Retail clothing runs the full gamut between discount and high-end designer fashions. The industry is highly competitive and as a result performance metrics can become detailed and exhaustive. For a small business, however, basic metrics are sufficient to assess the financial status and overall health of the business. Profit margin is a critical metric that tells a business the percentage of profit it receives from each dollar in sales.
Profit margin is most often stated as gross profit margin. To calculate gross profit margin a business first needs to calculate gross profit by subtracting the cost of goods sold from total sales revenues. Since most clothing retailers purchase inventory rather than produce it, cost of goods sold includes expenses such as inventory, freight charges and labor costs related to unpacking and preparing clothing before it gets to the sales floor. The formula for calculating gross profit margin is gross profit divided by sales. For example, if sales revenues are $100,000 and the cost of goods sold is $75,000, gross profit is $25,000. Gross profit, then would be 25 percent.
The financial performance analysis site CSI Market reports that in the first quarter of 2013, average gross profit margins for the retail clothing industry were 36.12 percent for the quarter and 36.06 percent averaged out over the previous 12 months. This represents a change from the last quarter of 2012 where the average gross profit margin for the quarter was 36.57 percent and 35.98 percent for the previous 12 months. CSI also reports a range of gross profit margins that include a low of 22.99 percent in the last quarter of 2004 and a high of 36.57 percent in the last quarter of 2012.
Inventory turnover contributes to a healthy gross profit margin. CSI Markets reports the average retail clothing inventory turnover rate for past 12 months reported in the first quarter of 2012 was 5.46 percent, meaning retail clothing inventories turned over 5.46 times during the year. Calculate the inventory turnover rate for your retail clothing business and then compare it to the industry average by dividing the cost of goods sold for a specific period by the average inventory value for the same period.
Markup is a way for a retail clothing business to maintain an acceptable gross profit margin. Unfortunately, many clothing lines dictate a selling price and in a turn determine a markup percentage. This makes the right product mix and superior customer service essential for a retail clothing business. Consumer research plays an important role in determining what customers want to buy. Employee customer service and product-specific training, convenient store hours, a liberal return policy and short check-out lines contribute to a customer-first environment.