Contents
Understanding Expense Ratios.
Retail Expense Ratios.
The Retail Expense Ratio is a ratio that measures the percentage of operating expenses to retail sales revenue. The lower the expense ratio, the better a retailer has been able to control their costs. There is a wide variance between different retail sectors due to differing operating characteristics. For instance, wholesale clubs often have an expense ratio under 10% while most department stores have expense ratios in the mid-to high 20% range. The difference is because department stores operate in high-end malls while wholesale clubs operate in less costly industrial and commercial low rent locations. Selling , general, and administrative costs includes personnel salaries, commercial rent, utility costs, retail store fixtures, store opening costs, store build-out costs, inventory shrinkage, advertising, promotional, ordering, purchasing, and related costs.
There basic formula for calulating expense ratios is as follows:
Expense Ratio ( %) = [ Selling, General & Administrative (SG&A) / Sales ]
The lower the expense ratio the more profitable a retailer will be.
A rising expense ratio should be investigated by management to determing the causes. Expense ratios should be compared to a retailer's direct competitors in the market. Further, a retailer should compare their retail expense ratio to prior year's of performance to monitor any variances.