Asia is a verdant ground for luxury watch retailers as the rise of the middle class and many new millionaires being minted signal stronger demand for these timepieces. Our local stock market has two listed luxury watch retailers: The Hour Glass Ltd (SGX: AGS), or THG, and Cortina Holdings Limited (SGX: C41). Both have boutiques in Singapore and across Southeast Asia and sell a variety of luxury watch brands including Tag Heuer, Rolex, Patek Philippe, and Audemars Piguet, to name a few.
The nature of luxury timepieces is such that sales are few and far between, but each item is sold at a very high absolute price. I decided to use three ratios to compare the two watch retailers in order to assess the efficiency of their operations and how fast they can convert their revenue to cash. One metric is the inventory turnover days and the other is the cash conversion cycle.
Inventory turnover days
The first metric, inventory turnover days, assesses how quickly inventory is sold. Luxury watches typically spend a lot of time sitting on a display shelf before being sold, and during this time, the retailer’s inventory is essentially “locked up,” unable to be converted into sales and cash. An efficient retailer is able to “churn” its inventory more quickly by stocking watches that are in higher demand rather than displaying an array of watches that are slow-moving.
The formula for inventory turnover days is:
(Average Inventory / Cost of Goods Sold) x 365 days
As can be seen in the table above, THG and Cortina both have inventory days hovering between 190 to 200 days, implying that they sell one item every six months or so. This is normal for the luxury timepieces industry as the value of each item is high.
Cash conversion cycle
The second ratio is that of the cash conversion cycle (CCC). The CCC calculates the number of days it takes for a business to convert receivables and inventories to cash flow. A lower CCC is also desirable as it means the business can more quickly churn its inventory into cash. The formula for the CCC is:
DSO + DIO – DPO
DSO is days sales outstanding (receivables turnover days), DIO is days inventory outstanding (inventory turnover days), and DPO is days payable outstanding (payables turnover days).
From the table, THG’s cash conversion cycle is slightly higher than that of Cortina, but both are hovering around to six months. For such a lengthy period, both watch retailers should ensure they have sufficient cash balances (on their balance sheets) to pay for operational expenses such as marketing, rental, and staff salaries.
Using these two ratios
Armed with these ratios, investors can use them to assess other companies within a similar industry. Two other watch companies that come to mind are Hong Kong-listed companies Hengdeli Holdings Ltd (HKG: 3389) and Emperor Watch & Jewellery Limited (HKG: 887). Investors can compare the inventory turnover days and cash conversion cycle to assess which retailer is the most efficient in converting inventory to cash.
Note that the CCC is just one aspect of a company. Investors also need to assess other pertinent factors including each company’s stable of watch brands, debt levels, and other financial metrics.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.