The cash conversion cycle

Days inventory outstanding is how long goods sit before selling. Days payable outstanding is how long the retailer takes to pay suppliers. Days sales outstanding is how long customers take to pay, which for a cash-and-card retailer is close to zero. The cycle is inventory days plus receivable days minus payable days.

A retailer that sells in thirty days and pays in sixty has a negative cycle: it is financed by its suppliers. That is the structural advantage of high-turn retail, and it is why turnover matters more than margin in some formats.

Off-price buyers often pay quickly, sometimes at or near delivery, because speed of payment is part of what they are selling to a distressed seller. They then hold goods longer, including packaway held for a full year. That combination, fast payment and slow turn, is a much heavier cash cycle than conventional retail, which is why working capital is the real constraint on the model rather than access to merchandise.

It is also why an assortment that clears slowly hurts an off-price buyer twice: once in realized price and once in the cost of the capital tied up waiting, as set out in lot valuation.

Inventory days can be approximated from reported inventory and cost of sales. A jump in inventory days without a matching rise in sales is the earliest visible sign that goods are not moving, usually a quarter or two before it shows up in margin. That is the measure to check against the levels in the inventory dashboard.