Saturday, November 30, 2013

"We lose money on every sale, but make up for it in volume"---See chart here that shows profit margins of major retailers during the holiday season vs the rest of the year...

Are Black Friday "deals" just an illusion or is there something else going on?

Here is a chart I found at Bloomberg.  It shows various major retailers (horizontal axis) and 2012 "Operating Profit Margin (OPM)" for those retailers.  Here is link to a very short and very helpful video that explains Operating Profit Margin.  In a nutshell, it is what is left over from revenues to pay taxes, interest on debt and other fixed costs AFTER all variable costs (wages, cost of the goods sold, etc) are paid.
 For example, look at the Walmart.  For the first 9 months of the year (bar with cross hatches) its OPM was a little bit below 6%--lets call it 5.8%.  This means that Walmart paid 94.2% of its Net Revenues in operating costs and has 5.8% left over to pay taxes, interest on debt and other fixed costs it incurred.

In last quarter of 2012 is OPM was OVER 6%, lets call it 6.8% (the solid BLACK bar).  So, Walmart had a HIGHER OPM during the Christmas season than during the rest of the year! It is the law of averages, I guess.  

Throughout the year it is "Every Low Prices" but during the holiday they can obscure the pricing landscape with blowout prices on some things then higher average prices ("regular prices) on complementary or select other goods.

Use this analysis to view the other retailers pricing scheme during this selling season.

Home Depot and Lowes are the only ones who have a lower OPM during the last quarter compared to the rest of the year.

All the others seem to conform to the humorous observation often made regarding retail...

"We lose money on every sale, but make it up in volume".

At least that is what we are lead to believe.

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