Financial due diligence tells investors a great deal about a retailer.
But historical financial statements don’t always reveal the underlying health of the merchandising engine producing those results.
For private equity investors evaluating a retail business, merchandising deserves dedicated attention.
Start with the assortment
Questions should include:
Is the assortment differentiated? Are there too many SKUs? Are important customer needs missing? How dependent is the business on particular brands or suppliers?
Examine inventory quality
Two companies can report identical inventory values while having dramatically different inventory health.
Investors should understand turns, aged inventory, seasonal carryover, markdown exposure, SKU productivity, and inventory concentration.
Understand gross margin
Is margin improvement sustainable?
Determine whether historical margins resulted from structural improvements or temporary factors such as vendor deals, unusually low markdowns, inflation, or inventory timing.
Evaluate vendor concentration
Significant dependency on a few suppliers can represent risk.
Conversely, strong strategic supplier relationships may represent an important competitive asset.
Assess the team
Retail performance depends heavily on people.
Evaluate whether the merchandising organization has the experience, analytical capability, processes, leadership, and succession depth necessary to support the investment thesis.
Connect diligence to the value-creation plan
The best merchandising diligence doesn’t end with identifying risks.
It should help investors identify opportunities: assortment improvements, private brands, pricing, vendor economics, inventory productivity, category expansion, organizational improvements, and new growth opportunities.
Ash & Co. Retail Advisors provides retail deal evaluation and advisory support to private equity firms and other investors.
