Footwear Insight

20 • Footwear Insight ~ July/August 2023 footwearinsight.com Business Insight By Alan Miklofsky I t seems to me that the significantly inflated cost of doing business is a huge obstacle to the future financial success of independent shoe retailing on a wide scale basis. My premise is that the financial formula that the usual shoe store operates under is significantly impaired or damaged as a result of the inflated costs of expenses as contrasted against the stable nature of gross profit margins. If gross profit margins are not repaired soon (i.e., if they do not increase significantly) this theory would indicate future poor results for other footwear segments (including wholesale and distribution and for shoe manufacturing) since those segments depend on enough retail locations for footwear to be sold through. e Pandemic was not a cause of all this, but the effects of it cer- tainly sped things along. Already burdened by payroll cost increases over many years, who can debate the fact that the years since the Pandemic brought significant in- flation in payroll costs that have significantly inflated the operating costs for shoe stores in recent years? Let's just say that your overall Personnel Costs (including wages, bonuses, vacation pay and benefits) went from 22% to 26% (of overall revenue) since that time. at's an increase of about 20%. Did your maintained gross profit margins increase by 20%? I sincerely doubt it. And, no other operating expense ratio went down, did it? at's my point. e shoe industry is not repairing itself the way other industries are. You may have already noticed that quite a few other industries have altered their own financial formulas in obvious ways. I am sure no one will disagree that grocery stores have increased their prices. Restaurants have significantly increased their menu prices and some even charge fees added to your receipt. If you've traveled recently, you might agree that the travel industry (specifically airline and hotel rates) seems to have figured out a way to repair itself. So, when is the shoe industry going to make its repair? FINANCIAL FORMULA I am sure you might agree that the intent of any business is to make a profit in the form of a return on investment. e retail shoe business is considered capital intensive due to the com- paratively high cost of maintaining a proper inventory compared to other businesses. In retailing, the expenses of operating the business (which one might describe falling under major classes such as Administrative, Marketing, Occupancy, Personnel) are intended to remain sufficiently below the maintained Gross Profits of the business to allow for a Net Operating Income. And, out of that Net Operating Income must come Interest, Taxes, Depreciation, Amortization, Debt Service and Investments for the Future. Aer those are met, the owner can make a Distribution to the shareholders… if there is anything le. According to an article published February 21, 2023, in businessnewsdaily.com and written by Shayna Waltower, 2 in 3 Business Owners aren't paying themselves due to Inflation. SOLUTIONS Strategies Start with the end in mind and plan for profitability. A prudently focused business owner should seek to develop a go-forward plan for producing enough profit and cash flow from his business. is means, he or she should expect to have fewer expenses than gross profit. • e main culprit here (although all categories of expenses have increased over time), particularly coming out of the Pandemic, is the percentage of Personnel Expense. • Service takes time and since train- ing takes time and some customers aren't quick decision makers, average ticket and sales per hour would have to increase faster than com- pensation rates. It takes time to provide full service and unless your average "tickets" have increased the same percentage as your operating expenses, you might be "treading water." • Simply putting in the time to have a better knowledge of the numbers that make up the financial formula for your business is worth all the time and attention you put into it. Knowledge is king and realizing all the factors that make up your store's profits is a key factor to your success. Smart retailers know their margin numbers and work every day to maximize those margins and decrease markdowns. • is usually employs a well-organized and detail-oriented approach to merchandise man- agement. Oen this includes an open to buy planning system. • Many retailers I know establish good For more information on Alan, visit his LinkedIn page at: https://www.linkedin.com/in/alanmiklofsky KNOW YOUR NUMBERS

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