Industry Profiles

Wholesale Distribution Credit Risk and DSO Benchmarks

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Olympic Steel photo
Flat-rolled steel awaits distribution at an Olympic Steel, Inc. warehouse. Average operating cash flow for the industry fell to 4.1% of revenue.

Six-year trends for five key credit and financial benchmarks in the wholesale distribution industry show improvements in credit risk and DSO, but operating cash flow has dipped and debt is rising.

In a sign that wholesale distributors have tightened their credit standards in line with other industries, both the bad debt allowance and days sales outstanding (DSO) benchmarks have improved for the second consecutive year, according to the 2011 annual benchmark figures for the 80 companies in the wholesale distribution industry group of the Credit Standards Index (CSI). 

Buying and reselling is the name of the game in wholesale distribution, which is why the emphasis on sales and resales has traditionally placed greater pressure on the credit standards in this industry than in any other.  The strain on profit margin and cash flow have also served to make it the least favorable for investments in the eyes of Wall Street as evidenced by the industry's No. 70 ranking out of 70 industries in the CSI in market capitalization-to-revenue ratio, a key indicator of how the market values companies and industries.

The wholesale distribution industry group of the CSI encompasses 26 various sub-groups that span from 5000 to 5961 on the Standard Industrial Classification (SIC) code list, the principle guide used by most organizers in grouping companies by their industry.  Wholesale electronics (5065), wholesale computers and peripheral equipment (5045) and wholesale industrial machinery and equipment (5084) are the three largest sub-groups.

The credit risks in the wholesale distribution industry have dramatically improved in the past two years as 72% of the companies in the 2011 industry group reported a bad debt allowance (BDA) of 3% or lower whereas in 2009 the amount was only 52%.  The BDA benchmark in 2011 was 2.6 percent, an improvement from the 2.9 percent mark in 2010 and an even bigger improvement from the 3.7 percent mark in 2009.  The median BDA was 2.2%.

Central Garden & Pet Company, a pet supplier based in Walnut Creek, California, showed the largest improvement reducing its BDA from 10.1% in 2010 to 7.4% in 2011.  Three other companies -- Digital River, Interline Brands and Schnitzer Steel Industries -- reported BDA's 2.1% lower in 2011 from 2010.  The company that reported by far the highest BDA at 17.8% is Grupo Casa Saba SA de CV, a $3.7 billion wholesale drug company company based in Colonia Lomas, Mexico.

DSO, an efficiency ratio that measures in days the amount of time it takes a company to collect its accounts receivable, came in at 42.22 days, an improvement of 1.56 days from the 2010 industry average of 43.78 days.  Median DSO is 42.25 days.  In the past six years, the industry's benchmark DSO has stayed within the 42-45 day range with the exception of 2007 when it spiked to 48.33 days and 2009 when it went to 45.92 days.

Core-Mark Holding Company, a new addition to the CSI and a $8.1 billion wholesale grocery company based in San Francisco, California, has the lowest DSO in the CSI industry group at 9.70 days.  Core-Mark barely qualified for the CSI because its accounts receivable is only 3% of revenue.  Meanwhile, Insight Enterprises, Inc., a $5.3 billion computer wholesaler based in Tempe, Arizona reported the highest DSO at 83.41 days.  Insight has a CSI score of 3.90, which is tied for the second worst in the industry group.

Operating cash flow as a percent of revenue has gradually declined among wholesalers in recent years to the current 2011 benchmark of 4.1%.  The figure is the same as the 2010 benchmark, which is based on a smaller sample size, but much lower than the amounts from 2006 to 2009.  In 2009, the cash flow benchmark was 7.7%.

Wholesale distributors typically don't generate much cash, which is one reason they aren't well received by Wall Street, but there are some notable exceptions.  Digital River, Inc., an internet-based computer products wholesaler based in Eden Prairie, Minnesota, has the industry group's highest operating cash flow for 2011 at 23.8%, followed closely by Sigma-Aldrich Corp. at 19.8%.  The lowest cash flow was reported by Agilysys, Inc., a $208 million computer products reseller based in Cleveland, Ohio.

Liquidity, as measure by the all-important current ratio, has always been strong in the distribution business mainly due to high levels of inventory and accounts receivable.  The 2011 benchmark for current ratio is a respectable 2.28.  Fastenal Company, one of the top wholesalers in the nation with a CSI score of 2.10, reported the highest current ratio of 6.58 to 1.00, or 6.58 times current assets over current liabilities.   School Specialty, Inc., a $762 million school supplies wholesaler, has the lowest current ratio at 0.93.

The industry's debts-to-assets ratio, or total liabilities divided by total assets, benchmark is a worrisome 0.58 and nearing the 2008 level of 0.60.  The company with the best ratio of liabilities to assets in the industry group is Fastenal at an impressive 0.13.  Meanwhile, the industry's worst ratio belongs to Dominos Pizza, Inc., which has a staggering 3.52 debts to assets ratio, one of the highest in the CSI.