Barnes & Noble sells books, magazines, music, and videos through retail stores and on the Web. For a retailer like Barnes & Noble, inventory is a critical element of the business and it is necessary to carry a wide array of titles. In 2008, sales totaled $5,122 million and cost of sales and occupancy totaled $3,541 million. Inventories constitute the largest asset on Barnes & Noble’s balance sheet, totaling $1,203 million at the end of 2008 and $1,358 million at the end of 2007.

Required

a. Compute the inventory turnover ratio for Barnes & Noble for 2008.

b. Over the last two years, the number of Barnes & Noble retail stores has remained fairly steady and sales have grown at a compounded annual rate of 11.6 percent.

Assume that the number of stores will remain constant and that sales will continue to grow at an annual rate of 11.6 percent each year between Year +1 and Year +5. Also assume that the future cost of goods sold to sales percentage will equal that realized in 2008 (which is very similar to the cost of goods sold percentage over the past three years). Project the amount of inventory at the end of Year +1 through Year +5 using the inventory turnover ratio computed in Part a. Also compute the percentage change in inventories between each of the year-ends between 2008 and Year +5.

Does the pattern of growth in your projections of Barnes & Noble inventory seem reasonable to you considering the assumptions of smooth growth in sales and steady cost of goods sold percentages? Explain.

c. The changes in inventories in Part b display the sawtooth pattern depicted in Exhibit 10.5. Smooth the changes in the inventory forecasts between 2008 and Year +5 using the compound annual growth rate in inventories between the end of 2008 and the end of Year +5 implied by the projections in Part b. Does this pattern of growth seem more reasonable? Explain.

d. Now suppose that instead of following the smoothing approach in Part c, you used the rate of growth in inventory during 2008 to project future inventory balances at the end of Year +1 through Year +5. Use these projections to compute the implied inventory turnover rates. Does this pattern of growth and efficiency in inventory for Barnes & Noble seem reasonable? Explain.