Gross Margin Return on Investment (GMROI)

Gross margin return on investment (GMROI) is the gross margin dollars a business earns over a period for each dollar it held, on average, in inventory at cost over the same period. A GMROI of 3.0 means each dollar of average inventory at cost returned three dollars of gross margin. It measures what margin and stock produced together per inventory dollar, not whether a category sold or held its margin on its own. It is also expanded as gross margin return on inventory investment; the measure is the same.

This entry defines the measure. To calculate it, use the GMROI formula page, which carries the worked example and a calculator.

What GMROI combines

GMROI = gross margin $ ÷ average inventory at cost. The ratio splits into two terms a planner already manages:

• →GMROI = gross margin % × (net sales ÷ average inventory at cost). The first term is margin quality: initial markup less the markdowns, discounts and shrink that make up planned reductions. The second is how many dollars of sales each dollar of stock at cost supports.
• →GMROI = inventory turn × (gross margin $ ÷ cost of goods sold), where turn is cost of goods sold ÷ average inventory at cost, as in inventory turns.

Because the terms multiply, opposite plans can produce the same GMROI. A high-margin category that turns slowly and a thin-margin category that turns fast can return the same margin per inventory dollar, and each fixes a low GMROI with a different lever. GMROI is read with its drivers beside it, never alone.

One illustrative example

The figures below are illustrative, chosen because they divide cleanly; they are not benchmarks or targets and are not drawn from any brand. A category earns $240,000 of gross margin on $500,000 of net sales, a 48 per cent margin, and holds an average of $80,000 of inventory at cost over the period. GMROI = 240,000 ÷ 80,000 = 3.0. Through the first split, 0.48 × (500,000 ÷ 80,000) = 0.48 × 6.25 = 3.0. Through the second, cost of goods sold is $260,000, a turn of 260,000 ÷ 80,000 = 3.25, and 3.25 × (240,000 ÷ 260,000) = 3.0.

Where the measure misleads

• →Retail inventory in the denominator. Stock valued at retail makes GMROI smaller and incomparable with a cost-based figure; the denominator is inventory at cost.
• →Mismatched periods. A season's margin divided by inventory averaged over a year is GMROI for neither period.
• →Inventory the business does not own. Vendor-owned consignment stock earns margin without sitting in the denominator, which inflates the ratio; stock a brand has placed on memo with an account stays in the brand's denominator.
• →A result read as a plan. GMROI reports what inventory earned. The levers that change it — depth, receipt timing and markdown timing — are set in the merchandise financial plan and open-to-buy before the period starts.

How it is used

GMROI puts categories with different margins and turns on one scale, which is why it belongs in a season hindsight and in the review that sets next season's inventory investment by department and class. Its two drivers say which lever a weak category needs: a margin problem points to price architecture and markdowns, a turn problem to depth and receipt flow.