Introduction
A retailer's biggest bet sits on its shelves. Every product in a store or warehouse was paid for, or will be soon, before a customer has bought it, so the speed at which inventory sells and the supplier terms on which it is paid for decide how much cash the business ties up. Get both right and suppliers effectively finance the stock; get them wrong and inventory piles up, markdowns follow and cash drains away.
Costco shows how far the first outcome can go. At the end of its fiscal year to 31 August 2025 it held merchandise inventories of $18.1 billion and accounts payable of $19.8 billion, according to Costco's Form 10-K, so its suppliers were owed more than the value of everything in its warehouses. This article explains how inventory turns, weeks of supply and gross margin return on inventory (GMROI) are measured, why many retailers and restaurants run negative working capital and how working capital shapes deals.
Inventory Turns and Days of Inventory
- Inventory Turns
The number of times a company sells through its average inventory in a year, calculated as cost of goods sold divided by average inventory at cost. Dividing 365 by turns gives days of inventory: how long, on average, an item sits before it is sold.
Turns vary hugely by format, because they reflect what a retailer sells and its assortment breadth, how many different items it must keep in stock. Costco's fiscal 2025 merchandise costs of about $239.9 billion against average inventory of about $18.4 billion imply roughly 13 turns a year, or about four weeks of stock. AutoZone, which must keep thousands of slow-moving parts available for many vehicle models, reported inventory turnover of 1.4x in fiscal 2025, down from 1.5x, calculated on its trailing five-quarter average inventory, according to AutoZone's Form 10-K.
| Metric | Formula | What it shows |
|---|---|---|
| Inventory turns | Cost of goods sold / average inventory | How fast stock sells through |
| Days of inventory | 365 / turns | How long stock sits before sale |
| Weeks of supply | Inventory / forecast weekly sales at cost | How long current stock will last |
| GMROI | Gross margin dollars / average inventory at cost | Gross profit earned per dollar of stock |
The Accounting guide's working capital drivers: DSO, DIO and DPO covers how days of inventory feeds the cash conversion cycle; for a retailer, the point is that faster turns mean less cash tied up for the same sales.
Within one retailer, the trend matters more than the level. Analysts compare inventory growth with sales growth each quarter: inventory rising faster than sales suggests stock is building ahead of demand, while inventory falling faster than sales can mean the retailer is protecting cash but risking empty shelves. The gap between the two, sometimes called the inventory-to-sales spread, is one of the most watched figures in a retailer's results.
Weeks of supply
Turns look backward; weeks of supply looks forward. Merchants compare inventory on hand with forecast sales to see whether stock will run short or pile up, and they watch it closely ahead of key seasons. A sharp rise in weeks of supply, or inventory growing much faster than sales, is often the first public sign of a markdown problem, since the excess must eventually be cleared at lower prices. Grocers, whose fresh food spoils within days, manage stock even more tightly, as explained in grocery retail economics: thin margins, high turns.
GMROI: Gross Margin Return on Inventory
Turns alone can mislead, because a category that sells quickly at a thin margin may earn less than one that sells slowly at a rich margin. GMROI combines the two.
- Gross Margin Return on Inventory (GMROI)
Gross margin dollars earned over a year divided by the average inventory at cost needed to earn them. A GMROI of 3.0 means each dollar invested in stock produced three dollars of gross margin. Retailers use it to compare categories, vendors and stores on the return they earn from inventory.
GMROI has two levers: it equals the gross margin percentage multiplied by sales divided by average inventory at cost, so a retailer can raise it by earning more on each sale or by selling each dollar of stock faster. Categories with very different profiles can therefore earn the same return.
Merchants use GMROI to decide which categories deserve more space, which vendors to expand and when to cut a slow line. It connects directly to the margin analysis in retail margins: gross margin, occupancy and SG&A leverage: a markdown that protects turns lowers margin, and the right trade-off is the one that maximizes gross margin per dollar of stock.
Negative Working Capital
- Negative Working Capital
A position in which a company's operating current liabilities, mainly accounts payable to suppliers and customer deposits, exceed its operating current assets such as inventory and receivables. Retailers and restaurants that sell for cash before they pay suppliers often run it, so their suppliers fund the stock.
Retailers collect cash at the register, often within days of receiving goods, while paying suppliers on terms of weeks or months. When inventory sells faster than payment terms run, accounts payable exceeds inventory. Costco describes the difference between merchandise inventories and accounts payable as its net investment in merchandise inventories; at the end of fiscal 2025 that figure was negative by about $1.7 billion.
Fast turns are one route; long supplier terms are another. AutoZone turns its inventory only 1.4 times a year, yet it reported an accounts payable to inventory ratio of 114.2% at the end of fiscal 2025, down from 119.5%, because it has historically negotiated extended payment terms from suppliers and plans to continue doing so. Restaurants reach the same place differently: they hold only days of food, sell for cash or card and pay suppliers on normal terms.
| Exact figures, fiscal 2025 | Costco | AutoZone |
|---|---|---|
| Inventory turns | About 13x (calculated) | 1.4x (reported) |
| Accounts payable vs inventory | About 109% (calculated) | 114.2% (reported) |
| How suppliers fund stock | Stock sells before bills are due | Extended payment terms |
Why it funds growth, and why it reverses
Negative working capital turns growth into a source of cash. Each new store's opening stock is largely financed by suppliers, and rising sales increase payables along with inventory, so a growing retailer generates cash from working capital rather than consuming it. If net working capital runs at minus 5% of sales, every $100 million of added sales releases about $5 million of cash, a working capital release that helps fund the next round of openings.
Lenders watch the same dynamic. Retailers often borrow against inventory and receivables through asset-based loans, whose availability falls as inventory and its liquidation value decline, the structure covered in asset-based lending for retailers: borrowing bases.
Working Capital in Deals
Working capital matters in every retail and restaurant transaction. Purchase agreements usually set a working capital target, often called a peg, based on a normal level, with the price adjusted up or down if the business delivers more or less at closing. Because retail working capital swings with the season, inventory building before the holiday and payables peaking after it, the peg is set on an average across the year rather than on a single month.
Inventory quality and buyout cash flows
Diligence also tests the quality of inventory, not just its amount. Buyers age the stock to see how much has sat unsold for many months, check whether inventory reserves for obsolete or slow-moving goods are adequate and compare the book value with what the goods would fetch in clearance. A retailer carrying old seasonal stock at full cost may need a write-down that reduces both earnings and the working capital delivered at closing.
In leveraged buyouts, working capital shapes the cash available to repay debt. A sponsor buying a growing retailer with negative working capital gains a cash inflow as sales grow; one buying a shrinking retailer must fund the reverse. How lenders and sponsors judge which consumer businesses can carry leverage is covered in consumer LBOs: which brands and retailers fit. For a coverage banker, inventory and working capital are where retail strategy meets cash: a retailer that turns its stock quickly and pays its suppliers later can grow on other people's money, while one whose inventory outruns its sales finds out how expensive that money really is.
