CUMULATIVE GROSS MARGIN
Gross Margin is the difference between Net Sales and Cost of Good Sold. Gross Margin % is based on the relation of Gross Margin to Net Sales, calculated as Gross Margin Dollars divided by Net Sales. For example, if your Total Store Net Sales are $750,000 and the Cost of Goods Sold is $350,000, then the Gross Margin is $400,000. Expressed as a percent of sales, that is 400,000 / 750,000 or 53%. Your Point of Sale software should calculate the Gross Margin % and the Stock Turn Rate for you at the classification level-or even at the vendor level within each class. The goal in apparel stores for Cumulative Gross Margin is between 130 and 150.
Why It's Important
Cumulative Gross Margin should be considered by class annually. Look at the actual performance of each class last year. Rank the items in order from highest CGM to lowest. Then ask yourself those difficult questions. Do I want to continue to carry ________? Would a different vendor allow me a higher Gross Margin % or be more popular with my customers and give me an improved Stock Turn Rate? Or do I continue to carry this merchandise, knowing it is not highly profitable, to bring in customers who usually purchase other items? Is there anything I can do to improve the Stock Turn Rate or Gross Margin of this merchandise?
If you understand the profitability of merchandise by class (or vendor if you choose and your software allows it), it may help you determine what appeals most to your customers so that you have the best possible choices available at any given time.
Increasing Profitability by Using a Gross Margin Plan
Consider your lowest performers first. What can be done to improve their performance? Some suggestions are to try a new vendor that will allow for a higher Initial Markup. Sometimes it's as easy as holding back 30%-40% of your Open-To-Buy for in-season purchases at discounted cost. Generally, in season purchases allow for a higher gross margin because their cost to you is less. At this point in the season you know what classes, vendors or items to look for.
Also, take a good look at the top ten performers. These classifications may be able to support a slightly faster turn that can make a difference in inventory levels. A smaller investment in inventory will save you money and usually improve your Net Profit. Always try to improve your Profit.
Cumulative Gross Margin is an often overlooked but very important aspect of the Open-to-Buy. Too many items remaining at the end of the season will lower the Cumulative Gross Margin (lower Stock Turn Rate) as will items moved via excessive Markdowns (lower Gross Margin %). Items that sell briskly with a good Gross Margin will increase the Cumulative Gross Margin. If a line was purchased that was not to your customer's liking for any reason, it will remain on your store shelves and show up in the Cumulative Gross Margin numbers.
Properly using an Open-To-Buy is the best way to maximize your profit. If you would like help managing your inventory, as well as preparing a Gross Margin Plan for your store, please visit our Open-To-Buy information page or contact us. We want you to achieve the most profit possible. Preparing and reviewing the Gross Margin Plan is a good step in the right direction.