With pressure on profitability mounting and the outlook for 2009 increasingly uncertain, cost control matters more than ever to buoy profitability. What many people fail to remember is that 70% of discretionary (non-COGS) costs in this business relate to headcount – both directly (# people) and indirectly (T&E, IT, etc…).
So how best to peek inside a company to gauge whether cuts are coming from fat or muscle? I think a fair way is to plot each company’s productivity versus total SG&A ratio. This is by no means a way to make blanket statements about which companies are behaving better than others as it relates to capital deployment – especially given that there are differences in business models (wholesalers, retailers, and vertically owned manufacturers). But it definitely helps us put the data in perspective, and ask the appropriate questions about where one company stands relative to another.
There are 2 major buckets of companies.
1) High productivity, high SG&A ratio. These are companies I am least worried about. They have mostly healthy productivity levels, and have either a) given employees the proper tools to maintain such productivity (R&D, marketing, technology, etc…) – such as Nike, UnderArmour, Ralph Lauren and Coach, or b) are just flat-out fat and/or poorly run with room to cut (Timberland, Quiksilver, Liz Claiborne). That’s not great for the here and now, but certainly leaves a nice call option.
2) Low productivity, low SG&A. First off, I fully acknowledge that this group includes several retailers and the two vertically operated manufacturers, who have more of their respective investment bases captured on (or near) the balance sheet in the form of equipment or leases. But it’s impossible to look past some massive gaps in SG&A spend on like-for-like businesses. FL, DSW, and GIL bad; FINL PSS and HBI good. You get the idea.
See chart below, and/or contact my office for additional color.