High Peak Financial
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Blog

This blog is written by Austin Conner and covers a mix of business topics that interest me.

I am currently a contract CFO and have worked with companies in a number of industries.


Benchmarking Company Performance

I was asked the following question by a company refining its business model for a retail product: "What gross margin percentage should we aim for?"  There are a number of different ways to tackle this.

  1. What is your competitor pricing at? How much higher or lower is your product?
  2. What is your current cost of goods sold? How efficient is your supply chain? Have you made a decision on outsourcing production - quality vs. control tradeoff? 
  3.  What is the industry average?

Let's answer the original question by looking at #3... As is often the case, there is no "direct" peer, so we will look at peer (retail and consumer) industry averages.  To find the industry average, I downloaded and analyzed public company data. Here is how I selected the group and calculated the gross margin percentage:

  • SIC group code: 10212 (Manufacturing - Apparel & Furniture) & 10217 (Retail - Apparel & Specialty)
  • Companies with market cap greater than $25 million
  • Eliminated companies in the business of licensing or with royalty driven sales models, which would skew the gross margin percentage higher
  • Eliminated convenience stores/gas stations, which were captured in SIC group code 10217
  • Revenue and gross profit are calculated on a last twelve months or LTM basis to eliminate seasonality. Gross profit is then divided by revenue to arrive at the gross margin number.

I ended up with 157 companies. The lowest gross margin was 19.5% for Blue Nile and the highest gross margin was 67.9% for Coach.  The left side includes retailers with little pricing power such as TJ Maxx, Staples and Best Buy whose gross margins are between 23-28% and are in highly competitive markets. In the middle, two notable companies in consumer technology are Apple and GoPro which have gross margins of 39.5% and 46.3%, respectively.  The largest toy company by revenues Mattel has a gross margin of 47.2%. On the right are premium branded consumer companies such as Coach, Michael Kors and Tiffany’s.  

So to answer the original question what should be our target gross margin, I would say aim for 40% to 45%, and you will be performing above average using the operating metrics of larger, more mature businesses as your guide.