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Using Inventory to Measure Future Success

Gail is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As an investor, one of the things I look at as an indicator of strength in a particular company is its inventory.  That is particularly true in companies with retail stores.  The quicker they convert products in their stores and warehouses into money in the cash register, the stronger they’ll be.  Home Furnishing Stores fall nicely into this category and today I’ll take a look at several companies within that industry.  I’ll look at the inventory numbers for each, and whether Inventory turnover relates to an increase in stock price.

It’s easiest for me to think in DAYS Inventory Outstanding.  I know then that if the result is 15, that it takes the company 15 days to turn their inventory into Sales.  While theoretically I “get” that a Turnover ratio of 15 means that Inventory gets completely sold and restocked 15 times during a year, it is easier for me to think in terms of Days.  I calculate Days Inventory Outstanding as follows:

365 ÷ (COGS ÷ (Average Inventory))

Bed Bath & Beyond (NASDAQ: BBBY) is clearly the largest in this group with a Market Cap of $13 billion.  My first surprise when looking at this stock is that its headquarters is in Union, NJ.  That means that the store where I purchased items for my first household was probably its original store!  I remember when Bed Bath & Beyond opened their first store in Boulder after I moved to Colorado.  I was pretty excited – kind of how I’m feeling now that Trader Joe’s is planning on opening its first store in Colorado.  Now, however, Bed Bath & Beyond has well over 1000 stores nationwide.   

Days Inventory Outstanding for Bed Bath & Beyond has been trending up from 132 in FY2011 to 140 on 8/24/12 (the MRQ).  The stock is currently trading around $58 and has declined 17% in the past six months.

Haverty Furniture (NYSE: HVT) was founded in 1885 in Atlanta and sells furniture and bedding products.   It has a healthy market cap of $373 million and is currently trading around $17.  Its Days Inventory Outstanding has declined by eight days since FY2010 to 104 days on 9/29/12.  Of the four companies reviewed here, Haverty is the only firm which seems to be managing its inventory efficiently.  Haverty is trading around $17, up 63% in the past six months.

BBBY data by YCharts

Pier 1 Imports (NYSE: PIR) has been in operation since 1970 and has a market cap of $2.1 billion.  Days Inventory Outstanding for Pier 1 is also trending upwards, which is the wrong direction!  This ratio has increased by 15 days from 135 Days on YE 2/25/11 to 150 Days on 8/24/12.  Pier 1 is set to release its quarterly earnings report on Thursday, December 13.  The average estimate from 12 analysts is earnings of $0.24 per share from revenue of $416 million for the quarter.  Pier 1 is currently trading around $19.50 per share, up 26% in the past six months.

Williams-Sonoma (NYSE: WSM) has been one of my favorite stores since I discovered it when a near-by mall was renovated in the 1990’s.  Williams-Sonoma was one of the new tenants.  It’s definitely one of the big boys in this industry with a market cap of $4.3 billion.  Days Inventory Outstanding for Williams-Sonoma has also been trending up from 84 days in FY2011 to 92 Days for the MRQ.  Trading around $44, Williams-Sonoma is up 28% for the past six months.

 

Days Inventory Outstanding – two Fiscal years ago

Days Inventory Outstanding – Last Fiscal Year

Days Inventory Outstanding – most recent quarter

Change in Days

Bed Bath & Beyond

132 Days
(YE 2/26/11)

132 Days
(YE 2/25/12)

140 Days
(8/24/12)

+ 8 Days

Haverty Furniture

112 Days
(YE 12/30/10)

113 Days
(YE 12/31/11)

104 Days
(9/29/12)

- 8 Days

Pier 1 Imports

135 Days
(YE 2/25/11)

131 Days
(YE 2/24/12)

150 Days
(8/24/12)

+ 15 Days

Williams - Sonoma

84 Days
(YE 1/29/11)

86 Days
(YE 1/28/12)

92 Days
(7/28/12)

+ 8 Days

Conclusion:

With the exception of Haverty, it appears that companies in the Home Furnishings Industry are holding on to their inventory longer and longer.  However, there doesn’t appear to be a direct correlation between Inventory Turnover and stock price – obviously other factors are in play.  I will continue to use this ratio as a measure of overall strength and efficiencies, but will look at other ratios to predict future growth as well.   


GailPEddy has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Bed Bath & Beyond and Williams-Sonoma. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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