Kroger, Safeway Inc., and Winn-Dixie Stores Inc. are three grocery chains in the United States

Kroger, Safeway Inc., and Winn-Dixie Stores Inc. are three grocery chains in the United States. Inventory management is an important aspect of the grocery retail business. Recent balance sheets for these three companies indicated the following merchandise inventory information:


Merchandise Inventory
End of Year (in millions) Beginning of Year (in millions)
Kroger $4,966 $4,935
Safeway 2,623 2,509
Winn-Dixie 658 665
The cost of goods sold for each company was:
Cost of Goods Sold (in millions)
Kroger $63,927
Safeway 29,443
Winn-Dixie 5,182


a. Determine the number of days’ sales in inventory and the inventory turnover for the three companies. Round to the nearest day and one decimal place.

b. Interpret your results in part (a).

c. If Winn-Dixie had Kroger’s number of days’ sales in inventory, how much additional cash flow (rounded to nearest million) would have been generated from the smaller inventory relative to its actual average inventory position?

Answer:


a. Number of Days’ Sales in Inventory = Average Inventory
Cost of Goods Sold ÷ 365
Kroger: ($4,966 + $4,935) ÷ 2
$63,927 ÷ 365 = $4,950.5
175.1
= 28 days
Safeway:
Winn-Dixie:
Inventory Turnover =
($2,623 + $2,509) ÷ 2
$29,443 ÷ 365
($658 + $665) ÷ 2
$5,182 ÷ 365
Cost of Goods Sold
Average Inventory
= $2,566.0
80.7
= $661.5
14.2
= 32 days
= 47 days
Kroger: $63,927 =
($4,966 + $4,935) ÷ 2
Safeway: $29,443 =
($2,623 + $2,509) ÷ 2
12.9
11.5
Winn-Dixie: $5,182
($658 + $665) ÷ 2
= 7.8



b. The number of days’ sales in inventory and the inventory turnover ratios are
relatively the same for Kroger and Safeway. Winn-Dixie has a significantly
higher number of days’ sales in inventory and a significantly lower inventory
turnover than Kroger and Safeway. These results suggest that Kroger and
Safeway are more efficient than Winn-Dixie in managing inventory.


c. If Winn-Dixie matched Kroger’s days’ sales in inventory, then its hypothetical ending inventory would be determined as follows,


Average Inventory
Number of Days’ Sales in Inventory =
28 days =
Cost of Goods Sold ÷ 365
X
($5,182 ÷ 365)
X = 28 × ($5,182 ÷ 365) = 28 × $14.2
X = $397.6
Thus, the additional cash flow that would have been generated is the difference
between the actual average inventory and the hypothetical average inventory,
as follows:
Actual average inventory……………………………………… $661.5 million
Hypothetical average inventory…………………………… 397.6 million
Positive cash flow potential………………………………… $263.9 million

That is, a lower average inventory amount would have required less cash than
actually was required.