Do Watches and Jewelry have an Expiration Date?
Date December 2019
When it comes to fine jewelry and watches what do the terms “slow moving” and “aged inventory” really mean, and why should a lender care? The importance lies in the difference between the two categories and how they can affect a jeweler’s business, and ultimately their asset-based line of credit. Understanding the nuances of aging in this category is important as it can affect outcomes, both in terms of how a retailer manages its inventory, as well as the way an asset-based loan is monitored.
Aged versus slow-moving inventory
Slow-moving inventory is a category of merchandise that occupies the bottom 20 percent of a retailer’s inventory. By definition this bucket can also include aged inventory, which may or may not present a challenge to recovery values. It is important to note that the definition of what is “aged” inventory varies by product type. For example, certain watches may have a much shorter window of aging due to the fashion trend or design element of the category. Alternately, a category like diamond stud earrings are often considered a basic item for which there is less of a design element “expiration date” to their appeal to buyers. Understanding the differences between the types of aged and slow-moving inventory (and how to monitor this inventory) is important, as it could cost a retailer revenue in missed sales.
In its simplest form, slow-moving inventory consists of mistakes in buying, aged or discontinued models, broken collections, or items that no longer fit within an assortment. This merchandise is typically featured in sale events, often multiple times, and as this inventory fails to sell through, it continues to age. Slow-moving inventory can cost a retailer in terms of carrying, maintenance, and storage costs in addition to lost sales.
When potential customers shop, a retailer’s sales staff and visual displays have the power to create a lasting impression. If customers are drawn to a display featuring the latest colors and fashion merchandise, they are more likely try it on and subsequently purchase it, passing over merchandise from prior seasons. This is especially relevant in the fine jewelry space, where normal-course annual inventory turnover is lower than for other retailers. A glut of aged inventory can eventually lead to customers overlooking even current merchandise. When the slowest-turning product figures into the first impression of a store, it taints customers’ perception of the retailer’s branding, credibility, and relevance. Customers may then question the quality and freshness of the top 20 percent of the retailer’s inventory as well. In this intangible way, slow-moving inventory may cost a retailer sales in multiple categories. In the most extreme circumstance, a downturn in business could lead to unstable credit.
Carrying aged and slow-moving inventory can also have potentially negative financial implications. Assuming this is the retailer’s oldest and slowest-moving inventory, what does it really cost in terms of gross recovery potential? Let’s assume the cost of this merchandise is $200,000 and the retail is $400,000. If it is sold at a 70 percent discount to move it quickly, the retailer would recover $120,000 gross, for a net loss of $80,000. Many would argue that the retailer should instead hold this inventory. But it may take years to sell and may eventually still require a discount of 50 percent just to recover the cost of the goods. This may alleviate the issue of taking a loss but does not address the aging problem. The inventory aging will compound as slow-selling items continue to accumulate in cases, possibly at the expense of future sales.
Alternatively, if a retailer took the net revenue of $120,000 after a 70 percent discount and put it towards its fastest-turning merchandise, assuming it received a modest one-time turn at the same margin, it would have generated $120,000 in gross profit and covered the net loss on the selloff of the aged inventory by $40,000.
Most lenders examine their clients differently, but the slowest-moving inventory for jewelry retailers is always an important consideration. Typically, lenders will look at turnover rates and the best uses of working capital. If an inventory segment is aging or not performing well, it may be prudent to introduce inventory exclusions or reserves against the eligible inventory. Lenders not being industry experts will usually make a decision which often will not benefit the client in terms of excluding this product. The rule for most is all aged will be treated as just that, and type will not be considered.
Slow-moving inventory and the overall composition of the goods naturally affect a retailer’s sales staff. Retailers typically pay a commission rate to sales staff based on sales volume. Recently, the trend has been to pay full commissions only if the item sold is transacted at the full retail price. However, the presence of aged goods limits the quantity of new merchandise, which then limits sales associates from earning full commission rates. This structure does not provide incentives to feature aged items, causing them to continue to age and eventually require additional discounting. To combat this situation, a retailer must offer incentives for the staff to move through older goods, which may entail supplementing the regular commission rate. An incentivized structure of this kind is a win-win for the company and its employees, as it increases earnings opportunities as well as replenishment opportunities for fresh inventory.
Today’s suppliers increasingly have sought long-term, mutually beneficial relationships. When a buyer seeks assistance in trading out or exchanging slow-moving inventory, most suppliers now see this as an opportunity rather than a burden.
Previously, suppliers solely focused on near-term sales opportunities without any regard to the maintenance of current styles at the store level. If the account was up to its credit limit or saturated with product, leaving no money available to purchase new inventory, suppliers frequently would not or could not continue making sales to these clients. However, vendors have experienced a shift in thinking when it comes to servicing a client of this kind. Many vendors are now more willing to accept returns and exchanges or to recycle goods, as it provides for long-term sales opportunities. The bottom line is that these vendors value continued business opportunities, which also benefits the client by creating space to refresh the inventory mix. The top of the inventory turns regularly, but the bottom does not. It is mutually beneficial for a vendor to support a retailer by allowing returns and exchanges on slow-moving goods so as to maintain a thriving business.
The point of no return
There will always be slow-moving inventory. Whether it is off-trend, dated, or part of a broken collection, it is still the lowest turning portion of a retailer’s capital, and it is no longer working for them. Many retailers may think they will eventually find a market for slow-moving inventory, but keep in mind that as retailers move aged inventory out of the bottom, the balance of the inventory will begin to slip down to occupy that space. The challenge then becomes focusing on the bestselling goods and continually replenishing fast-turning product. Vendors want retailers to carry their complete collection. But sometimes that simply does not make good business sense for a jewelry retailer. Vendors have the same issues as retailers. Not every item turns as quickly as they would like.
Resisting selling or disposing of slow-moving inventory below cost will not serve a business in the long run. The bottom line is that keeping inventory that is not selling costs a retailer sales, customers, and employees. When a new shipment arrives from a vendor, the staff is eager to stock, sell, and earn commission on exciting new goods. The opposite can be said about an old necklace that is never even shown. So at what cost beyond the actual dollars spent on an item is that piece costing a business?
Monitoring aged and slow-moving inventory
What comprises aged inventory may vary by retailer; however, this category of merchandise always has the potential to create problems for lenders when it comes to recovery assumptions. Common categories to monitor include watches and leather watch bands, bridal and colored stone items, materials made of gold and silver (specifically beads or add-on items like charms), and non-jewelry giftware items.
The issue retailers face within the watch category is that popular models sell quickly, and less desirable models stay in the case. Most retailers try to sell these items through over-the-counter discounts or sale events, but it would be like buying a “new” car that is three years old; it inherently will require a higher discount to attract the smaller pool of buyers who are not concerned with its physical age or dated design elements. Watch bands are typically a low-recovering category, as they are very slow turning as part of normal-course business. Replacement straps for lower priced watches may not even be considered, as the customer is more likely to just replace the watch if the strap breaks.
Aged inventory in the bridal and solitaires category is a different story. A common issue in this category could simply be a less desirable mounting, a stone in a less popular cut, or a stone that is beyond the typical price point for the retailer. A classic cut stone may simply need a new mounting to appear new. Mountings are lower-cost items and therefore present a lower risk for loss when deeply discounted. The solution for an undesirable stone shape may be a simple remount, or the stone may require aggressive discounting to move. Retailers that retain diamond inventory thinking it will eventually sell do their business a disservice by keeping open-to-buy dollars wrapped up in slow-moving, high-cost goods.
Another common issue lenders face and should monitor in the fine jewelry space are discontinued brands. Remaining inventory from prior-season designer collections typically does not move, as the target customer is looking to purchase the current line. This is especially prevalent with fashion-oriented brands where annual collections are well marketed as such, and once dated, have significantly less appeal. Another example of a popular current jewelry category that can pose issues is branded bead and charm collections that are meant to be sold with a matching bracelet. A retailer may have a great selection of beads on hand and no matching bracelets. One effective solution for this type of aged product is to use it as a gift-with-purchase opportunity. Customers may spend a certain dollar amount and then select from the aged assortment at a deep discount or free with purchase. Finding a creative solution that adds value to a client’s view of the retailer is important, as aged inventory can signal that a company is unhealthy.