RETAIL MATH

There are two main ways retailers calculate and rate results in retail accounting, the cost method
and the retail method. The retail method is the most widely used by most retailers. Both the retail
price and the cost price are recorded for accounting purposes. The merchandise received is
valued at the planned retail price for a retail inventory. When a physical inventory is taken, it is
also valued at retail. This forces the merchant/buyer to look at the inventory for what sales
revenue it can generate, not the cost. The cost of the merchandise is what they paid to the vendor.
The cost inventory or the cost of goods is what they track to calculate the profit/return from and
for tax purposes. The terms used for the cost or retail methods are pretty much universal.

Definitions

Markup $’s - The difference between the retail price and the cost...

Markup % - The difference between the retail price and the cost; divided by the retail.

Initial Markup - A function of the Retail price, it is the difference between the delivered cost of
an item and its planned retail price. It can be stated as a percent or in dollars. The most common
is by percent. It is commonly used for financial planning and budgeting.

Maintained Markup - Maintained markup is the actual sales dollars minus the cost dollars
divided by the actual sales dollars. This is also referred to as Sustained markup.

Margin - A retail term relating to the profitability generated by selling a particular item / line of
merchandise. It is calculated taking sales minus the cost.

Markdown - This is a reduction of the original retail price or any subsequent price. It decreases
retail stock and on an income statement works like an "expense" to gross margin. In stores with
a sophisticated cash register, markdowns are sometimes taken at "point of sale". The product
price will reflect a markdown or a "new price" entered in to their inventory control system when
the sale is rung up.

Temporary Markdown - Continuing goods that are being promoted (discounted) for a short
period of time to generate traffic or cash flow in the store/dept and will be taken back to regular
price and filled back in.

Permanent Markdowns - Retail price reductions on goods that are being discontinued and need
to be cleared from stock. These goods will not be reordered. (Unless it’s at a close-out price.)

Why are Markdowns taken?

M To stimulate slow selling items.
M To eliminate seasonal merchandise from stock.
M To bring customers in and generate cash flow.
M To meet a competitors price.
M To attract business via promotion, possibly coupled with advertising.
Average Stock - Stock levels will typically vary considerably during a season, so an average
stock figure is developed in order to determine turnover.

Turnover - This is a measure of balance between sales and stock (inventory). It is an index of
the rapidity with which stock moves in and out of a store or department. A pure definition would
be the number of times in a given period that the average inventory has been sold or replaced.

Sell Through % - This is a measure of a products performance figured using pairs. On regular
product a 3% to 5% weekly sell through is well thought of. It is calculated by taking sales by the
beginning inventory of the period you wish to review.

Stock to Sales Ratio - This is the relationship of stock on hand at the beginning of the month to
the planned sales for that month. Similarly, we have Weeks of Supply, which refers to the
number of weeks that would be required to sell through a given inventory. Either ratio typically
varies greatly from one period to the next for seasonal or promotional reasons.

Gross Margin - This number determines the profitability of the store and/or the effectiveness of
a buyer. Some retailers work in dollars and some work in percentages. Gross Margin is
essentially the financial results of the business prior to most expenses.

Sales per Square Foot - A tool used to state the sales generated in a specific amount of retail
space. Generally this is expressed in annual terms.

Book Inventory - The current inventory valued at the retail price.

Physical Inventory - Accurately counting the stock on hand by pair at the retail price.

Shortage / Overage - The difference between the book inventory and the physical inventory.
(Usually a shortage.) The dollar difference is then divided by the retail sales to figure the
shortage percent.

ACRONYMS AND THEIR DEFINITIONS

BOS = Beginning of Season - Inventory / Stock that is on hand the first day of the new
season. This is an important number needed to calculate the season turn rate.

EOS = End of Season - Inventory / Stock that is on hand the last day of the new season.
This is an important number needed to calculate the season turn rate and budget
control.

EOM= End of Month - Stock that is left on hand at the end of the selling month.

BOM = Beginning of Month - Stock that begins the next selling month. Same
number as previous months EOM.

WTD = Week to Date (Sales) - Cumulative sales totals for the current week.
 MTD = Month to Date (Sales) - Cumulative sales totals for the current month.

STD = Season to Date (Sales) - Cumulative sales totals for the current season.

YTD = Year to Date (Sales) - Cumulative sales totals for the current year.

OTB = Open to Buy - The dollars the buyer has to spend based on the sales, turn rate,
and inventory plan. Sometimes referred to as OTR = Open to receive.

MU$ = Mark up dollars - This is retail minus the cost.

MU% = Mark up percent - This is retail minus the cost divided by the retail.

GM$ = Gross margin dollars - This is usually mark up dollars minus markdowns dollars
Some retailers take mark up dollars minus markdowns dollars, minus shortage
dollars.

GM% = Gross margin percent - This is usually mark up dollars minus markdowns
dollars divided by sales. Some retailers take mark up dollars minus markdowns dollars,
minus shortage dollars divided by sales.

MDS = markdowns - The dollar difference between regular price and promotional off
price.

MD% = Markdown percent - The dollar difference between regular price and
promotional price divided by the regular price to get a percentage.

POS = Point of Sale - At the cash register.

EDI = Electronic Data Interchange - Bar code technology that creates the capability of
capturing selling information on style, size, color, and location of product as well
as transmitting orders electronically.

ROI = Return on Investment - The yield or profit realized from the investment.
Sometimes referred to as RIOC = Return on invested capital.

WOS = Weeks of supply - Calculated by taking the average sales divided by the
inventory.

T/O = Turn over / turn rate - The true calculation is: Sales for the season divided by
average stock for the season gives you the seasonal turn. This is usually
annualized by taking that percent times 2. To calculate average stock, you take the BOS
plus each months EOM and divided by 7 to get the average stock for the season.
 FORMULAS
(At a Glance)

Retail = Cost + Markup $’s

Retail = Cost / (100% - Markup %)
Retail = Markup $’s / Markup %
Cost = Retail - markup $’s
Cost = Retail x (100% - Markup %)
Markup $’s = Retail - Cost
Markup $’s = Retail x Markup %
Markup % = Retail - Cost / Retail
Markup % = Markup $’s / Retail
Stock to Sales Ratio = BOM Inventory / Net Month Sales
Turn Rate = Sales / Average Inventory
Sell Through % = Sales / (Sales + On Hand)
Average Stock for Season = (Bos + 6 months EOM’s) / 7