Hasn’t sold in a year? Dump it. Here’s why.

Having a profitable year has a lot more to do with how well you handle inventory than making a profit on an item when you sell it.
So, let’s get something straight. If no one buys an item in your store within a year, it’s outdated. You buy inventory for only one reason: As an investment that will pay you a profit later. “Later” in a jewelry store is defined as within the next 365 days.  

Here’s why:

Buy an item Jan. 1 for $100 and expect to sell it by Dec. 31st for $225. After 12 months you should expect to get your original $100 investment back plus a gross profit of $125.

Look at it monthly, though, and you’ll begin to get antsy after a year. On the $100 item, we need $125 in profit. Divide the $125 in profit by 12 months, and another way of looking at it is that item needs to give us $10.42 a month in gross profit.

So for each month it does not sell, the item owes you $10.42. Think of it like loaning a friend $100, and each month he owes you $10.42 in interest. High rate? Yes, but this interest also has to pay for salaries, rent, advertising, etc., so it must be that much.

So if you held the item for 18 months, the accumulated gross profit is $187.56. You’d need to sell it for $287.56 instead of $225.  If it stays there for three years then it has to sell for: 36 months x $10.42 = $375.12 + $100 original cost = $475.12!

It was tagged at $225 but now must sell for $475.12. If it does, you’ll make exactly the same amount as it should have just buying and selling it once a year, three times over three years.

Can you wait three years to collect your money and still pay your overhead? No!

Is a customer going to pay almost double for a 3-year-old dud? No!

If this item stays for another three years, you’ll be down another $475.12 in lost profits. So in the third year, let’s assume you get your cost out of it (give up on making a profit, Charlie) and you buy a different item for $100. But the difference is, now it sells every year. It’ll make $475 for the next three years rather than losing $475.

You can’t make up for what happened in the past, but you can make up for lost time and profits in the future.

Take the hit and move on. This happens to be what other retail industries do. Clothing industries dump merchandise at the end of a season. How long is a season for them? Three to four months. So consider yourself lucky.

David Geller is a consultant to jewelry-store owners on store management and profitability. E-mail him at [email protected].

This story is from the October 2010 edition of INSTORE