5 E-commerce companies & their Cash-Conversion Cycles at IPO
I first heard about Gymshark sometime at the beginning of the year. I was sitting at my desk at work looking through venture studios models (during lunch, of course 😉). At the time my partner Mash & I were set on starting an e-commerce venture studio (Compass.Africa). We were obsessed with direct-to-consumer brands & figured we could launch 5 or so & see how they go. Our other partner, Dali, said he’ll foot the bill for the first one with some initial capital, but we need to have skin in the game for others (thanks Dali).
I looked through a few models, venture studios that is. The likes of Expa & PSL. Then I googled the ‘Biggest D2C brands’. The usual suspects came up: Warby Parker, Bonobos, Casper, Glossier etc. All of them venture funded. We didn’t have that much money. Dali is a successful entrepreneur but we only had enough to make 1 shipment of 1 particular type of item. We settled on electronics, specifically podcast mics & vlogging kits. But during the course of my googling, I bumped into a unique company, one that was not venture funded. The company’s name; Gymshark.
Gymshark is a British fitness brand created by Ben Francis & his friend Lewis Morgan. I think how I came about Gymshark was a youtube video Ben made on how the company made 200 million dollars in a single year. I wondered how this gent created a business that size without any venture funding.
Then a tweet by a Canadian gent called Jay went viral on how Gymshark runs a negative Cash Conversion Cycle.
What is a Cash Conversion Cycle:
“The Cash Conversion Cycle tells a business owner the average number of days it takes to purchase inventory, and then convert it to cash. That is, it measures the time it takes a business to purchase supplies, turn them into a product or service, sell them, and collect accounts receivable (if needed)” — thebalancesmb
How to calculate a Cash Conversion Cycle:
Cash Conversion Cycle = Days Inventory Outstanding (DIO) + Days Receivables Outstanding (DRO) — Days Payables Outstanding (DPO)
- DIO = Average Inventory/Cost of Goods Sold (COGS) * 365
- DRO = Average Receivables/Revenue * 365
- DPO = Average Payables/COGS * 365
It is a relative measure of how long a business takes to convert its investments in inventory to cash.
I have since wondered which other mega e-commerce companies around the world run their operating cycles or more important their cash conversion cycles. I figured it’s important to understand this particular part of the business to have a successful e-commerce venture.
Aside from the traditional e-commerce companies people know (Amazon & Alibaba), public & none public D2C companies (Caspers & Warby Parker). I looked at other traditional e-commerce companies that have gone public recently & how they handle their cash conversion cycle.
I looked at 5 e-commerce companies at IPO
Zulily is an e-commerce company founded in 2009. Having started with clothes for newborns & expanded from there. The company focuses on flash-sale products for new moms & dads.
IPO Year — 2013
Valuation @ IPO — $2.7 billion
- Revenue — $331,240,000
- COGS — $240,943,000
- Avg. Inventory — $6,087,000
- Avg. Receivables — $1,831,500
- Avg. Payables — $27,021,000
** Days Inventory Outstanding (DIO) — 9 days
** Days Receivables Outstanding (DRO) — 2 days
** Days Payables Outstanding (DPO) — 41 days
Zulily Cash Conversion Cycle = 9 days + 2 days - 41 days = -30 days
The company had a negative cash conversion cycle of -30 days at IPO. Meaning they were able to turn over stock, collect receivables, 30 days before they needed to pay suppliers.
Wayfair is an e-commerce company founded in 2002. The company runs multiple stores focused on furniture.
IPO Year — 2014
Valuation @ IPO — $3 billion
- Revenue — $915,843,000
- COGS — $691,602,000
- Avg. Inventory — $14,963,000
- Avg. Receivables — $7,689,000
- Avg. Payables — $102,153,000
** Days Inventory Outstanding (DIO) — 6 days
** Days Receivables Outstanding (DRO) — 5 days
** Days Payables Outstanding (DPO) — 45 days
Wayfair Cash Conversion Cycle = 6 days + 5 days - 45 days = -34 days
Like Zulily, Wayfair had a negative cash conversion cycle of sub -34 days. It took them on average 6 days to sell products, 5 days to collect receivables & 45 days to pay suppliers.
Stitch Fix is a personal styling e-commerce company founded in 2011. Blending technology & personal styling the company is known as the Netflix of e-commerce due to the use of data science to match clothes to customers opposed to search functionality.
IPO Year — 2017
Valuation @ IPO — $1.4 billion
- Revenue — $977,139,000
- COGS — $542,718,000
- Avg. Inventory — $56,200,000
- Avg. Receivables — $0
- Avg. Payables — $40,413,000
** Days Inventory Outstanding (DIO) — 38 days
** Days Receivables Outstanding (DRO) — 0days
** Days Payables Outstanding (DPO) — 27 days
Stitch Fix Cash Conversion Cycle = 38 days + 0 days - 45 days = 11 days
Stitch Fix is peculiar because customers do not search to buy products they receive a box each month, which is called a ‘fix’ & then decide if they want to purchase the items. Stitch Fix can afford this because they make their margin on a subscription fee charged for the ‘fix’.
Chewy is an e-commerce company founded in 2011. Chewy focuses on pet food.
IPO Year — 2019
Valuation @ IPO — $8.8 billion
- Revenue — $2,104,287,000
- COGS — $1,736,737,000
- Avg. Inventory — $193,429,000
- Avg. Receivables — $42,634,000
- Avg. Payables — $419,153,500
** Days Inventory Outstanding (DIO) — 41 days
** Days Receivables Outstanding (DRO) — 7 days
** Days Payables Outstanding (DPO) — 88days
Chewy Cash Conversion Cycle = 41 days + 7 days - 88 days = -40days
Pet treats & pet food seem like a very good business for a pet-loving nation. A concept that died during the Dotcom crash of the 2000s found its Zeigest moment in the 2010s.
The Hut Group (THG)
The Hut Group is an e-commerce company founded in 2015. Like Wayfair, The Hut Group manages multiple stores. The company focuses on premium fashion products.
IPO Year — 2020
Valuation @ IPO — £4.5 Billion
- Revenue — £1,140,260,000
- COGS — £631,447,000
- Avg. Inventory — £180,665,500
- Avg. Receivables — £174,831,000
- Avg. Payables — £355,287,000
** Days Inventory Outstanding (DIO) — 104 days
** Days Receivables Outstanding (DRO) — 56 days
** Days Payables Outstanding (DPO) — 205 days
THG Cash Conversion Cycle = 104 days + 56 days - 205 days = -45 days
THG is the only non-American company on the list. Because of premium products, it takes the company a while to sell products, though it takes them even longer to pay suppliers. This has helped them maintain a negative cash conversion cycle.
The biggest e-commerce companies in the world have proven that a negative cash conversion cycle is imperative for the growth of an e-commerce company.
Chewy S1: https://sec.report/Document/0001193125-19-163344/
Jay Vasantharajah’s Blog:https://jayvas.com/the-power-of-having-a-negative-cash-conversion-cycle/
Stitch Fix S1: https://www.sec.gov/Archives/edgar/data/1576942/000119312517313629/d400510ds1.htm
THG Prospectus: https://dl8hes3yo0qpy.cloudfront.net/wp-content/uploads/2020/09/10153258/THG-Prospectus-1.pdf
Wayfair S1: https://www.sec.gov/Archives/edgar/data/1616707/000104746914007027/a2220999zs-1.htm
Zulily S1: https://www.sec.gov/Archives/edgar/data/1478484/000119312513393718/d552850ds1.htm