by Kelly Farrell, Farrell Growth Group
There are a variety of ways to measure performance when benchmarking against your peers. Farrell Growth Group’s MIX program compares financial statements of top ag retailers and measures overall performance as pretax income as a percentage of sales.
However, just looking at the bottom line profit doesn’t always tell the whole story. There’s more to analyze.
More Finance Than Agronomy
I remember reviewing a high-performing retailer’s financials and noticing it had significantly higher finance charges compared with its peers. In fact, more than 70% of its profitable bottom line was attributed solely to interest charges collected on slow-paying accounts. The company’s actual operating model or value proposition was responsible for less than 30% of the healthy bottom line. In effect, the retailer was operating more of a bank than an agronomy store.
For that particular MIX report, I focused more on operating income to highlight the majority of this retailer’s profitability was a result of the interest made on its lending activities rather than the retail operations. It was an important lesson in understanding a retailer’s go-to-market strategy—and making sure the retailer understood as well.
Where Money Is Really Made
A similar situation highlighting the difference between operating income and nonoperating income became obvious during the run-up and subsequent crash in fertilizer prices during 2008 and 2009. Unprecedented windfall profits were soon followed by unprecedented windfall losses thanks to the rapid appreciation and then depreciation of fertilizer inventories. Although unprecedented in scale, similar scenarios have played out since.
It Will Happen Again In 2021
Retailers who purchased inventory in the fall of 2020 now have the opportunity to capture greater margins as prices increased over the winter. Many retailers will report strong financial performance in 2021. But is it really “strong financial performance” or simply “good fortune”? Some retailers may actually lose customers or acres to serve, but their losses will be masked by their inventory gains.
Like the finance charges on slow-paying accounts, inventory appreciation or depreciation can mask the underlying business’ real performance. Those inventory gains or losses are typically buried in product margins.
The few ag retailers who track and separate inventory purchasing gains and losses from product margins and operating earnings know precisely how speculative inventory purchases impact their businesses’ actual operating results.
Kelly Farrell is a partner in Farrell Growth Group, which provides premier financial planning tools to ag retail.
