Cash Flow's Impact on Profitability

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Cash Flow's Impact on Profitability

The inventory management strategies of five public direct to consumer companies with strong cash on hand that have optimized their inventory turnover time, with a positive correlation with revenue growth, profitability, or gross profit margins are identified and discussed below. Despite an extensive review of a range of direct to consumer companies identified from a range of different startup databases and lists, including Crunchbase, failed to identify a fifth company that met the required criteria. The information available publicly relating to inventory management strategy varied considerably. In addition, two of the best practices for improving the inventory turnover ratio have been identified and discussed. The best practices were identified as practices generating considerable discussion and commentary from industry experts and which had been adopted by multiple companies.

Stitch Fix

  • Stitch Fix is a public direct to consumer company providing personalized online shopping. The company has a team of stylists that pick clothing that best suits an individual's personal style. The clothing is delivered to the consumer either once or regularly. The consumer selects the items they wish to keep and returns the rest.
  • The company has illustrated the benefits of having cash on hand. In 2015, their cash on hand was $68.5 million, in 2016 $91.5 million, in 2017 $110.6 million, and in 2018 $297.5 million. Although 2019 represented a slight decline from 2018, recording $196.5 million cash on hand. This is largely due to one-off capital investment. The cash flow generally within the company has largely been growing annually, the exception being 2019 due to the one-off capital investment.
  • Over recent years, Stitch Fix has experienced positive revenue growth, increasing its revenue from $342 million in 2015 to $1.58 billion in 2019. Their "rate of revenue growth has varied in recent periods. Specifically, their revenue increased by 28.6% in 2019 compared to 2018, 25.5% in 2018 compared to 2017, and 33.8% in 2017 compared to 2016."
  • Stitch Fix relies on its data science capabilities to fuel the business. This includes the rich and growing set of detailed client data and the proprietary algorithms they have developed. This data is used for a range of different purposes, including the optimization of inventory.
  • Inventory is held in the following categories: Women's, Petite, Maternity, Men's, Plus, and Kids. Due to the nature of the company, a diverse range of styles are held within each category. The areas they employ data technology include allocation, batch picking, transportation, shipping, returns, and ongoing process improvement.
  • The inventory management strategy is largely dictated by their fulfillment centers, shipping, transportation, and logistics processes. The company currently has six fulfillment centers within the US (California, Arizona, Texas, Pennsylvania, Georgia, and Indiana), and one in the UK. Data science and proprietary algorithms are used to create efficiencies within these fulfillment centers, which, in turn, has a flow on effect on the amount of inventory the company needs to hold at any one time.
  • Efficiency drives the management of returned inventory, ensuring it is processed quickly to be allocated to another purchase. Stitch Fix said in its 2019 annual report, "Our specialist returns teams in our dedicated return intake areas accept, process, and reallocate returns to our inventory so the merchandise can be selected for another Fix. Our expertise in inventory management allows us to turn inventory quickly, which drives working capital efficiency. "
  • Stitch Fix secures its inventory in advance by entering into purchase agreements well in advance of the coming season, with data being utilized to help predict the future trends having growing importance. The inventory is secured in advance of the trend being reflected in consumer purchase behaviors. This practice is particularly sensitive to price and preference trends, presenting an element of risk. Historically, Stitch Fix has suffered high inventory write-offs due to wrongly predicting future trends and sub optimal purchase patterns. Both have improved in line with enhanced data capabilities.
  • There is additional risk due to the operational model that Stitch Fix is operating under. This model does not allow for the markdown of inventory, ruling out several methods of inventory liquidation. This is factored into budgets with an inventory reserve, which accounts for predicted losses due to the aforementioned factors and lost and damaged inventory.


  • Wayfair is a public direct to consumer retailer offering a range of goods including furniture, homeware, and home decor across the home category of merchandise. They aim to cater to every taste and budget. The company has exhibited remarkable success since it was founded in 2002.
  • The company has experienced increasing cash and cash equivalents over at least the previous four years. Cash and cash equivalents amounted to $466 million in 2015, rising to $1.1 billion in 2019.
  • Wayfair's revenue has followed a similar upward trend both domestically (within the US) and internationally. Their revenue in 2017 was $4.7 billion, increasing to $6.8 billion in 2018, and $9.1 billion in 2019.
  • Despite this, the company has posted a net loss over the last three years, mainly due to some large item capital investment. Wayfair said in its 2019 annual report, "our existing cash and cash equivalents and investments, together with cash generated from operations and the cash available under our revolving credit facility, will be sufficient to meet our anticipated cash needs for the foreseeable future."
  • Wayfair offers over 18 million products from over 12,000 suppliers. The company provides "one of the largest online selections of furniture, decor, decorative accents, housewares, seasonal decor, and other home goods." It means that the different tastes, purchasing goals, budgets, and styles are taken into account, and attempts made to accommodate them. Carrying only home category products has helped Wayfair build infrastructure around the unique characteristics of that market.
  • A minimal inventory strategy has been adopted by Wayfair, which enables them to offer a huge number of products from a large number of suppliers.
  • The minimal inventory strategy has resulted in Wayfair shifting the burden of inventory back onto the suppliers, with most products shipped to the consumer directly from the supplier. The suppliers can make use of the logistics network that Wayfair has developed. When developing the logistics network, Wayfair leveraged its capabilities to benefit both the consumer and the supplier.
  • Besides shifting the risk, Wayfair's minimal inventory strategy allows them to save money on storage and warehousing.


  • Chewy is a public direct to consumer pet supplies company, offering consumers everything they need to care and look after their pet. Chewy´s success is partially attributable to recognizing the growing role pets play in a family and offering products to reflect their status as a family member.
  • Despite experiencing negative free cash, Chewy has been included because, over the last five years, they have effectively recovered from a negative free cash position, and based on recent trends, they will be in a positive free cash position this year. The free cash position is largely reflective of the capital investments they have made. In 2017, the free cash was negative $120 million, in 2018, negative $57 million, and in 2019 just negative $2 million.
  • Over the last three years, Chewy has seen increased revenue growth. In 2017, Chewy had annual revenue of $2.1 billion, rising to $3.5 billion in 2018, and $4.8 billion in 2019.
  • Chewy has an extensive inventory, carrying more than 2,000 different products. All are offered at competitive prices. The inventory they have in stock reflects the most popular and best products.
  • The lack of seasonality and a subscription service have helped Chewy maintain a minimal inventory strategy as it has meant relatively consistent and stable inventory requirements. It has also enabled them to optimize inventory pricing.
  • The technology used to run the Chewy platform is both scalable and integrated, meaning that they can run their operation cost-efficiently. Inventory is one of their scalable variables. Through automating many of the planning and fulfillment processes, they have gained greater control over the inventory they need to keep in hand.
  • Like Wayfair, Chewy looks to shift the risk concerning inventory onto the supplier and has developed a range of co-sourcing and outsourcing arrangements with vendor partners to achieve this. The use of fulfillment centers in a network throughout the U.S. means that orders are fulled close to the consumers' residence allowing for cost-effective and efficient product delivery. This strategy supports the minimal inventory approach.
  • Despite reviewing Chewy´s annual reports over the last several years, this is the extent of their inventory strategy publicly disclosed.

  • is a public direct to consumer flower company, providing arranged flowers and flower delivery services. Acquiring the 1-800flowers telephone number has contributed to the success of this company. They were also among the first online flower companies.
  • 1-800flowers is the epitome of consistency, having recorded revenues around the $1.9 billion mark for the last five years. Their profitability reflects this consistency with their gross profit margin hovering in the low 40s over the same time period.
  • Cash and cash equivalents reflect a similar upward trend, rising from $28 million in 2015 to $175 million in 2019.
  • Adopting a successful inventory management system has been fundamental to the success of, especially given the seasonality of the market and the high potential of damaged or spoiled inventory. By offering relief for royalty operational model, effectively relieves itself of any need to hold inventory. The operation model centers on using a network of independent vendors to offer a range of different products with the added benefit of immediate or almost immediate delivery. receives a royalty for creating the link from buyer to vendor.
  • This model of operations effectively relieves of any responsibility for inventory and any risk.

PetMed Express Inc

  • PetMed Express Inc is a public direct to consumer pet medication company. They claim to be "America's number one pet pharmacy.
  • After verifying each prescription, an order is sent to PetMed Express's fulfillment center at its headquarters. Unlike some of the other companies, PetMed Express maintains all of its inventory and directly shipping products to the consumer.
  • PetMed Express has been slow but steady increases in revenue over the past four years, with revenues rising from $233 million in 2015 to $274 million in 2018 (this was the most recent year available).
  • Throughout this same period, PetMed Express has experienced consistent free cash or cash equivalents rising from $37 million to $78 million.
  • One of the potential negatives of PetMed Express's inventory strategy relates to purchasing some of their products from third-party distributors. As PetMed Express is not a licensed distributor, the ongoing supply of these products is not guaranteed in the future. Inventory ordering is based on internal operational estimates of future needs.
  • The market is a relatively stable one, where trends are more easily predicted. The market's stability and consistency reduce the company's risk considerably, despite operating what is perceived as a more high-risk strategy.
  • This is the extent of the inventory management strategy made public by PetMed Express.

Excluded Companies

  • Despite an extensive search of direct to consumer companies operating in this space, we could not find another company that met the required criteria. A comprehensive search of various public company listing sites revealed very few public direct to consumer companies. A number of the companies ruled out met the financial criteria but where not public companies. Others had been public companies but had since been acquired and removed from the exchange. These companies included Blue Devine and
  • Blue Apron was excluded for not meeting the required criteria currently having had a difficult few years.
  • Major consumer brands have acquired other companies like Harry's and Dollar Shaving Club, and details of their operations are no longer available.
  • Several others have noted Casper's troubled entry onto the public markets and delayed their own IPO. Warby Parker is one of these companies.

Best Practice Proper Forecasting

  • Two of the companies previously mentioned have adopted the best practice of proper forecasting. PetMed Express and Stitch Fix both rely on the proper forecasting to effectively manage their inventory and, in turn, their inventory turnover ratios.
  • The inventory turnover ratio reflects the number of times the inventory is brought and sold over the financial year. Companies are trying to increase the ratio. Proper forecasting enables companies to ensure they have the inventory on hand that reflects consumer demand at any given point in time. Proper forecasting is essential to avoid delays between receiving the order and shipping it to the consumer. At the other end of the scale, an oversupply of inventory that far exceeds consumer demand.
  • These poor outcomes will result in adverse financial outcomes in terms of increased write-offs or reduced sale prices. They also lower rather than increase the inventory turnover ratio. On the other hand, when forecasting is done properly, it provides valuable insights into inventory management and ensures the inventory in hand is a reflection of the market demands. This ultimately means a faster turnover, which increases the inventory turnover ratio.

Encourage the Sale of Old Stock

  • Disposing of the old stock decreases companies holding costs. It also helps to improve the inventory turnover ratio. By selling old stock promptly, even if it is at a reduced price, it reduces the likelihood of becoming obsolete and unsaleable. This would adversely affect the inventory turnover ratio.
  • When the stock is sold before it becomes obsolete, it still contributes to the inventory turnover ratio. It also creates holding space for more relevant inventory relative to the current consumer demands, which optimizes the likelihood of increasing the inventory turnover ratio.
  • The sale of old stock is especially relevant to perishable goods from a financial perspective. Receiving something for the product better than receiving nothing should the product become unsaleable and have to be written off. The perishable goods market is high turnover, so the sale of older products must be encouraged. The alternative is the company will face high write-off expenses, while at the same time have reduced holding capacity for other inventory-
  • This is a common practice of all major consumer goods companies, including the major supermarket brands. Other consumer goods companies employing this strategy include Coca Cola, Nestle, and Mars.

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