The Effects of Firm Size and Sales Growth Rate on Inventory Turnover Performance in the U.S. Retail Sector

Abstract

Past research shows that inventory turnover varies substantially across firms as well as over time. A significant portion of this variation can be explained by gross margin, capital intensity, and sales surprise (the ratio of actual sales to expected sales for the year). We extend econometric models of inventory turnover by investigating the effects of firm size and sales growth rate on inventory turnover using data for 353 public listed US retailers for the period 1985–2003. With respect to size, we find strong evidence of diminishing returns to scale. With respect to sales growth rate, we find that inventory turnover increases with sales growth rate, but its rate of increase depends on firm size and on whether sales growth rate is positive or negative. Our results are useful in (1) helping managers make aggregate-level inventory decisions by showing how inventory turnover changes with size and sales growth, (2) employing inventory turnover in performance analysis, benchmarking and working capital management, and (3) identifying the causes of performance differences among firms and over time.