3-2 problem set
Markdowns
Module Three:
Retail Pricing and Repricing of Merchandise
1
Ascertain the types of price adjustments and confirm their importance as
merchandising decisions
Calculate markdowns as dollar amounts and percentages
Understand the differences between point-of-sale (POS) and permanent (physical) markdowns
Understand the criteria for the determination of taking markdowns (outdate, weeks of supply, sell through percentage, build)
Delineate the procedures for making price changes
Recognize the impact of repricing decisions on profit, including the journalization of markdowns
Objectives
Employee discount
Gross markdown
Markdown (MD)
Markdown cancelation
Markdown journalization
Markdown percentage
Net markdown
Outdate
Permanent (physical) markdown
Point-of-sale (POS) markdown
Retail reduction
Sell through percentage (ST%)
Weeks of supply (WOS)
Key Terms
Key Concept Formulas
Markdown
Markdown $ Original or present retail price $ New retail price $
Markdown $ Percentage off Present retail price $
Total markdown $ First total $ markdown Second total $ markdown
Planned Markdown $ N Markdown %
Markdown %
Markdown %
Markdown cancellation Higher retail $ Markdown price $
New Markdown $ Gross markdown $ Markdown canelation $
Key Concept Formulas
Sell Through Percentage
Sell through %
Weeks of Supply
Weeks of Supply
Universal aspect in retailing today
Price reductions necessary to increase sales and create demand for product
Price adjustments must be properly recorded to:
Achieve an accurate book inventory figure
Plan initial markup goals when pricing goods
Control and manage the amount received in an attempt to merchandise at the gross margin and profit goals established
Repricing of Merchandise (Markdowns)
In the profit and loss statement, markdowns are a portion of retail reductions that affect gross margin and include:
Point-of-Sale (POS) and permanent markdowns
Coupons
Employee discounts
Repricing of Merchandise (Markdowns)
Lowering or reducing of any retail price on one item or a group of items
Markdown is the amount that reduces the inventory value
Markdowns are expressed as a percentage of net sales for all product sold for a specific time period, usually a week, month, quarter, season, or year
Important tool in merchandising and for buyers
Is a means of promoting and increasing sales, but impacts the gross margin and must be monitored and controlled
Markdowns
Necessary merchandising tool buyers can use to their advantage in order to:
Drive sales on a store, department, or class level
Stimulate the sale of merchandise to which customers are not responding satisfactorily (i.e., merchandise not selling at acceptable sell through rates)
Drive customer traffic to stores or website by offering sales
Meet competitive prices/price matching
The Purpose of Markdowns
Free up open-to-buy to bring in new merchandise on order and reorder merchandise that is selling
Create special promotions or sales (e.g., for Mother’s Day or Black Friday)
Clear fashion merchandise that has a short lifecycle
End-of-season clearance
The Purpose of Markdowns
Buyers are given a plan for markdowns in both dollars and percentage.
Buyers will need approval by their divisional merchandise manager or planner before taking the markdowns.
In order to have the markdown approved, buyers will need to:
Project the amount of markdowns needed to be taken
Project the sales increase (build) needed to cover the markdown
After the markdown is taken, buyers will need to compare the actual markdowns taken to the plan to see if the desired sales increase was achieved
Markdowns
Buying errors:
Overbuying in quantities
Poor timing in ordering merchandise
Receiving and accepting merchandise that has been shipped late
Unbalanced buying or accepting merchandise that is different than ordered
Pricing errors:
Not taking timely markdowns
Setting the initial price too high
Not being competitive in price for the same product
Calculated risks of carrying “prestige” or trendy fashion merchandise
Causes of Markdowns
Selling errors:
Poor stock keeping
Failure to display merchandise properly or advantageously
Uninformed sales associates
Special sales from stock:
Off-price promotions
Multiple sales (e.g., buy one, get one for 50% off)
Broken assortments
Necessary price adjustments
Remainders from special sales
Causes of Markdowns
Your first markdown is your least costly and most profitable; it needs to be a smart markdown.
Why:
Buyers should have sufficient markup to cover costs and expenses.
Timely in-season markdowns present a good assortment of merchandise for customers to buy from.
“Wear now” product
Can sell the outfit; multiple unit sales
Reduction in end-of-season clearance markdowns
Timing of Markdowns
Accurate timing can reduce the amount of markdowns needed.
Buyers need to analyze their selling and take markdowns when:
Merchandise becomes slow selling
Customer demand is sufficient to sell the merchandise with a minimum price reduction
Consumers’ interest in the merchandise decreases and new product is being received
Competition has reduced the prices on like merchandise
Timing of Markdowns
The “right” markdown price depends on:
The reasons for the reduction
The nature of the merchandise
The timing of the selling season
The quantity on hand
The original (initial) markup
History of like-item pricing and customer response to that price
The Amount of the Markdown
Size of markdown must be substantial enough to produce the planned results
Rules to be considered:
The first markdown should be sharp enough to move a significant amount of the merchandise
The markdown should be sufficiently large to attract customers who rejected the merchandise at its original price
The price may be reduced sufficiently to appeal to the next price zone customer
The Amount of the Markdown
Calculating the dollar markdown
Concept:
Original or present retail $ - New retail $ = Markdown $
Problem:
A cashmere pullover that was not selling as well as planned was reduced from $198 to $169. What is the dollar markdown?
Solution:
Original or present retail $198
New retail - $169
Markdown $ = $29
Markdown Calculations
On a group of items
Concept:
Original or present retail $ - New retail $ = Markdown $
Markdown $ x Units taken = Total Markdown $
Problem:
A buyer reduces 93 calculators from $15 to $10. What is the total markdown in dollars?
Markdown Calculations
Solution:
Original or present retail $15
New retail - $10
Markdown $ = $5 per piece
Total markdown $ = $5 markdown × 93 pieces
Total markdown $ = $465
Markdown Calculations
Using Percentage “Off” Method
Concept:
Present retail price $ × Percentage off = Markdown $
Problem:
A store advertises 25% off on a group of 50 chairs currently retailed at $100 each. What is the total dollar markdown?
Markdown Calculations
Solution:
Percentage off = 25% × $100 Retail
Markdown $ = $25 per chair
Total markdown $ = $25 markdown × 50 pieces
Total markdown $ = $1,250
Markdown Calculations
Additional markdowns taken on top of individual markdowns
Examples include:
Additional percentage-off or dollar-off product already marked down
Store coupons
First markdown taken on the initial price
Second markdown taken on the first markdown price
Compounding of Markdowns
Dollars Off First Markdown and Dollars Off Second Markdown
Concept:
Total markdown $ = First total $ markdown + Second total $ markdown
Problem:
The men’s clothing buyer had a group of 50 jackets priced at $225 each that were selling very slowly. To stimulate sales of these jackets, the buyer reduced the price of the jackets in that group to $175. At this price, 40 pieces were sold in a short time. At a
later date, the remaining pieces needed a further reduction to clear them from stock.
The buyer reduced them to $100 each, and at that price they all sold out. What was
the total dollar markdown taken?
Compounding of Markdowns
Solution:
First Markdown on Group
Original retail price $225
– First markdown price – 175
Amount of markdown per piece = $50
× Number of jackets × 50
First $ markdown = $2,500 $2,500
PLUS
Second Markdown on Group
First markdown price $175
– Second markdown price – 100
Amount of markdown per piece = $75
× Number of jackets × 10
Second $ markdown = $750 + 750
Total markdown $ on this group = $3,250
Compounding of Markdowns
Percent Off First Markdown and Percent Off Second Markdown
Problem:
A collection of twill pants with an original retail price of $100 was promoted for 25% off. There was a coupon in the circular for an additional 20% off. What is the total markdown if 200 pants were sold?
Compounding of Markdowns
Solution:
First Markdown on Group
Original retail price $100
– First percent off markdown (25%) – $25
New retail price = $75
– Second percent off markdown (20%) – $15
= New retail price = $60
Total markdown = $25 + $15 = $40 × 200 Units sold = $8,000.00
Compounding of Markdowns
Concept:
Planned markdown $ = Planned net sales $ × Planned markdown %
Problem:
The sales in the men’s footwear department were planned for $560,000, and the markdown percentage was planned at 35%. Find the dollar amount of markdowns that would be permitted.
Solution:
Total planned markdown $ = $560,000 net sales × 35% Planned markdown %
Total planned markdown $ = $196,000
Calculating Planned Dollar Markdown When Markdown Percentage and Net Sales are Known
Concept:
Actual markdown $ = Actual net sales $ × Actual markdown %
Problem:
The sales in the men’s footwear department actually totaled to $700,000, and the actual markdown percentage was 40%. Find the actual dollar amount of markdowns that occurred.
Solution:
Total actual markdown $ = $700,000 Actual net sales × 40% Actual markdown %
Total actual markdown $ = $280,000
Calculating Actual Dollar Markdown When Markdown Percentage and Net Sales are Known
Need to compare planned markdowns to the actual markdowns that were taken
Did the markdowns achieve the goal?
If actual markdowns taken are greater than the plan, the result would be negative and the buyer is overspent
If actual markdowns taken are less than the plan, the result would be positive and the buyer should have more markdowns available to spend
Remember the ultimate goal is to drive sales
Comparing Planned Markdowns to Actual Markdowns
Concept:
Over/under markdown $ = Planned markdown $ − Actual markdown $
Problem:
In the previous men’s footwear example, compare the actual markdown dollars incurred to the markdown dollars planned by the buyer.
Solution:
Over/under markdown $ = $196,000 − $280,000
Over/under markdown $ = -$84,000 or $84,000 over the planned markdowns
Comparing Planned Markdowns to Actual Markdowns
Calculating Markdown Percentage
Markdowns are expressed as a percentage of the net sales for a specific time period.
They can be calculated for an entire department, vendor, or classification.
Concept:
Markdown %
Problem:
In March, Department #33 had net sales of $50,000. The markdowns taken for March totaled $16,5000. What was the markdown percentage for March?
Calculating Markdown Percentage
Solution:
Markdown %
33.0%
Differences exist in what a customer gets when product is marked down versus what it costs a retailer.
Markdowns are a depreciation or devaluation of the retail value of inventory.
Once product is marked down, the retailer is not collecting that value of inventory set by the original price.
Retailers must account for this devaluation of retail inventory.
The markdown percentage that appears on buyer’s reports (six-month planning and open-to-buy) is the markdown journalized.
Markdowns will always journalize higher than what the customer receives at point-of-sale.
Markdown Journalization
Markdown Journalization
Concept:
Markdown % to the customer
Markdown % to the journalization
Problem:
A women’s denim buyer is running a fall promotion on denim jeans. Denim jeans that have a regular retail price of $120.00 will be promoted at $80.00. Calculate the markdown percentage for the customer and the markdown percentage journalized by the buyer.
Markdown Journalization
Solution:
Original retail $ New retail price $ Markdown $
$120.00 $80.00 $40.00
Markdown % to the customer
Markdown % to the customer 33.3%
Markdown % to the journalization
Markdown % to the journalization 50.0%
Two types of markdowns that affect the gross margin differently:
Point-of-Sale (POS)
Permanent (physical)
Buyers need to understand the gross margin implications of each.
Point-of-Sale (POS) and Permanent (Physical) Markdowns
Point-of-Sale (POS):
Most common type used by retailers today
Temporary and can change daily, weekly, monthly, etc.
Merchandise can revert back to the current selling price and be reduced to a new price
Can be dollars off or percentage off
Coupons are POS markdowns
POS markdowns are journalized and gross margin affected only when the merchandise is sold
Point-of-Sale (POS) Markdowns
Concept:
Total POS markdown $ = Individual markdown $ × Units sold
Problem:
The activewear buyer is planning a New Year’s “Get Fit” sale. On December 31st, all
$69.00 leggings will be promoted at $49.99, and on New Year’s Day, all $69.00 leggings
will be promoted at 40% off. Here is what sold on each day:
December 31st: 480 leggings
New Year’s Day: 600 leggings
Calculate the total point-of-sale markdown dollars, total sale dollars, and markdown percentage for the sale.
Point-of-Sale (POS) Markdowns
Solution
Total markdown $ for the POS promotion
Point-of-Sale (POS) Markdowns
| Retail price $ - New retail $ = | MD $ × | Units sold = | Total MD $ |
| $69.00 - $49.99 - | 19.01 × | 480 | $9,124.80 |
| Retail price $ × MD % = | MD $ × | Units sold = | Total MD $ |
| 69.00 × 40% = | 27.60 × | 600 | $16,560.00 |
| Total MD $ = | 9,124.80 + 16,560 = $25,684.80 |
Solution
Total sales $ for the POS promotion
Point-of-Sale (POS) Markdowns
| New retail $ × | Units sold = | Total sales $ | |
| 49.99 × | 480 | $23,995.20 | |
| Original retail $ − MD $ = | New retail $ × | Units sold = | Total sales $ |
| 69.00 − 27.60 = | 41.40 × | 600 | $24,840 |
| Total sales = | 23,995.20 + 24.840 = $48,835.20 |
Solution
The markdown % for the POS promotion
Point-of-Sale (POS) Markdowns
| × 100 = | MD% |
| × 100 = | 52.59% / 52.6% |
Not as common as POS, but still used by retailers
Merchandise price is changed permanently, reducing the inventory value
Ticketed price is changed to reflect the new price (e.g., new price sticker, red-lined, green-lined, etc.)
Once ticket price is changed, price cannot be marked up again
Dollar markdowns only
Permanent (Physical) Markdowns
Permanent markdowns are journalized and affect gross margin immediately.
Permanent markdowns usually are taken after several POS markdowns to sell through the product.
For permanent markdowns, buyers need to know how much is on hand to calculate the markdown. Create a sell-down chart.
When calculating sales, once product is permanently marked down, this becomes the new starting retail for any additional markdowns.
Permanent (Physical) Markdowns
Concept:
Total permanent markdown $ = Individual markdown $ × # Units on hand
Problem:
The dress buyer is permanently marking down fall velvet dresses. The buyer purchased
1,000 dresses and only 100 sold at the regular price of $150.00. The first permanent
markdown was to $129.99, and 200 sold at that price. The second permanent markdown was taken to $99.99, and 500 sold.
Calculate the total markdown dollars for the dresses, the total sales dollars, and the
markdown percentage.
Permanent (Physical) Markdowns
Solution
First, you need to create a sell-down chart:
Permanent (Physical) Markdowns
| 1,000 Units purchased to sell at $150.00 |
| − 100 Units sold at regular price $150.00 |
| = 900 Units on hand to permanent MD to $129.99 |
| − 200 Units sold at $129.99 |
| = 700 Units on hand to permanent MD to $99.99 |
| − 500 Units sold at $99.99 |
| = 200 Units remain on hand |
Permanent (Physical) Markdowns
| Retail price $ − New retail $ = | MD $ x | Units on hand = | Total MD $ |
| 150 − 129.99 = | 20.01 x | 900 | $18,009.00 |
| 129.99 − 99.99 − | 30.00 x | 700 | $21,000.00 |
| Total MD $ = | 18,009 + 21,000 = $39,009.00 |
| Retail $ × | Units sold = | Total sales $ |
| 150.00 × | 100 | $15,000.00 |
| 129,99 × | 200 | $25,998.00 |
| 99.99 × | 500 | $49,995.00 |
| Total sales = | 15,000 + 25,998 + 49,995 = $90,993 |
| × 100 = | MD% |
| × 100 = | 42.87% 42.9% |
Buyers must use analytical criteria for taking markdowns.
Criteria used include:
Outdate
Weeks of supply (WOS)
Sell-through percentage (ST%)
Build
Analytical Criteria for Taking Markdowns
Outdate:
Last date merchandise should be available for sale.
Buyers set outdates for fashion product that may have limited life spans.
Sales of product are monitored on a week-by-week basis to determine if the product will be sold through by the outdate set.
Buyers set the outdates when product is ordered or receipted in stores.
Example: For holiday-themed product (e.g., snowmen, snowflakes, wreaths, etc.) the outdate is typically set for January 1st.
Analytical Criteria for Taking Markdowns
Weeks of supply (WOS):
WOS tells a buyer how many weeks of product you have left to sell out completely.
WOS is calculated weekly and is based on the current trend of product sales.
WOS is monitored against the outdate.
If a buyer has too many weeks of product and it will surpass the outdate, it may be wise to take a markdown to accelerate sales.
WOS is normally calculated in units as a buyer needs to sell through units in inventory.
If prices are changed, WOS in dollars will yield a different result.
Once product is sold, it is removed from inventory. When calculating WOS and sell-through percentage, you need to know how many units are on hand at the beginning of the week.
Analytical Criteria for Taking Markdowns
Weeks of Supply (WOS)
Concept:
Weeks of Supply
Problem:
You started a season with 1,000 wallets to retail at $39.00. In the first week, you sold 50 wallets. In the second week, you sold 80 pieces when you took a POS markdown to $29.99. Calculate the WOS for the first week and the second week.
Weeks of Supply (WOS)
Solution:
WOS Week 1 20.0 Weeks of supply
Start Week 2 with 1,000 units on hand
WOS week 11.875 ÷ 11.9 Weeks of supply
Sell Through Percentage (ST%)
Tells a buyer how fast or slow merchandise is selling
Like WOS, ST% is calculated on a weekly basis and in units
Based on the current selling trend and is a snapshot in time
Should not be confused with turnover (turn) which is a productivity measure over a longer period of time
Concepts:
Sell through %
Sell Through Percentage (ST%)
Problem:
A small leather goods buyer starts a season with 1,000 wallets to retail at $39.00. In the first week, the retailer sold 50 wallets. In the second week, the retailer sold 80 pieces when the buyer took a POS markdown to $29.99. Calculate the sell-through % for the first and second weeks.
Solution:
Sell through % week 1 5.0%
Sell through % week 2 8.4%
Also known as percentage change, trend, or acceleration
Comparison as a percentage change in what was sold from week to week
When markdowns are planned, buyers need to project the increase in sales expected
Analyzing build will determine whether the sales goal was achieved
Like WOS and ST %, it is calculated in units; dollar builds will provide a different result
Builds can be negative, meaning less was sold in a subsequent week than the previous week
Builds can be over 100% if more than double the amount of units were sold in the subsequent week
Build
Build
Concept:
Build %
Problem:
Calculate the build for the wallets in the previous example between Week 1 and Week 2.
Solution:
Build %
Build % 60.0%
Inverse relationship
Tells a buyer when to markdown product as well as when to reorder product:
If WOS is too long or too high and merchandise will be in stock past the outdate, the ST% is slow, and the buyer should take a markdown.
If WOS is too short or too low and product will be sold out by the outdate, the ST% is fast, and the buyer should try to reorder the product if it can be delivered and sold in a timely manner.
Relationship of WOS and ST %
Every price change impacts gross margin and profits.
Markdowns reduce the retail price, causing a decrease in gross margin that is further reflected in a decrease in profit.
Markdowns are planned and the risk is anticipated.
It is offset by planning a higher initial markup.
Referring back to the Profit and Loss Statement (Chapter 1) vs. the Markup formula:
Gross sales − Reductions = Net Sales; which is always 100%
Retail − Cost = Markup; retail is always 100%
The Relationship of Repricing to Profit
Therefore, a correlation exists:
If no markdowns are taken, gross sales and net sales would be the same, and gross margin % and markup % for all intents and purposes would be equal.
As markdowns are taken, gross margin % may be reduced and will not equal markup %.
The Relationship of Repricing to Profit
| Net Sales | 100% | Retail | 100% |
| − Cost of goods sold % | − Cost % | ||
| = Gross margin % | = Markup % |