Cash Flow's Impact on Profitability

Goals

To examine successful U.S. public direct-to-consumer brands (or traditional consumer goods brands with a strong ecommerce) to identify the practices/trends/correlations that relate to strong revenue growth, profitability, gross profit margin, inventory turnover time, and cash flow/cash position. Ultimately, the goal is to see if there is support for the hypothesis that companies with greater cash flow have optimized their inventory turnover time (i.e. lowering their working capital requirements) and that there will be a positive correlation with revenue growth / profitability / gross profit margins.

Early Findings

Casper

  • Casper has seen its revenue grow from $250.9 million in 2017 to $357.9 million in 2018 and $439.3 million in 2019.
  • Gross profit has also increased during that time, with gross profit of $116.9 million in 2017 up to $215.4 million in 2019.
  • Although the company started as a strictly direct-to consumer brand, they reported in the 2019 annual report that they sell direct to consumer in 70 countries, have 60 retail stores, and 18 retail partners, including Amazon, Target, and Costco. A quote from the 2019 annual report says '...we believe interaction with multiple channels has created a synergistic "network effect" that increases system-wide sales as a whole.'
  • The company has historically had losses and negative cash flow, and therefore is not a good example of the stated hypothesis which focuses on companies with greater cash flow.

Lululemon

  • Lululemon has had positive cash flow in all but one of the last four years. Cash increased by $233.4 million in FY 2017, increased by $255.7 million in FY 2018, decreased by $109.2 million in FY 2019, and increased by $212.2 million in FY 2020. The company's cash ans cash equivalents reported in the annual report for FY ending February 2, 2020, was $1,093.5 million.
  • The company has a "tight supply approach to merchandising." This means they purposely limit inventory in order to drive demand. The most common way this happens is tied into collaborations with brands and/or celebrities. They produce limited inventory of pieces they expect to be in high demand. This strategy has resulted in a faster inventory turnover than that achieved by other athletic brands.
  • Both revenue and gross profit have been consistently increasing for Lululemon, with revenue moving from $2,060.5 million in FY 2016 to $3,979.3 million in FY 2020. Similarly, gross profit went from $997.2 million in 2016 to $2,223.4 million in 2020.

Summary of Findings

  • We began our research by beginning to examine the companies provided to determine if their financials supported the hypothesis presented. While Casper was excluded for not having the required strong cash position needed to support the hypothesis, Lululemon did and we were able to find supporting documentation showing that they have also optimized inventory turnover time.

Proposed next steps:

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