is being flattened. That would be the seasonality of retail sales. 

    And this may prove to be what really defines the New Normal for retailers. 

    The customary peaks of retail spending have been flattened.

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    Retailers are in the driver's seat. Don't squander your clout!

    Yes, we know. Owning a retail business these days is one flexibility test after another. And there are no one-size-fits-all solutions. 

    In the United States, one of the most widespread impacts of the virus is uncertainty. With no end in sight. It is the virus that is in charge. As the president of Alaska Airlines noted, "We don't know what the future looks like."*

    But the fact remains, whomever is selling to the ultimate consumer has leverage. Might that be you?

  • COVID-19 thumbs/NewsHeadlines.png

    It's not just the clocks that changed

    "Retail is a mirror of society."

    Yes, Daylight Savings began a couple weeks ago. But it's not just the time on the clocks that changed; the times themselves have substantially changed. 

    Followers of The ROI has heard us assert many times that "Retail is a mirror of society." As we reflect on the first quarter of 2022, we are struck by how much has changed in just those three months. And retailers must adapt – yes, again! – to this rapidly changing environment.

    Think about it. Consider the assumptions you made just a few months ago, in late December and early January about 2022. 

  • Time For The Enforcer

    The Clock Is Ticking…

    Christmas is two weeks away.

    Time to focus on the “science” part, the numbers part, of “the art and science of inventory management.” The march has begun toward a vital, critical touchstone – your 12/31 targeted ending inventory level.

    On that date, you must have appropriate inventory levels and mix for the months ahead – plus the cash to pay for it!

    This is the moment an “ending inventory enforcer” must step up. 

  • COVID-19 thumbs/foggy.jpeg

    The Lingering Days of Summer

    Since Labor Day in the US is the first Monday in September, this year it happens as late as possible. Labor Day will not be celebrated until next Monday, September 7. 

    Most years, most folks would be perfectly happy to have August stretched out even longer. Ahh, those lazy, hazy, crazy days of summer, right?

    • Well, we DO have the "crazy" part down pretty well. And "hazy" rings true too, as the fog of uncertainty persists.
    • And now, imagine it: a Zoom Thanksgiving... OMG!

    And so, meanwhile, we regard Consumer Confidence as THE key indicator of consumer spending. Just last week, the Conference Board reported that Consumer confidence is at a six year low*. Ouch!

    But, was that a surprise to retailers? Not really. Most retailers are well along in coping with these challenges. 



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