Retail Math

Mathematics is not about numbers, equations, computations or algorithms: it is about

understanding
- William Paul Thurston (American Mathematician)

Retail Math is fundamental to understanding your

business. This course will teach you the terminology and
calculations used by many retailers, but even more
important is that you understand:
• Why you are calculating these things
• What insights they give you
• What further analysis they suggest
• What decisions and actions you will take as a result

Having these insights is the true power and objective of mastering Retail Math.

In addition to some of the examples and explanations you will find in this course, you can
deepen your understanding of how to use these measures by taking Merchant Academy courses
RPT 02 Sales KPIs, RPT 03 Margin KPIs, RPT 04 Inventory KPIs and RPT 05 What Margin
Are You Responsible For?

Throughout your career, you will most frequently be using tools and spreadsheets
that handle many of these calculations for you.
However, it is essential that you understand the logic and purpose of each
calculation so that you can glean the full insight of the numbers – as well as
immediately spot any potential errors before they create major problems down the
line.
Retail Math Terms and Calculations
Keep in mind that the acronyms, terms and calculations we will use throughout this course may
not match exactly the terms and calculations used by every retailer you work with.
As we discuss in Merchant Academy course RPT 01 KPI and Reporting Rules of Thumb, you
will need to know the exact calculation used for each measurement you see on a report as these
can vary from retailer to retailer.
This is particularly true of sell-thru
calculations, where the “inventory
available to sell” in the denominator can
by defined in different ways, and for gross
margin calculations.

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These calculation differences will have an impact on how you interpret and use these measures,
so don’t assume – always confirm – exactly how your company defines each calculation.
In this course we’ll provide a common definition, show examples and provide tips and guidelines
on how to use:
• Variance
• % Contribution or % Mix
• Sell-Thru
• Average Selling Price
• Initial Mark-up/Mark-up
• Gross Margin
• Average Inventory
• Inventory Turn
• Weeks of Supply
• POS Markdowns
• PERM Markdowns

Variance / % Variance ($Var / %Var)

Variance shows you the changes in any number of measures (for

example – sales or inventory ownership) either over time (this year
vs. last year) or between two different versions (Plan vs. Last Year
or Actual vs. Plan).

When doing the calculation, you subtract the previous or earlier

version (e.g., Last Year or LY) from the current (This Year or TY) and then divide that number
by the previous version.

Example 1:

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These results tell you that while you exceeded sales by nearly 4% over the same period last year,
you did not achieve the even more aggressive sales Plan of 5.9% growth you set for this business
compared with last year’s sales.

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Example 2:

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Takeaways:
Store A exceeded LY by 50%, and was flat to plan (no variance).
Store B’s variance to LY was 80% and its variance to Plan was 20%.

How could you apply these insights to improve your business?

Despite having similar performance Last Year – and despite similar expectations for this year
(Plan), something happened at Store B to significantly improve sales… we need to investigate
what that could be and see if we can learn something to increase sales in other stores as well.

% Contribution or % Mix

% Contribution or % Mix is used when you want to Sales Mix

compare what portion of the total (e.g., sales, inventory
ownership) comes from one group or another. 17% Class A

It is often used when you want to compare performance 34% Class B

across all subgroups of a total. For example: 22% Class C
27%
• Compare the % Contribution of each store to total Class D
sales
• Compare the % Mix of Class sales to Department
It can also be useful to compare the relative mix of two related measures. For instance:

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 • Compare the % Mix of Sales by Class with the % Mix of inventory ownership by Class
within a Department
Analysis like this can help you identify both opportunities and risks as you compare the relative
performance and inventory productivity of different Classes.

Example 1:

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 This result indicates that Briefs are far more “productive” than
Boxers in that you do a larger percentage of your sales on a smaller
percentage of your average inventory with these styles.
This could mean there is an opportunity to increase Brief sales if you
increase the average inventory to be more in line with its sales
contribution versus Boxers.
You will need to do further investigation to confirm this opportunity, but a Mix% analysis like
this is where you can start to identify these opportunities.

Example 2:

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 Initial Insights:
Backpacks, followed by Totes are the biggest contributors to sales.
Backpacks, followed by Hobos make up the largest portion of our
inventory.
Let’s consider how you could apply the insights from the sales and
inventory mix comparisons to identify opportunities or risks in this
business:
With a sales mix of nearly 35% and an inventory mix of less than 29%, there seems to be an
opportunity to increase the inventory ownership of backpacks as that may support and drive
higher sales.
There may be a similar – though smaller -- opportunity with Totes, where the sales mix is
slightly higher than the inventory mix.
Both Hobos and Clutches, however, make up a higher portion of inventory than their sales
mix warrants. You would want to look for low-performing styles to exit (and mark down to
sell out of your inventory).

Sell-Thru (ST%)

Sell-thru describes the percentage of stock you had available for sale which was
actually sold.
Sell-thru is an important measure for seasonal merchandise, since the goal is to
sell thru as much of this stock as possible before the season ends.
You will also sometimes refer to “regular price (or full-price) sell-thru,” meaning
the percentage of your available inventory that you sold before any permanent
markdowns were taken.
In this course, we are using a sell-thru calculation that divides the units sold in a
given period by the sum of the ending inventory in units plus the units sold during that period.

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Keep in mind that you may come across sell-thru calculations that use either retail or cost value
instead of units, and the denominator (inventory available to sell) can also be defined in different
ways. Any of these variations will impact your interpretation of the sell-thru results.

Example 1:
If sales for last week were 200 units and the inventory at the end of the week was 2,300 units,
what is the sell-thru % for the week?

Example 2:
This table captures sales over the past 5 weeks and ending on hand inventory for a winter scarf
program at eight stores.

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You have a second delivery of 200 units of the same
program arriving this week. Your original allocation for
this second delivery was to send roughly half of these
units to Store A (your flagship) and spread the balance
among the other seven stores.
If this is the last delivery, and this program will be
marked down at the end of the season, how might you use
your sell-thru calculations, to recommend changing the
allocation of the final 200 units?
Based on these sell-thrus by store, you could recommend the following:
• Stores B and E – and possibly C - should not receive any more inventory
• Store D can receive more inventory, but less than originally planned for the second
delivery
• Store A should also receive more units, particularly as they are the flagship and you want
them to have an appealing visual presentation until the final weeks of the season
• Your final allocation, however, should send more units than you originally planned to
Stores F, G and H to help fuel their sales during the remainder of the season

Average Selling Price (ASP)

The Average Selling Price, or ASP, tells you the average

price you received per unit for a period of time.
There are two main ways you will use ASP in analyzing
your business:
First, you can compare the ticketed retail on a single item
(or a group of items at the same retail) against ASP. An
ASP at or near the ticketed retail means you are selling these items without discounting. An ASP
that is far lower than the ticketed retail means your sales are mainly coming from discounting.
You can also compare ASP over time. Let’s say you’re
looking at the men’s shoe department ASP this year versus
last year. You know there have been no major shifts in the
overall assortment – you are carrying the same brands as
last year, and the price points have not significantly
changed.
If your ASP is significantly higher than last year, however,
you will want to investigate the cause. Potential reasons
might include:
• Much lower discounting to produce the sales versus LY
• A shift in what the customers are buying – they are buying more of the higher price point
items versus LY

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Either insight helps you understand your business performance and strategize ways to continue
building on the strengths of the business.

Example 1:
Last week’s sales of a Men’s sneaker – $150,000

Example 2:
The retail price on a pair of jeans is $89.00
Last month you sold 1800 units for sales of $116,000

What was your ASP?

With an ASP of $64.44 and ticketed retail at $89.00, this ASP indicates that discounting played
a big part in moving units and driving sales last month.
To learn more about your business, it would also be interesting to look at:
• How does this ASP differ from the previous year on this or a similar item?
• What about the previous month?
• How many units do you typically sell in a month where discounting is not employed, and
your ASP is much closer to $89.00?

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Initial Mark-Up / Mark-Up (IMU%, MU%)

Initial Mark-Up (IMU), also called Mark-Up (MU), is the difference between
the retail price and the purchase cost of an item, usually expressed as a
percentage
One of the ways to think about IMU or MU is that this is the maximum
profit you can achieve by selling your product to the customer. It is from this
profit that all other costs of doing business must be deducted before the
company realizes its profit.
How can you use this knowledge? Say you know you have a Department margin target of 46.7%.
As you are sourcing and negotiating for product to sell, if you are consistently negotiating IMUs
near 50%, then you are not leaving yourself much room for discounting, damages or unsold
inventory.
By negotiating an IMU significantly higher than 46.7%, you are giving yourself flexibility to
take discounts – or handle unsold inventory – without jeopardizing achieving your margin goals.
And one of the reasons your Department has a margin goal of 46.7% is because after that profit
is achieved, the company must still deduct all the other costs of doing business – payroll, rent,
marketing, and so on – before arriving at the company’s net margin. Thus, they are counting on
you to negotiate an IMU and then manage your business to achieve a gross margin that allows
the company to make a profit.

Example 1:
A buyer negotiated a purchase cost of $22.50 for a jacket and set the retail selling price at
$69.00.
What is the IMU?

Example 2:
Due to an increase in raw material costs, a major outerwear vendor has increased their pricing.

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Assuming you do not want to increase the retail price, how will this year’s IMU compare with
last year’s?

Gross Margin (GM$, GM%)

Gross Margin is the profit you earn on the items you sell. The
calculation is based on deducting the “Cost of Goods Sold” (or COGs)
from your net Sales.
In our sample calculation here, COGs is slightly different from
purchase cost as a factor is applied to the purchase cost to account for
freight costs and shrink allowance, as these are deemed as essential
parts of having the goods available to sell to your customer.
Remember, every retailer has its own variation of the Gross Margin
calculation – usually differentiated by what they include in COGs or
not. So be sure you know exactly what goes into your margin calculation so you understand what
will impact your results.
Gross Margin is often expressed as a percentage (GM$ / Sales), but
remember that GM$ value is also important to measure.
An old saying goes, “you don’t take a percentage to the bank,” and Gross
Margin is all about what you are taking to the bank!

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Example:

Average Inventory

Inventory On Hand refers to the inventory at a snapshot of

time – e.g. today, the end of month, etc.
This is different from Average Inventory which measures the
average stock level over a period of time (a week, a month, a
season, etc.) and is an important input into other
calculations, like Inventory Turn.

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Example 1:

To calculate the average inventory of the Spring season (using BOMs + final month’s EOM):

Example 2:

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Any one of these – or a combination of these – factors could have caused your average inventory
to increase this year over last year:
• More store locations – more inventory needed to fill those stores
• Sales lower than expected causing inventory to build up
• A deliberate increase in inventory because your stores were too empty and you lost sales
due to out-of-stock last year
In and of itself, an increase (or decrease) in average inventory isn’t
necessarily a good thing or a bad thing.
What matters is to understand why it is happening and whether this is
good for your business (driving more, driving profitable sales) or a
potential problem you need to address (increase markdown risk and stress
on the physical locations to hold and manage these goods)

How The Timing of Receipts Impacts Average Inventory

It’s also helpful to think about the impact of the timing of your receipts throughout a period on
your average inventory for that period.
In this first example, you bring in $100,000 in inventory over the season, with the receipts
“front-loaded” – e.g., the majority of the inventory ($75,000) arrives in the first three months:

The average inventory in this scenario is $57,000.

Now see what changes if we hold beginning inventory ($40,000) and sales ($97,000) constant,
but instead bring in the $100,000 in receipts evenly throughout these 6 months:

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Just by shifting the timing of receipts, our average inventory has gone down to $46,000. As we’ll
discuss in the next section, average inventory is an important component of your Inventory Turn
calculation. Remember that if you are trying to hit a target Turn, you can play with both the
amount of inventory you bring in and the timing of those receipts to try to achieve the Turn you
want.

Inventory Turn (Turn)

Inventory Turn is an inventory productivity measure that tells you how

many times you converted your average stock ownership into sales
over a time period.
It is expressed as an absolute number of times your stock “turns” (is
sold and replaced in inventory).
A higher number – as compared to a previous period or an industry standard – indicates your
sales were strong… but also potentially that you bought too little, had out-of-stocks and missed
earning additional sales.
A lower number indicates poor sales and excess inventory on hand.
Keep in mind that all businesses should not strive for the same Turn
targets. Size-intensive businesses – like bras or pants with length and
width sizing – should be turning slower if you want to ensure you are
not missing sales because you are out of the size a customer needs.
Conversely, un-sized businesses can typically run at a much higher
turn without running this out-of-stock/walking the customer risk.

Turn can be calculated for a month, quarter, season or year.

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Example 1:

Example 2:

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Thus, this year’s Turn was slower (lower) than last year’s Turn.
Some of the possible causes of this result:
• Lower sales than expected, assuming inventory was purchased to this level to support
higher sales
• More store locations so more stock needed to support visual presentation… but these
additional locations did not produce as much sales as the existing store base did (on
average)
• Overbought – too much inventory arrived in this season, unable to convert to sales

Weeks of Supply (WOS)

Weeks of Supply is another inventory productivity measure. It tells you

how long your current on-hand inventory would last if your average
weekly sales going forward matches your average weekly sales from the
last four weeks.
This measure can be calculated using units or value – our examples use
units. There can also be differences in how many weeks are used to
calculate the “average weekly sales.” Our calculation uses four weeks.
Weeks of Supply is easy to calculate, and it enables you to connect your
inventory level and your sales -- an important consideration. However,
keep in mind that it is also a backward-looking measure and assumes that past sales are an
accurate reflection of future sales.
You can imagine how this can be misleading depending on where you are
in the selling cycle. For instance, if you have just finished a holiday sale,
then your most recent weeks’ business is inflated compared to what you
actually expect to sell in the coming weeks. Therefore, you will see an
artificially low Weeks of Supply.
On the other hand, as you are ramping up for an important selling season –
like Q4 – you will see your WOS increasing as you are adding

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significantly to your inventory to support much higher sales in the coming weeks, but your
average weekly selling is still at “normal” levels.
Despite this variability, it is still useful to compare WOS year-over-year as you were presumably
in the same position last year vis-a-vis the weekly sales peaks and troughs, so you should be
seeing similar WOS as you compare year-over-year. And if you are not seeing comparable WOS,
then you should either know what is driving this – for example a deliberate plan to build your
inventory up at this time of year versus last year – or investigate further to figure out what is
driving the variance.
And often you are working towards a WOS target that has been deemed healthy for your
business given your product lead time and in-stock service level goals. Thus, you get a snapshot
on how well you are managing towards that WOS target.

One final thought before we look at some

examples and uses of Weeks of Supply…
there is another measure that attempts to
serve the same purpose, but is calculated
in a different way.
This variation – sometimes called
“forward weeks of cover” – uses
forecasted future sales instead of average
weekly sales (based on historical
performance) to calculate how long your
current inventory will last.
Using this variation depends on having visibility to that forward-looking forecast. And, of
course, its accuracy is dependent on the accuracy of your forecast.

Example 1:
Sales for the last 4 weeks: 100, 130, 98, 90
Current Inventory On Hand: 860
First, calculate Average Weekly Sales:

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Then calculate Weeks of Supply:

Which means that your current on hand inventory would last for another 8.2 weeks (assuming
you received no new product).

Example 2:

There was a (planned) sales event in weeks 4 and 5.

The following are the impacts on WOS both before
and after this event:
• Before the sales event there was a build-up of
inventory, causing the WOS to grow from 9.8
to 13.0
• When the sale started, the higher sales
immediately started bringing down the WOS in Week 4
• After the sale, with inventory levels back to “normal,” the WOS may be artificially low
as the sales “spike” is still impacting the average weekly sales calculation
For example, if sales were to continue at the rate of Week 8 (48) instead of the average weekly
rate of 57.8, the current inventory (400) will actually last 8.3 weeks versus the 6.9 weeks
calculated here. Thus, you wouldn’t want to overreact and panic that your stock is getting too
low based on the WOS reported here.

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POS Markdowns (POS MD, POS MD%)

POS Markdowns are short-term or temporary discounts.

The term comes from the fact that the discount is not a
permanent price change but instead is taken at the
register (“POS”) at the time of sale. After the sale
period, the product is expected to continue selling at its
original or regular price.
The POS MD is how you determine the “cost” of
running a promotion to achieve a sale. It’s the difference
between what you would have received if you had not put the item on sale versus what you
actually received, and then expressed as a percentage of the sales you achieved.
Thus, the POS MD% is not the same thing as the discount percentage - as in
“Take 20% Off!”
Let’s see an example of this:
You have an item that retails at $100 and you decide to run a promotional discount of 20%
When you sell the item (at $80) your markdown cost is $100 – $80 or $20; and your MD% is
$20 / $80 = 25%. So remember when you are looking at MD% figures that they are not the same
as the discount amount you promoted to your customers to make the sale.

Example 1:
You have a jacket with an original retail price of $70.00
During a two-day sale, you run a 30% discount and sell 150 units at $49,
delivering $7,350 in sales.

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Example 2:
What will be the markdown cost on a sweater currently priced at $90.00 if
you discount to $69.99 and project to sell 1600 units?

What if you go to 50% off ($45.00) and still project to sell 1600 units?

And what happens to the markdown cost if dropping to 50% off increases your sale projection to
2000 units?

PERM Markdowns (PERM MD, PERM MD%)

A Permanent Markdown – also called a Clearance

Markdown or a “Hard Mark” - is a permanent change to the
selling price of an item. “Hard Mark” refers to the fact that
you are physically marking and changing the price tag on
the item.
Unlike a temporary or POS MD where the price will be
raised back to the original selling price, a Permanent MD is
part of the process to move the item out of the inventory, usually because it is not performing as
needed and/or to make room for new styles.
The other important difference between a POS and PERM MD is their impact on your inventory
value. A POS MD has no impact on your inventory value, which is based on the retail ticket
price.

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However, taking a Permanent Markdown means you are changing that retail ticket price, and – if
you report inventory at retail value - you now re-value your inventory at the new, lower value.
One way to think about the logic of this: Your inventory value
represents the maximum sales you could achieve if you sold thru
every item you own. Once you have permanently marked down the
retail price of an item you have changed the maximum sales you
can achieve, so your inventory value must change to reflect this
new reality.

Example 1:
The original selling price of a sweatshirt is $60.00. It’s time to retire this
style and replace it with a new one, so you take a first permanent
markdown and reduce the selling price to $44.99. You own 7000 units
when you do this.

Your inventory that was previously valued at $420,000 ($60 x 7,000) is now valued at $314,930.

Several weeks go by and you’ve sold through an additional 2,000 units at $44.99. Sales are
slowing down, however, so you take a second markdown and reduce the price permanently on
the 5000 units still on hand to $29.99.

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Note that you calculate the cost off of the current ($44.99) price, not the original $60.00 retail.
Your inventory is now valued at $149,950.

Example 2:

You are taking a group of belts to clearance, taking the ticket price down by about 25%. This
table shows both the MD cost and the new value of the on hand inventory after the markdown.

Assuming that in the month you took this markdown, your total belt sales was $80,000, your
PERM MD% would be reported for the month as:

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