======SKU======
SKU (pronounced "skew"), which stands for [[Stock Keeping Unit]], is a unique code that retailers and manufacturers assign to each distinct product and its variants. Think of it as a product's fingerprint. While two T-shirts might be the same style, the red one in size Large will have a different SKU from the blue one in size Medium. This alphanumeric code allows a business to track every single item in its inventory precisely, monitoring everything from sales performance and stock levels to supplier details and warehouse location. Far from being just a jumble of letters and numbers on a price tag, the SKU is the fundamental building block of modern retail and [[supply chain]] management. For an investor, understanding how a company manages its SKUs can offer surprisingly deep insights into its operational efficiency, strategic focus, and overall financial health.
===== Why an Investor Should Care About SKUs =====
At first glance, SKUs seem like a nitty-gritty operational detail best left to warehouse managers. However, for a savvy investor, SKU data can be a goldmine of information, revealing a company's strategy and efficiency. It’s like looking under the hood of a car—the number of SKUs and how they are managed tells you a lot about the engine driving the business.
==== SKU Count as a Business Indicator ====
The sheer number of SKUs a company offers is a direct reflection of its business model. There's no single "right" number; what matters is how the count aligns with the company's strategy.
  * A **high SKU count** often points to a strategy of offering vast selection. Think of Amazon or a "big box" home improvement store. The goal is to be a one-stop shop for every possible need. While this can build a wide customer base, it also creates immense complexity in inventory management, marketing, and logistics. A risk here is "SKU proliferation," where a company adds more and more products without a clear strategy, leading to bloated [[inventory]], higher costs, and confused customers.
  * A **low SKU count** suggests a highly focused strategy. Companies like Costco and Aldi are famous for this. They curate a limited selection of high-demand, high-quality items. This simplicity is a superpower: it gives them enormous buying power with suppliers, simplifies logistics, boosts [[inventory turnover]], and allows them to maintain lower prices, creating a powerful [[competitive advantage]]. For a company like Apple, a limited number of iPhone SKUs allows for focused marketing and a streamlined manufacturing process.
An investor should pay attention to the //trend// in SKU count. A deliberate reduction in SKUs (sometimes called "SKU rationalization") can be a very positive sign, suggesting management is cutting underperforming products to focus on profitable winners and improve [[gross margins]]. Conversely, a rapidly expanding SKU count without corresponding sales growth can be a red flag.
==== SKUs and Financial Health ====
Effective SKU management has a direct and measurable impact on a company's financial statements.
  * **Inventory and Working Capital:** Each SKU sitting in a warehouse ties up cash. A company that masterfully manages its SKUs will keep inventory levels lean, freeing up [[working capital]] that can be used for growth, paying down debt, or returning cash to shareholders. Poor SKU management leads to excess inventory, which can result in costly markdowns and write-offs, directly hurting profitability.
  * **Revenue and Profitability:** By analyzing sales data at the SKU level, a company can identify its "heroes" (high-volume, high-margin products) and its "zeros" (slow-moving, low-margin items). A well-run business will constantly optimize its product mix, promoting its heroes and culling its zeros. This discipline is a key driver of sustainable [[revenue]] growth and strong [[profit margins]].
===== The Value Investor's Lens on SKUs =====
For a [[value investor]], who seeks simple, understandable businesses with durable competitive advantages, the SKU story is particularly compelling. A company with a focused, disciplined approach to its product lineup often exhibits the very traits a value investor prizes.
The Costco model is a perfect case study. By limiting itself to roughly 4,000 SKUs (compared to a typical supermarket's 40,000+), Costco creates a treasure-hunt atmosphere for customers while running an incredibly efficient operation. The high sales volume per SKU gives it immense negotiating power with suppliers, a benefit it passes on to its members through low prices, which in turn fuels fierce customer loyalty. This is a classic, self-reinforcing business model—a thing of beauty to an investor.
When analyzing a retail or consumer goods company, ask these questions:
  - Does the company have a clear strategy for its product assortment, or is it just throwing things against the wall?
  - Is management actively pruning underperforming SKUs to improve profitability?
  - How does the company's inventory turnover compare to its peers? A high turnover rate often indicates efficient SKU management.
Watching for SKU-related red flags, such as management complaining about "inventory challenges" or announcing major write-downs, can help you avoid businesses bogged down by complexity and inefficiency. In the world of investing, as in retail, sometimes less is truly more.