This is a post for the non-financial types out there. I always think of people that think they are getting a good deal on an item that is on sale not realizing (or caring) that the store is still making a profit on the sale price. Every once in a while I’ll overhear someone, or think for myself, what the markup is on an item in the store. Usually this is clothes but it can be anything. It’s almost impossible to find out exactly what the markup is on something but depending on the company, you can get a general idea. Let’s look at two examples.
The first is Lululemon. If you don’t live in a major metro area you may not have heard of them before. They make outrageously expensive exercise gear, mostly for women, but also for dudes that might be into yoga or something. The Sheconomist tells me they are quality products, and they’ll replace about anything that breaks or re-size clothes for you for free. So you pay a bunch up front, say $60 for a tank-top, but you get a quality product that will last forever and have great customer service. But what is the markup on that?
You can check it by looking at their financial statements because Lululemon is a publicly traded company. In the most recent quarter they made about $187 million in revenue. Their cost of sales, which are the costs of materials for making the clothes, making them, and some other odds and ends, were about $77 million. This left about $110 million for “gross profit” which is essentially the markup on all their clothes in terms of cost to make the item. If you divide 110/187 you can see that about 60% of the cost of a $60 tank-top ($36) is profit and 40% ($24) is actual cost.
That’s a pretty big markup but there are other costs. You have to run a business and pay for marketing, executives, customer service, and other things. These are called operating expenses when added to the cost of sales. When you add those two expenses together you see the real markup on that $60 tank-top. Operating expenses totaled $135 million for Lululemon so the mix of expenses in profit is actually not 60/40 like before, it’s more like 72/28 ($43/$17 on our tank-top). But still, 28% markup is HUGE!
A quick caveat on markup vs margin. I’m using the terms interchangeably but they really aren’t. It’s all in how you calculate percentages. See, margin is the percent of the total that is price. Markup is the percent of the cost above the cost of the item. With our $60 tank-top, the markup over the $43 cost is 40% (17/43=0.4). But for our purposes think of it all in terms of the final sales prices, it keeps things simple.
This is a quick and easy way to figure out what the markup is that companies are charging customers. But keep in mind that different products have different markups. A jacket might have more margin than some socks, or the other way around. What I’m providing is just a general understanding of the markup at a specific store or company. The more targeted the products (Like Lululemon) the easier it is to see the margin. Even these numbers won’t be perfect, but the idea does give you a general picture of the profits.
Now I promised you a second example so here’s another clothing company: Abercrombie & Fitch. Now that you understand the math I can just give you the hard numbers:
- Revenue: $917 million
- Cost of sales: $334 million
- Total operating expenses: $870 million
So the cost of materials represents 334/917 = 36% of the price tag on Abercrombie stuff and all the expenses make up 95% of the price tag. Based on margins alone it’s clear that Lululemon has a lot more profit built in to reach item while Abercrombie has tighter margins. This can be a sign of a company with low prices, or just a company with too many expenses.
Now, because this post is not a how-to guide on calculating margins (though it could be) I want to make this service available to the (I estimate) 50% of my readers that don’t quite know how to do this themselves. If there’s something out there you want to understand the markup on, it could be just about anything from Walmart to John Deere to Nike, send me an email and I’ll be happy to look into it for you. If there are enough then I’ll make a post. If just a few I’ll email you back when I can do it. My contact info can be found here.
Image: lululemon athletica