The Secrets of Profitability

Secrets of Profitability

January, 2017—

Decent profitability is not an option in the home furnishings business—it’s imperative. Here’s how to achieve it.

Last spring the HighJump film crew and marketing staff came to visit me in San Diego. Our goal was to film videos on a host of topics that were critical to success. We captured my opinions and practices on camera so retailers could benefit from my experiences as an in-the-field professional consultant over the years. These presentations were not rehearsed nor scripted, so viewers would get the “real-deal” as if I were in their business talking to them. Welcome to the Secrets of Smart Retailing series.

This column and the video that accompanies it focuses specifically on profitability. Profit, also known as net income, is simply the dollars you use to either purchase assets (like inventory) or pay off debt obligations. Businesses without sufficient profitability will find it hard to grow, as there are few funds available to buy inventory and keep current with critical suppliers. The flow of goods suffers in unprofitable situations, and with the flow being the lifeblood of retail, interruptions to it must be avoided at all costs.

Decent profitability is not an option of doing business—it’s a mandate. To be clear, I consider decent profitability to be over 6 percent of sales before tax in any time period. I consider very good profit to be over 9 percent of bottom line. It should be everyone’s goal to achieve a double-digit operation and 4 percent and under is considered the danger zone without safety. One poor written sales month with a poor gross margin, combined with an upswing in inventory could cause a “perfect storm” for a low-net income operation. Those who operate normally as high-profit operations can weather these storms if they do occur.
We saw this a few years back during the great recession en masse. Most profitable home furnishings stores with current payables and little institutional debt managed to hang on. Many low-profit stores with debt, however, went under. This was followed by the profitable stores quickly gobbling up their market share. The recession, combined with smart owners, created many of the regional retail powerhouses that we see in our industry today.
So how do you become or remain a profitable home furnishings store?

Here’s a short list of strategies home furnishings retailers like you should follow not just to get, but also to keep high profits.
Profitable home furnishings stores…

  • track their performance metrics closely and consistently
  • simultaneously and continuously seek to grow volume and gross margins. (I really wish I could sit here and give you countless examples of long-term successes where other businesses profit by staying flat and cutting costs, but in all the years I’ve been working I have yet to come up with one.)
  • know traffic for their locations without any guesswork because they have the data readily available to them.
  • use that data to staff their stores properly based on those traffic patterns and they manage revenue per guest.
  • obtain an appropriate rent expense that is typically above 9 percent in the worst sales month.
  • turn inventory over quickly and also carry the appropriate level per their sales volume. (See my October 2016 RetailerNOW cover story at tinyurl.com/zdomcpl)
  • have the right number of vendors with the right fit for their niche in the marketplace.
  • generally have more effective people than the average operation, and pay those employees better overall than their competitors.
  • are committed to never-ending self-improvement throughout the organization (not just in sales).
  • implement and manage systems that are geared toward providing customers the highest level of service and convenience.

For other strategies and tactics, please watch my video: The Secrets of Profitability in Home Goods Retail. View it at tinyurl.com/gujyq3s

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Editor’s Note: This is the third in a series of columns and videos designed to help retailers grow their home furnishings stores.

Each month, David McMahon will discuss a new topic in RetailerNOW and go even deeper in an accompanying video.

About the Author

David McMahon
David McMahon, CSCP, CMA, EA is VP of consulting and performance group at PROFITsystems, a HighJump Company. He holds professional certifications as a Certified Supply Chain Professional and a Certified Management Accountant. He can be reached at david.mcmahon@highjump.com.