Working capital management in retail
| Název práce v češtině: | Management pracovního kapitálu v retailu |
|---|---|
| Název v anglickém jazyce: | Working capital management in retail |
| Klíčová slova: | Pracovní kapitál, Management pracovního kapitálu, Peněžní cyklus, Retail |
| Klíčová slova anglicky: | Working capital, Working capital management, Cash Conversion Cycle, Retail |
| Akademický rok vypsání: | 2018/2019 |
| Typ práce: | diplomová práce |
| Jazyk práce: | angličtina |
| Ústav: | Institut ekonomických studií (23-IES) |
| Vedoucí / školitel: | Mgr. Aleš Čornanič |
| Řešitel: | skrytý - zadáno vedoucím/školitelem |
| Datum přihlášení: | 23.05.2019 |
| Datum zadání: | 23.05.2019 |
| Datum a čas obhajoby: | 16.06.2020 09:00 |
| Datum odevzdání elektronické podoby: | 07.05.2020 |
| Datum proběhlé obhajoby: | 16.06.2020 |
| Oponenti: | doc. Bc. Jiří Novák, M.Sc., Ph.D. |
| Kontrola URKUND: | |
| Seznam odborné literatury |
| 1. Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2014). Working capital management, corporate performance, and financial constraints. Journal of Business Research, 67(3), 332-338.
2. Deloof, M. (2003). Does working capital management affect profitability of Belgian firms?. Journal of Business Finance & Accounting, 30(3-4), 573-588. 3. Ebben, J. J., & Johnson, A. C. (2011). Cash conversion cycle management in small firms: Relationships with liquidity, invested capital, and firm performance. Journal of Small Business & Entrepreneurship, 24(3), 381-396. 4. Kieschnick, R., Laplante, M., & Moussawi, R. (2013). Working capital management and shareholders’ wealth. Review of Finance, 17(5), 1827-1852. 5. Mun, S. G., & Jang, S. S. (2015). Working capital, cash holding, and profitability of restaurant firms. International Journal of Hospitality Management, 48, 1-11. 6. Nobanee, H., Abdullatif, M., & AlHajjar, M. (2011). Cash conversion cycle and firm's performance of Japanese firms. Asian Review of Accounting, 19(2), 147-156. 7. Moss, J. D., & Stine, B. (1993). Cash conversion cycle and firm size: a study of retail firms. Managerial Finance, 19(8), 25-34. 8. Wang, B. (2019). The cash conversion cycle spread. Journal of Financial Economics, 133(2), 472-497. |
| Předběžná náplň práce |
| Proposed Topic:
Working capital management in retail Motivation: The management of working capital, such as inventories, trade accounts receivable and payable, is crucial for a company to be able to run its business. From a cash-flow perspective, investments into working capital management represent cash outflows, which reduce free cash flows of a company. Therefore, as Kieschnick et al. (2013) shows - Working capital management is an important determinant that influences firm value. Overinvestments can lead to lower corporate rentability as large inventories can be inefficient and can lock up the capital that could have been used to generate cash for its shareholders. On the other hand, underinvestments can lead to underutilization of the market potential, which leads to missed revenues. In some cases, a holding of very small or even negative working capital can lead to financial distress as a company is not able to meet its obligations due to lack of liquidity. Since the working capital influence both profitability and liquidity, academic research has been focusing on these two aspects – liquidity view and profitability view. This thesis is going to look at working capital management through the lens of profitability since the goal of WC management, from the profitability view is to shorten conversion cycle (CCC) which allows to increase profits, and the shortening of CCC has shown to be a viable corporate strategy in recent years (e.g. fast-fashion companies such as Zara, H&M). Overall, the working capital seems to be researched relatively very generally. There are papers focused on characteristics such as country evidence. For example, Nobanee et al. (2011) which focused on Japan or Belgian evidence from Deloof, M. (2003). Another field of interest is the relationship of the company size and working capital such as Moss, Stine (1993) or Ebben, Johnson (2011). However, besides paper solely focused on management techniques and processes, the financial papers usually do not consider the specifics of the industries as they tend to use multi-industry data. This approach appears to be a little unfortunate since the differences of importance and complexity of WC management across industries seems not negligible. Moreover, academic papers have focused on general mean effects with no consideration of observing the distribution tails within the Cash Conversion Cycle (CCC). Hence, this thesis would like to bring a more detailed view into the working capital literature. Therefore, this thesis will examine a specific industry. We choose the retail industry, because, we believe that the working capital plays a major role in capital decisions. It is because the industry is not asset-heavy, inventories represent a large portion of assets, and investments into inventories are major cash outflows, thus optimization of WC plays a crucial role for this high-turnover industry that retail is characterized by. Moreover, the retail industry is undergoing structural changes in brick and mortar vs. online shopping shifts. Thus, the CCC in retail can reveal to work differently than CCC in general. In addition, we are going to examine the apparel sector, since it is one of the most complex sectors which is influenced by fashion trends as well as different sizes of merchandise. These factors further leverage the effect of working capital. Furthermore, we will also look onto tails in the CCC distribution to see how these companies behave and whereas the high CCC can be a strategy and source of potential comparative advantage, or mismanagement. Hypotheses: H1: Corporate profitability and Working Capital has an inverted U-shape relationship. H2: Higher the Gross profit Margin, higher the Cash Conversion Cycle. H3: EBITDA to Free Cashflow to Firm (FCFF) bridge – the larger the investment into the working capital, the smaller the investment into the long-term Assets (Capex). H4: Portfolio performance – low CCC retail firms outperform market & high CCC companies. The goal of the first hypothesis is to test whether there is a concave relationship with an optimal efficiency point from which the more efficient working capital management can hurt the corporate profitability (e.g. corporate loss because of a missed revenue due to stock-outs). This relationship was for the first time found by Baños-Caballero et al. (2014) in the broad sample of non-financial UK companies, hence this thesis would like to test the relationships on the industry-specific data. Second, the general notion depicted by return on invested capital (ROIC) shows that there are two forces which tend to be opposite, the margins and the turnover of assets (two inputs of ROIC). Meaning that a luxury item – one with high margin, will have lower asset turnover, therefore ceteris paribus, lower WC turnover, and hence higher CCC. Does this general characteristic of ROIC holds in the retail industry specifically in the apparel sector or can high margin company preserve high turnover? The third hypothesis tackles the EBITDA bridge to FCFF, where the CapEx, increase in WC and taxes are forces which are decreasing the firm’s free cash flow. The inherent question is whether the degree of investment into the working capital will impact the capital expenditure of the company since the company has limited capital to employ. The last hypothesis is going to test the stock performance of the companies with the lowest CCC. Wang (2019) found that stocks with low CCC outperform high CCC stocks. However, the paper was based on a broad dataset consisting of companies from 48 industries. Does retail or apparel register the same behavior? Methodology: The thesis is going to be based on financial ratios, correlation analysis, and regression model. The OLS regression is going to be used and the model is going to be inspired by Baños-Caballero et al. (2014) and Mun, Jang (2015). Moreover, to capture the behavior of the best efficient and worst efficient companies, the quantile regression is going to be used. Furthermore, the working capital efficiency is going to be proxied by Cash Conversion Cycle (CCC), where the main focus is going to be on Days of Inventory Outstanding (DIO), as it is the major driver for working capital in the retail industry. Data: The paper will utilize panel data. The dataset is going to consist of publicly listed retail companies in developed markets. The time span of the data is going to be from 2012 – 2018. The primary source of the data will be Thomson Reuters and Bloomberg databases. The data will encompass accounting data from which various financial ratios will be calculated, as well as information about stock prices. Moreover, the information about the industry is going to be found from the above mention databases. Expected Contribution: This thesis should contribute to the working capital literature with new industry-specific results since it is focused on the retail industry with an additional focus on the apparel. Furthermore, the paper will provide the reader not only with results about the general average effect of corporate profitability based on CCC but will also try to reveal information for different levels of the cash conversion cycle (i.e. the worst and the best companies in case of CCC). We believe that this approach will bring significant contribution since only a few academic papers focused closely on the retail industry and to our knowledge no other paper analyzed quantiles. Moreover, a new industry benchmark in terms of Cash Conversion Cycle, Working Capital investment with respect to company growth and corporate profitability is going to be assembled. Benchmark should help reveal to management an ideal level of working capital which should a company holds. Outline: 1. Introduction 2. Review of existing literature 3. Hypotheses development 4. Data 5. Methodology 6. Results discussion 7. Conclusion |
| Předběžná náplň práce v anglickém jazyce |
| Proposed Topic:
Working capital management in retail Motivation: The management of working capital, such as inventories, trade accounts receivable and payable, is crucial for a company to be able to run its business. From a cash-flow perspective, investments into working capital management represent cash outflows, which reduce free cash flows of a company. Therefore, as Kieschnick et al. (2013) shows - Working capital management is an important determinant that influences firm value. Overinvestments can lead to lower corporate rentability as large inventories can be inefficient and can lock up the capital that could have been used to generate cash for its shareholders. On the other hand, underinvestments can lead to underutilization of the market potential, which leads to missed revenues. In some cases, a holding of very small or even negative working capital can lead to financial distress as a company is not able to meet its obligations due to lack of liquidity. Since the working capital influence both profitability and liquidity, academic research has been focusing on these two aspects – liquidity view and profitability view. This thesis is going to look at working capital management through the lens of profitability since the goal of WC management, from the profitability view is to shorten conversion cycle (CCC) which allows to increase profits, and the shortening of CCC has shown to be a viable corporate strategy in recent years (e.g. fast-fashion companies such as Zara, H&M). Overall, the working capital seems to be researched relatively very generally. There are papers focused on characteristics such as country evidence. For example, Nobanee et al. (2011) which focused on Japan or Belgian evidence from Deloof, M. (2003). Another field of interest is the relationship of the company size and working capital such as Moss, Stine (1993) or Ebben, Johnson (2011). However, besides paper solely focused on management techniques and processes, the financial papers usually do not consider the specifics of the industries as they tend to use multi-industry data. This approach appears to be a little unfortunate since the differences of importance and complexity of WC management across industries seems not negligible. Moreover, academic papers have focused on general mean effects with no consideration of observing the distribution tails within the Cash Conversion Cycle (CCC). Hence, this thesis would like to bring a more detailed view into the working capital literature. Therefore, this thesis will examine a specific industry. We choose the retail industry, because, we believe that the working capital plays a major role in capital decisions. It is because the industry is not asset-heavy, inventories represent a large portion of assets, and investments into inventories are major cash outflows, thus optimization of WC plays a crucial role for this high-turnover industry that retail is characterized by. Moreover, the retail industry is undergoing structural changes in brick and mortar vs. online shopping shifts. Thus, the CCC in retail can reveal to work differently than CCC in general. In addition, we are going to examine the apparel sector, since it is one of the most complex sectors which is influenced by fashion trends as well as different sizes of merchandise. These factors further leverage the effect of working capital. Furthermore, we will also look onto tails in the CCC distribution to see how these companies behave and whereas the high CCC can be a strategy and source of potential comparative advantage, or mismanagement. Hypotheses: H1: Corporate profitability and Working Capital has an inverted U-shape relationship. H2: Higher the Gross profit Margin, higher the Cash Conversion Cycle. H3: EBITDA to Free Cashflow to Firm (FCFF) bridge – the larger the investment into the working capital, the smaller the investment into the long-term Assets (Capex). H4: Portfolio performance – low CCC retail firms outperform market & high CCC companies. The goal of the first hypothesis is to test whether there is a concave relationship with an optimal efficiency point from which the more efficient working capital management can hurt the corporate profitability (e.g. corporate loss because of a missed revenue due to stock-outs). This relationship was for the first time found by Baños-Caballero et al. (2014) in the broad sample of non-financial UK companies, hence this thesis would like to test the relationships on the industry-specific data. Second, the general notion depicted by return on invested capital (ROIC) shows that there are two forces which tend to be opposite, the margins and the turnover of assets (two inputs of ROIC). Meaning that a luxury item – one with high margin, will have lower asset turnover, therefore ceteris paribus, lower WC turnover, and hence higher CCC. Does this general characteristic of ROIC holds in the retail industry specifically in the apparel sector or can high margin company preserve high turnover? The third hypothesis tackles the EBITDA bridge to FCFF, where the CapEx, increase in WC and taxes are forces which are decreasing the firm’s free cash flow. The inherent question is whether the degree of investment into the working capital will impact the capital expenditure of the company since the company has limited capital to employ. The last hypothesis is going to test the stock performance of the companies with the lowest CCC. Wang (2019) found that stocks with low CCC outperform high CCC stocks. However, the paper was based on a broad dataset consisting of companies from 48 industries. Does retail or apparel register the same behavior? Methodology: The thesis is going to be based on financial ratios, correlation analysis, and regression model. The OLS regression is going to be used and the model is going to be inspired by Baños-Caballero et al. (2014) and Mun, Jang (2015). Moreover, to capture the behavior of the best efficient and worst efficient companies, the quantile regression is going to be used. Furthermore, the working capital efficiency is going to be proxied by Cash Conversion Cycle (CCC), where the main focus is going to be on Days of Inventory Outstanding (DIO), as it is the major driver for working capital in the retail industry. Data: The paper will utilize panel data. The dataset is going to consist of publicly listed retail companies in developed markets. The time span of the data is going to be from 2012 – 2018. The primary source of the data will be Thomson Reuters and Bloomberg databases. The data will encompass accounting data from which various financial ratios will be calculated, as well as information about stock prices. Moreover, the information about the industry is going to be found from the above mention databases. Expected Contribution: This thesis should contribute to the working capital literature with new industry-specific results since it is focused on the retail industry with an additional focus on the apparel. Furthermore, the paper will provide the reader not only with results about the general average effect of corporate profitability based on CCC but will also try to reveal information for different levels of the cash conversion cycle (i.e. the worst and the best companies in case of CCC). We believe that this approach will bring significant contribution since only a few academic papers focused closely on the retail industry and to our knowledge no other paper analyzed quantiles. Moreover, a new industry benchmark in terms of Cash Conversion Cycle, Working Capital investment with respect to company growth and corporate profitability is going to be assembled. Benchmark should help reveal to management an ideal level of working capital which should a company holds. Outline: 1. Introduction 2. Review of existing literature 3. Hypotheses development 4. Data 5. Methodology 6. Results discussion 7. Conclusion |