The end result? Well, not much, really – at least in terms of seasonal volumes. Although we’ve seen spikes on the back of the Black Friday sales, they’ve usually been followed by a fall-away in consumer demand in the early part of December; so, you could argue that Black Friday has simply shifted Christmas spending decisions forward by a week or two. And there’s increased risk, too. Along with Christmas, Boxing Day and the January clearance, Black Friday presents another essentially unpredictable catalyst for retailers to stock their shelves.
Industry analysts tend to focus on the proportion of ‘full-fat’ (ie undiscounted) sales achieved three weeks either side of midwinter, but another measure probably provides a more telling indicator as to the likely trajectory of margins: inventory turn. It is calculated by dividing a company's annual sales by inventory, although its meaningfulness, particularly in terms of retail, is enhanced if you can calculate the ratio using average weekly or monthly inventory levels. For example, if a clothing retailer has an average inventory of £100m and the cost of goods sold is £200m, then you would divide the latter by the former to give you a ratio of 2:1, expressed simply as 2.
You will often find this ratio used in conjunction with, and complemented by, a separate ratio expressing the cash conversion cycle (CCC): the amount of time each pound is bound up in the production and marketing process before it is converted into cash through sales. The ratio is achieved by adding the number of days a given company takes to sell an entire inventory to the number of days needed to clear accounts receivable, before subtracting the number of days it takes for the company to settle its own accounts payable. By optimising this ratio, the company essentially holds on to cash longer, thereby reducing the liquidity risk associated with growth.
The risk for retailers from one-off sales such as Black Friday is that they’ll build up excess inventory. Since more merchandise means more money tied up in stock, analysts like to see a high inventory turnover ratio. The higher the ratio, the less inventory the retailer is keeping in relation to its sales. Although it obviously has its limitations, the ratio provides a pointer as to how much capital is tied up in stock – and for how long. This secondary issue can also have a bearing on the level of discounting throughout the year, which has a direct impact on margins.
