Issue link: http://www.e-digitaleditions.com/i/105134
Distributor Proļ¬ts continued Exhibit 3 The Change in Gross Margin Percentage by Industry Segment 2011 Vs 2010 Change in Gross Margin Percentage 5.0 0.0 Industrial Construction Consumer FEDA -5.0 -1.0 Industry Segment Exhibit 4 The Change in the Operating Expense Percentage by Industry Segment 2011 Vs 2010 Change in Expense Percentage 5.0 0.0 Industrial Construction Consumer FEDA -5.0 -1.0 -1.5 Industry Segment Exhibit 5 The Change in Inventory Turnover by Industry Segment 2011 Vs 2010 Change in Inventory Turnover 5.0 0.0 Industrial Construction FEDA Consumer -5.0 Industry Segment Exhibit 6 The Change in Average Collection Period by Industry Segment 2011 Vs 2010 1.0 Change in Collection Period (Days) 0.0 Industrial Consumer Construction -1.0 -2.0 -3.0 -4.0 -5.0 -6.0 -7.0 Industry Segment 32 FEDA New s & View s Change in the Gross Margin Percentage The primary culprit in the inability to increase ROA quickly was a deterioration in the gross margin percentage. Exhibit 3 indicates the decline was across all segments.The gross margin percentage fell slightly in 2010. The decline in 2011 was somewhat larger. Neither the decline in 2010 or 2011 is large enough to be of concern by itself. However, when viewed in the context of the large increases in sales, it takes on a much larger significance. The decline in the gross margin percentage reflects a very normal "volume-at-any-price" mentality that tends to predominate during, and at the end, of difficult economic times. However, at this point in the recovery and with the sales increases demonstrated, the trend to sacrifice margin for sales should have vanished. It has not. The fear of a weak recovery may be impacting gross margin performance. Whatever the cause, it is the single most important issue that needs to be addressed by distributors. FEDA Change in the Operating Expense Percentage The growth in sales did have the impact of driving operating expenses down as a percent of sales.This pattern was also apparent in 2010. Combined, they allowed firms to offset the significant expense challenges of 2009. As shown in Exhibit 4 this decline was also experienced across all industry segments. The decline in operating expenses was larger than the decline in the gross margin percentage across all industries. This allowed firms to increase their operating expense percentage. However, rapid sales growth led to some significant increases in investment levels, which was reflected in nonoperating expenses, especially interest. High investment levels and higher interest expenses muted the increase in operating expenses. The net result was that ROA increased only slightly in a period of recovery when things should have gotten appreciably better. The decline in the operating expense percentage,while welcomed, was not as significant as would be expected given the sales growth. A lot more work is needed in controlling operating expenses in the future. For almost every line of trade in distribution, the key to expense control is control of payroll expenses. The Change in Inventory Turnover Exhibit 5 shows that inventory turnover rates experienced a mixed pattern in 2011. The turnover for construction suppliers improved, it fell for consumer-based firms and it reflected no change for industrial distributors. The reality is that the changes, both positive and negative, were close to miniscule. Without a strong improvement in inventory performance, rapidly growing sales necessitates an equal increase in inventory investment. Whether the lack of improvement in turnover is a problem depends upon the level of sales growth that firms will experience in the future. If the trend in mergers and firm closings continues, then sales growth will be strong, regardless of economic conditions. This creates a mandate for making continued on page 39