Employ a Detailed Approach to Merchandise Analysis

Derive Initial Gross Margin
Once you have net sales, the next step is to derive your initial gross margin, which includes the merchandise cost of the items sold. Additional impacts to gross margin, however, often aren’t factored at this stage, but eventually impact margin.

These include the cost of overstock (the net hit to profit for moving excess inventory), as well as the cost of handling returns, particularly if the returns can’t be recycled back as good stock. Draw the first threshold line and conclude that at least the item contributes initial margin. If you can’t pass this hurdle, identify better performers for your offering.