Costco CFO Juggles Managing Inventory For Products in High, Low Demand
September 29 2020 - 5:16PM
Dow Jones News
By Mark Maurer
Costco Wholesale Corp.'s finance chief is zeroing in on working
capital and inventory levels to make sure the warehouse chain has
the right stock for sale as the pandemic continues.
The members-only retailer in recent months struggled to keep its
shelves filled with popular products such as sanitizing wipes,
baking yeast and laptops as consumers adjusted their shopping
habits and manufacturers had trouble meeting heightened demand.
"The supply chain continues to improve, but it will still take
six to nine months on some categories or products," Chief Financial
Officer Richard Galanti said.
Having sufficient reserves of highly-sought products meant
Costco had to find additional suppliers and decide which offerings
to cut back on, Mr. Galanti said.
Overall inventory levels rose 7% to $12.2 billion in the year
ended Aug. 30 compared with the prior year, Costco said last week.
Working capital, or cash trapped in operations, totaled $3.3
billion in its latest fiscal year, up from $248 million the
previous year. Mr. Galanti said working capital grew because the
company recently experienced higher-than-expected sales and hasn't
needed much of the debt it raised.
CFOs across industries saw their companies' working capital as a
percentage of revenue go up to 46.8% in the second quarter,
compared with 42.2% during the prior-year period, according to a
recent study of quarterly results by The Hackett Group, a
consulting firm. Inventory levels fell 0.1% to $938 billion.
Companies on average now take 60 days to pay their suppliers, up
10% from last year.
Costco usually stocks paper towels from two suppliers, but is
now buying products from as many as four manufacturers to meet
demand, Mr. Galanti said. In some cases, the company had to build
new relationships with suppliers, he said.
The company also decided it might store some patio furniture and
other seasonal items to sell next year instead of discounting them.
Costco has to pay vendors for these products now, resulting in an
increase in working capital as well as inventory, Mr. Galanti
said.
At the same time, Costco also takes longer to pay its suppliers.
Accounts payable -- the amount of money that the company owes to
its suppliers -- rose by 21% to $14.2 billion, according to
CreditRiskMonitor, a provider of commercial credit reports. The
company has been selling inventory faster than planned, which
increases payables, Mr. Galanti said.
The company earlier this year sold $4 billion in bonds to
increase liquidity and prepare for a range of worst-case scenarios.
Costco's same-store sales were up 14.1% year-over-year in the most
recent quarter.
Mr. Galanti said he is working closely with the company's
merchandising team to rightsize upcoming purchase orders for
certain product categories, such as seasonal items. Costco expects
lower sales of Halloween costumes and trick-or-treat candy this
year, which is why the retailer shrank its orders for these types
of products, he said.
The company provides its merchants with daily, weekly and
monthly reports on data such as sales, freight costs and inventory
shrinkage to help them anticipate demand, Mr. Galanti said.
Day-to-day inventory management is handled largely by Costco's
head of merchandising, senior vice presidents, merchandise managers
and buyers, Mr. Galanti said. "Their job is to make sure we have
product flowing and product on the shelf," he said, adding that he
is in close communication with those teams.
Finding new suppliers within a short time period can be costly,
even though for larger companies the effect is somewhat limited,
said Greg Melich, an analyst at Evercore ISI, a brokerage firm.
Retailers also need to guarantee the products meet internal
quality standards. "Costco, uniquely to their membership model, is
going to be extra careful to make sure what they have is really
good," Mr. Melich said.
Mr. Galanti should continue equipping merchants and supply-chain
workers with ample liquidity when searching for inventory, Mr.
Melich said.
Write to Mark Maurer at mark.maurer@wsj.com
(END) Dow Jones Newswires
September 29, 2020 17:01 ET (21:01 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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