Our friends at Revitalization Partners help companies make effective business decisions. Here is a blog from their newsletter with an interesting angle on SG&A costs. At Juniper Capital, we are committed to sharing business advice that helps you achieve success. We specialize in real estate investments with private money loans in Washington and throughout the Pacific Northwest. Share your thoughts on this blog or our social channels, so we can continue to provide you with good information for operating your business:
It’s time that companies become more intimate with their SG&A (Selling, General and Administrative) expense. A recent issue of Women’s Wear Daily, titled “Higher SG&A Costs Hitting Retailers,” highlights a current trend in high profile retail companies in which SG&A costs are increasing when compared to the prior year.
SG&A expenses generally refer to expenses such as non-direct or overhead payroll, benefits, commission, marketing, rent, insurance and utilities. SG&A expenses are generally deemed to be controllable expenses and can be adjusted based on business operations and sales level. Many investors and bankers evaluate expenses based on a ratio of SG&A expenses to revenue, or in other words, expenses as a percent of sales. SG&A expense percent to sales ratio should be stable year to year, or in growing businesses the ratio should be declining. If the percent to sales ratio is increasing, it sends up a huge red flag. Particularly since investors and bankers use this measure as a way to evaluate how companies effectively utilize their cash.
Of the 33 retailers analyzed, 18 posted higher SG&A to sales ratios for the most recent quarter compared to the previous year. Nine of those companies posted more than a 100 basis point increase in this ratio, which is a significant problem. There were two Pacific Northwest companies (Nordstrom and Zumiez) included in the group of retail companies that were analyzed. Interestingly enough, each company was at opposite ends of the SG&A spectrum.
Nordstrom, whose sales topped $13.5 billion last year, came in close to the bottom of the rankings with a 172 basis point increase in their SG&A expense ratio. This is an extraordinarily large increase and definitely negatively impacted their profitability for the quarter. Zumiez, whose sales were in excess of $800 million last year, ranked very high with a reduction of 143 basis points and was the second best performer on the list. Abercrombie & Fitch, a company that has been in the news lately, ranked at the bottom of the list with a whopping 50.5 percent SG&A expense to sales ratio that increased 240 basis points over last year!
Revitalization Partners frequently works with companies that have incurred increasing expense to sale ratios, often combined with decreasing sales. Given that the SG&A ratio as a percent of sales is a measure that assesses management’s ability to effectively utilize cash, it is a leading edge indicator that should be monitored regularly. An increasing SG&A percent could be a result of declining sales, or a significant increase in expenses that are incurred in anticipation of increased sales. When addressing this issue, we sometimes hear that expenses cannot be reduced because they have been cut to the bone. Although a pattern of increasing expenses ratios can jeopardize the company’s ability to survive, management sometimes resists further cuts because of some emotional barrier. The true fact is that expenses must be reduced, when necessary, to ensure the company can continue to be viable. This is particularly important with small to middle market companies that are privately owned. In most cases, the owners personally guarantee the company’s bank line of credit. If the company fails, not only does the owner lose their equity in the business, their personal assets are at risk as well.
It is incumbent on every business owner, regardless of whether they are the Nordstroms of the world, or a small family business, to carefully plan and monitor their companies SG&A expense. Doing so will ensure that your company does not end up on the financial spectrum of fifty shades of RED! And remember, don’t be afraid to ask for help in addressing these issues. Catching the problem early in the cycle will go a long way to addressing your company’s bottom line performance.
Revitalization Partners is a Pacific Northwest business advisory and restructuring management firm with a track record of achieving the best possible outcomes for their clients. They specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Contact Revitalization Partners if you want the best resolution in the fastest time with the highest possible return.
Revitalization Partners… when a company is worth saving.