Monday, September 15, 2014
Effects of Overstock for David’s Bridal
My best friend got married last year. It was an expensive affair – well over $100.000 – due mainly to the three ceremonies (Sikh, Catholic and civil), 700 guests and venue rentals. For her, the most important part was finding the perfect wedding dress and bridal outfit. However, since everything else was so costly, those two items had to stay within a relatively modest budget. Plainly put, she had Kleinfeld dreams, but a David’s Bridal budget.
I doubt that my friend was in a unique position with the latter - especially post-recession. Take a look below at the annual “Running of the Brides” at Filene’s Basement:
There’s definitely no doubt that the wedding industry is lucrative, and that bridal gown retailers try to capitalize on this as much as possible. More than anything, it is an industry that heavily relies on both effective forecasting and inventory management to turn a profit. However, it is also very fickle in nature, as styles change season to season, making the risk of obsolescent stock from last season very real.
This is epitomized in Basu’s article “David's Bridal Earnings Slump Puts Happy Ending in Jeopardy,” where he details the woes of overstock gowns at David’s Bridal, where a 45% decline in EBITDA made for very unhappy shareholders. Clearly, here the inventory carrying costs are great.
Perhaps the over-stock is a result of increasing customer service aspect of inventory strategy, as a way to differentiate itself from other competitors. However, as the David’s Bridal model is probably primarily single period (with some exceptions), calculating the critical fractile may well show that taking a hit in the customer service area by experiencing stock-out is preferable, as the cost of having gowns left over is so great. I think this is particularly true with the increased levels of competition David’s Bridal is facing from new players in the low-budget wedding gown arena such as HM and J.Crew (Bourne), which has resulted in increased costs in terms of marketing (Basu). However, since David’s Bridal most likely relies on selling many of the same gown to turn a profit, this may prove difficult.
For ‘high risk, high reward’ companies like David’s Bridal, how do we figure out what the critical fractile is, when demand is so uncertain from cycle to cycle?
Basu, Reshmi. "David's Bridal Earnings Slump Puts Happy Ending In Jeopardy." Forbes. Forbes Magazine, 10 June 2014. Web. 14 Sept. 2014. <http://www.forbes.com/sites/mergermarket/2014/06/10/davids-bridal-earnings-slump-puts-happy-ending-in-jeopardy/>.
Bourne, Leah. "The World's Most Fabulous, Most Affordable Wedding Gowns." Forbes. Forbes Magazine, 14 July 2014. Web. 14 Sept. 2014. <http://www.forbes.com/2010/07/14/budget-weddings-bridal-gowns-j-crew-ann-taylor-forbes-woman-style-designer-clothing.html?boxes=Homepagechannel>.
"Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) Definition | Investopedia." Investopedia. N.p., n.d. Web. 14 Sept. 2014. <http://www.investopedia.com/terms/e/ebitda.asp>.