First example: the inventory turnover ratio, a crucial performance metric. Calcbench tracks that!

The inventory turnover ratio measures how many times a company “turns over” (that is, sells and replenishes) its inventory in a given period. You calculate it by dividing the cost of goods sold into the average inventory for a given period. A higher number is considered good, since it typically means you’re selling goods at a brisk pace. (Although it can mean you’re not stockpiling enough inventory, too.) 

But why bother with all that math yourself? Calcbench tracks inventory turnover from its Bulk Data Query page. Simply build the peer group of companies you want to research, select the periods you want to study, and then scroll down to the performance ratios listed at the bottom of the page. Inventory turnover is listed under the liquidity ratios group.

For example, we selected 15 notable retailers, including Abercrombie & Fitch ($ANF), Costco ($COST), Ross Stores ($ROST), Target ($TGT), and Walmart ($WMT). Then we tracked the average inventory turnover for the whole group for the last 10 quarters. See Figure 1, below.

Notice that inventory turnover was sky high in early 2021, when everyone was flush with pandemic stimulus payments and we had nothing to do except spend it. Then came inflationary pressures in 2022-23, and inventory turnover fell; then inflation receded, and the turnover ratio has been clawing its way back up.

Bullwhip Effect

Another favorite metric of ours is something known as the “bullwhip effect.” This is defined as a rising ratio of inventory to sales, which theoretically is a harbinger of prices about to go downward; the retailer has too much stuff on hand, so it needs to slash prices to get them sold. The result is a sudden plunge in prices, like the crack of a whip.

We first wrote about the bullwhip effect in May 2022, when the rate of inflation was near its peak. Inflation then did start to decelerate and drift downward, but not to any great extent. We revisited the bullwhip effect in November 2022, and found that the inventory-to-sale ratio was still rising.

Now let’s take one more look. See Figure 2, below, which shows inventory-to-sales ratio for the same 15 major retailers we mentioned above.

OK, interesting. Now watch what happens when we add quarterly U.S. inflation rates (as reported by the website Trading Economics.)

Hmmm. Now we see that the rising inventory-to-sales ratio in the first half of 2022 did presage a decline in inflation, which arrived in latter 2022 and early 2023. What’s especially interesting is that the ratio rose again in the first half of 2024. 

Does that mean more price declines by early 2025? And if so, would those declines be driven by recession and falling consumer demand? 

We don’t know yet. Stay tuned for that Q3 earnings data.