Question

Inventory Turnover and days’ sales in inventory

Kroger, Sprouts Farmers Market, Inc., and Whole Foods Markets, Inc. are three grocery chains in the United States. Inventory management is an important aspect of the grocery retail business. Recent balance sheets for these three companies indicated the following merchandise inventory (in millions) information:

	Kroger	Sprouts	Whole Foods
Cost of merchandise sold	$85,512	$2,541	$9,973
Inventory, end of year	5,688	165	500
Inventory, beginning of year	5,651	143	441

a. & b. Determine the inventory turnover and the number of days’ sales in inventory (use 365 days and round to one decimal place) for the three companies. Round all interim calculations to one decimal place. For days' sales in inventory, round final answers to the nearest day, and for inventory turnover, round to two decimal place.

Company names	Inventory Turnover	Days' Sales in Inventory
Kroger		days
Sprouts		days
Whole Foods		days

c. The inventory turnover ratios and days’ sales in inventory are for Kroger and Sprouts. Whole Foods has a inventory turnover and a days’ sales in inventory than Kroger and Sprouts. These results suggest that Kroger and Sprouts are efficient than Whole Foods in managing inventory.

d. If Kroger had Whole Foods’ days’ sales in inventory, how much additional cash flow would have been generated from the smaller inventory relative to its actual average inventory position? Round interim calculations to one decimal place and your final answer to the nearest million.
$ million

Answer 1

(a) and (b)

Average inventory = (Opening inventory + Ending inventory)/2

Average inventory of Kroger = (5,688 + 5,651)/2

= 11,339/2

= $5,669.5

Average inventory of Sprouts = (165 + 143)/2

= 308/2

= $154

Average inventory of Whole Foods = (500 + 441)/2

= 941/2

= $470.5

Inventory turnover = Cost of merchandise sold/Average inventory

	Kroger	Sprouts	Whole foods
Cost of merchandise sold	85,512	2,541	9,973
Inventory, end of the year	5,688	165	500
Inventory, begining of the year	5,651	143	441
Average inventory	5,669.5	154	470.5
Inventory turnover	85,512/5,669.5 = 15.08	2,541/154 = 16.5	9,973/470.5 = 21.20

Days' sales in inventory = 365/Inventory turnover

Company name	Inventory Turnover	Days' sales in inventory
Kroger	15.08	365/15.08 = 24 days
Sprouts	16.5	365/16.5 = 22 days
Whole foods	21.20	365/21.20 = 17 days

(c) Inventory turnover ratios of Kroger and Sprouts are lower than Inventory turnover ratio of Whole foods. Higher the Inventory turnover ratio, better it is. Hence, Inventory turnover ratio of Whole foods is better than Kroger and Sprouts.

Days' sales in inventory of Kroger and Sprouts are higher than days' sales in inventory of Whole Foods. Lower the days' sales in inventory, better it is. Hence, Whole foods has a better days' sales in inventory.

Higher Inventory turnover ratio and lower days' sales in inventory of Whole Foods suggest that Whole Foods has an efficient inventory management system as compared to Kroger and Sprouts.

(d)

Average inventory of Kroger = $5,669.5 million

Days' sales in inventory = 24 days

Investment in inventory = (5,669.5/365) x 24

= $372.8 million

If Kroger had Whole Foods days' sales in inventory = 17 days

Investment in inventory = (5,669.5/365) x 17

= $264 million

Hence, additional cash flow generated = 372.8 - 264

= $109 million