Cornell study shows record profits for discount chains

Discount Store News, Oct 30, 1989

Cornell Study Shows Record Profits for Discount Chains

NEW YORK - The efficiency drive by the nation's discounters shifted into high gear over the last year, resulting in substantially lowered expense-to-sales ratios and record net profits.

Posting their highest earnings in over 20 years, discounters' average after-tax net profits in 1988-89 hit 3.16 percent of sales, up from 2.54 percent in 1987-88, according to a study of 22 discount retailers conducted by the International Mass Retail Association.

The study, which was conducted over the summer by Cornell University, revealed that discount retailers have been successful in moving goods out the door and squeezing more sales dollars out of each store. While gross margin dipped slightly, discounters were able to garner higher earnings figures by significantly lowering expenses.

Twenty-two retailers with aggregate sales of $30.5 billion from 2,713 stores participated in the 1989 edition of the Cornell "Operating Results in Mass Retail Stores" study.

After a somewhat depressed 1988 year, which saw per-store sales and stock turns decrease from the prior period, discounters rebounded with improved numbers, reflecting a relatively health discount industry.

Gross margin as a percent of total sales continued on a moderate downward trend, to 26.6 percent in 1988 to 1989, from 26.85 percent a year ago. Gross income as a percent of total sales dipped to 26.8 percent, from 27.2 percent.

Yet, even with a slight gross margin decline, net profits were pushed up because of cost-cutting. Discounters' gains in belt-tightening is borne out by the decline of total expenses as a percent of total sales - more than a full percentage point drop to 21.3 percent, from 22.6 percent in 1987 to 1988. Cost-cutting ran the gamut from store operations, field supervision and merchandising to advertising and promotion, accounting, and warehousing. Certain transportation, administration and human resources costs rose.

Discounters were able to cut costs in payroll, recruiting expenses, property rentals, utilities, insurance, equipment rentals, repair and maintenance, pre-opening expenses, communications, travel, professional services, advertising and miscellaneous. More money - as a percentage of sales - was spent on employee benefits, pensions and profit sharing, depreciation and amortization, supplies and services purchased, and donations.

Also for the first time, average sales per square foot (selling area) for all discounters increased to over $200, jumping to $201 per square foot in 1988 to 1989, from $177 per square foot in 1987 to 1988.

Annual turns for all owned departments moved higher to 4.1 in 1988 to 1989, up from 3.7 in 1987 to 1988. That 4.1 figure topped the previous six-year high turn figure of 4.0 recorded in 1986 to 1987.

However, stock shortage at retail, as a percentage of owned sales, took a troubling rise to 1.74 percent from 1.53 percent. Net earnings as a percentage of total sales also rose - to 3.16 percent from 2.54 percent - as did net earnings as a percentage of net worth (23.06 percent from 18.05 percent) and net earnings after taxes as a percentage of total assets (8.97 percent from 7.1 percent).

Sales per store in the 1988 to 1989 sample were $11.2 million, up from $9.3 million in 1987 to 1988. Again, larger chains (over $1 billion in annual sales) showed stronger performance than did the smallest chains (under $300 million). For instance, larger chains averaged $13 million in per-store sales, compared with $5.9 million at smaller chains.

Soft goods as a percentage of total sales, which had a relatively steady rise over the last several years, dipped under 40 percent to 37.1 percent from 40.1 percent. Hard goods increased to 62.9 percent from 59.9 percent. Soft goods also suffered an increase in clearance markdowns (7.9 percent to 8.2 percent), while hard goods saw less markdowns (2.9 percent to 2.7 percent).