The U.S. lawn and garden equipment industry is expected to grow modestly in 2013 to $8.0 billion in revenues, a positive sign for the industry, reflecting improving consumer credit conditions and an improving housing market.
To capitalize on this positive industry outlook, it’s important for equipment dealers to grow in smart and healthy ways by carefully tracking the most important drivers of their own business’s performance.
By combining a careful analysis of industry-level data with decades of experience in the inventory finance business, this article outlines some of the most important financial metrics dealers should be aware of, including volume, inventory aging and inventory turns. In addition, it’s important for all types of businesses to track revenue, gross margins and the cost of goods sold compared to industry performance.
While the ratios will be unique for each individual business, dealers can measure their performance against a broad cross-section of their peers and analyze the health of their own portfolios using the information below.
Dealers may choose to focus on the data that can provide the most actionable insights. For example, knowing how volume is trending and how many orders are being filled is important. Even better: Knowing how fast inventory is turning overall, and which specific products are selling well compared to which ones are aging.
Taken together, the data may enable dealers to connect the dots and look at their businesses in new ways. For example, a dealer can compare inventory turns to financing terms, and calculate whether products are selling before financing penalties come due. This gives the dealer a better way to measure cash flow and determine the underlying health of the business.
The right data at the right time
Dealers should decide which financial ratios and metrics are most relevant so they can track them over the long term. In general, there are three key figures that all types of dealers should calculate: Volume of goods sold, inventory aging and inventory turns.
Volume is the aggregate dollar amount of products sold — a figure that can vary enormously. It’s common to track volume on an annual basis.
Inventory aging is the total inventory dollars a dealer has over 12 months or 24 months. The goal for most dealerships is to move product as quickly as possible versus holding inventory on their books. This figure is typically best reviewed monthly.
Aged products over the last two years have increased approximately 6% year-over-year. The lawn and garden industry has experienced two light winter seasons and a historic summer drought. In general, lawn and garden dealerships should be concerned when products have been in inventory more than one to two years. (Download charts with GE Capital data here.)
Why is aging important? Limiting the number of older model year products sitting in inventory ensures that lawn and garden dealers have the capacity to take advantage of manufacturers’ new models and promotions. It’s important for dealers to have the optimum mix of products on hand for their customers, so some level of aging is expected. However, excessive aging will tend to increase the cost of carrying inventory which, in turn, may lead to lower profit margins.
Inventory turnover, commonly called turn, is a ratio showing how many times a company's inventory is sold and replaced over a period of time, typically annually. Inventory turns in the lawn and garden industry average 2.0 times per year. (See downloaded chart for data or download it here.)
There are two ways to calculate inventory turn. The first is looking at the current year's cost of goods sold (COGS) divided by average inventories. The second simpler method of calculating this metric is to divide annual volume by the total credit line. This particular calculation helps dealers understand whether their current credit lines allow for adequate sales growth. Maximizing product turn—in other words, increasing sales by selling through inventory—allows dealers to order new inventory and thereby respond quickly to ever-changing retail trends.
In addition to these three figures, there are three more important ratios for businesses of any size to pay attention to: Leverage, gross margin and earnings before interest, taxes, depreciation and amortization (EBITDA). Based on GE Capital’s experience in the lawn and garden industry, these indicators have remained somewhat stable over the last few years.
Leverage of approximately 4:1 has remained consistent over the last two years due to dealers’ decisions to reduce debt and increase their equity positions.
The median gross margin was 22% over the last six months compared to 21% year-over- year. This minimal increase may be due to product price point or incremental sales.
EBITDA performance declined by 0.4% year-over-year, from13.5% to 13.1%. This slight change could be attributed to increases in general operating expenses such as insurance or property taxes.
Other areas that can be important when looking to the future are business plans and succession plans. Finally, having a roadmap for retaining valuable employees is also important. These strategic plans complement the financial and performance-based considerations that go into building strong and lasting businesses.
It’s necessary to consider a number of factors when assessing the overall health of a business, but these data points can serve as guideposts for dealers who want to measure themselves against the lawn and garden industry as a whole. The ranges and percentages mentioned here are based on an average for dealers of all sizes, and dealers with different financial ratios aren’t inherently stronger or weaker than their peers. Ideally, dealers should use a combination of performance measures and analytics to guide the decision-making process. Identifying the most important metrics and effectively monitoring them with reliable tools will allow dealers to spend more time focusing on the customer experience and implementing sales strategies to foster growth.
Mike Horak is the president of the Outdoor Products Group within GE Capital’s Commercial Distribution Finance business. It’s important to note that this article is based on GE Capital’s experience in the lawn and garden industry and is for informational purposes only; it does not constitute legal, tax, financial or business advice.