By Tom Scotti
Managing Director, Gordon Brothers Asset Advisors
Lenders, interested observers and industry experts alike frequently consider sales trends to be an indicator of a company's health - and rightfully so. Increased sales to consumers typically point to expanding, economically beneficial relationships between sellers and the consumers they target. However, there are times, particularly in the short term, when it is vital to interpret sales trends in the context of other variables.
For example, when it comes to consumer product companies, one must consider the "below the line" incentives which are often linked to sales. These benefits provided to customers, such as discounts, rebates, slotting fees, co-op advertising allowances, markdown monies and return privileges, entice consumers to spend - and send sales numbers north. To the extent that a company alters these benefits over time, the lender must incorporate these changes into its analysis of the company's inventory, and revisit the company's ability to sell these goods to current customers in a disposition scenario.
To unearth these "below the line" factors, lenders can first look to their dilution analysis of a company's accounts receivable, but as many companies and distributors treat these incentives as expenses, this first stop will not suffice, and a more comprehensive analysis is warranted. When these often hidden costs increase over time, the overall quality of sales suffers. Lenders must take a proactive stance in determining if a company is planning on reducing these enticements and investigate, through dialogue with the company as well as independent research, the anticipated impact of these changes. More times than not, the company will underestimate the impact of such reductions on sales, particularly if it operates in a sector that is highly dependent upon these typically lucrative benefits. For instance, in the supermarket sector, vendor slotting fees are extremely important to sales - sales trends are impacted by effective product placement and desirable space allotment.
