SGI

Will the higher direct‑sales proportion improve SGI's cash conversion cycle and working capital efficiency?

Created August 07, 2025 at 10:37 AM

Short answer: Yes—shifting the revenue mix to a much larger share of direct‑to‑consumer sales is likely to shorten Somnigroup International’s (SG & I, ticker SGI) cash‑conversion cycle (CCC) and improve its working‑capital efficiency, provided the company can sustain the operational execution required to support a higher‑velocity, lower‑inventory model.

Below is a step‑by‑step explanation of why the change in sales mix matters, what the mechanics of the cash‑conversion cycle are, how the new “direct‑sales” mix can affect each component, and what caveats remain.

1. What the cash‑conversion cycle measures

Component	Formula	What it reflects	Typical impact of direct‑sales vs. wholesale
Days Inventory Outstanding (DIO)	(Average Inventory ÷ Cost of Goods Sold) × 365	How many days a company holds inventory before it is sold.	Direct‑to‑consumer (DTC) sales usually run on a “just‑in‑time” or even “made‑to‑order” basis, reducing inventory levels and therefore DIO.
Days Sales Outstanding (DSO)	(Accounts Receivable ÷ Net Credit Sales) × 365	How many days on average a company takes to collect cash from customers.	DTC often involves “pay‑now” or short‑term credit (e‑‑commerce, card‑on‑file, financing partners). This pushes DSO down.
Days Payable Outstanding (DPO)	(Accounts Payable ÷ Cost of Goods Sold) × 365	How many days a company can postpone payments to suppliers.	With higher volume and tighter supplier relationships (common in DTC), companies can often negotiate better terms, but the effect is usually modest compared to the DIO/DSO changes.
Cash‑Conversion Cycle (CCC) = DIO + DSO – DPO		The net number of days cash is tied up in the operating cycle.	A lower CCC means cash is freed more quickly.

A lower CCC is a hallmark of working‑capital efficiency: the company needs less cash to fund the same amount of sales.

2. What the news tells us

Item from the release	Implication
Direct‑sales as % of Net Sales = 66% (up from 23% previously)	>2‑fold increase in the portion of revenue that is sold directly to the consumer rather than through wholesale or distributor channels.
Net Sales growth = 53% YoY	Very rapid top‑line expansion, which creates an opportunity (and a risk) for working‑capital improvement if the growth is cash‑based (e‑commerce, in‑store DTC) rather than credit‑heavy.
Mattress Firm combination ahead of plan	Integration may add scale to the DTC platform (shared logistics, shared e‑commerce and fulfillment infrastructure).
Guidance raised for FY 2025	Management expects the new model to sustain or improve profitability, which typically means they expect the cash‑flow profile to stay strong.

3. How a higher direct‑sales proportion improves each CCC component

3.1 Days Inventory Outstanding (DIO)

Reduced inventory depth – Direct‑sales models (especially e‑commerce or “store‑first” “buy‑online‑pick‑up‑in‑store”) tend to hold less finished‑goods inventory because items are often built-to‑order or shipped directly from a distribution center that serves multiple stores.
Faster product turnover – The 53% sales surge, combined with a DTC‑centric channel, implies a faster inventory turnover ratio. For a company that previously relied heavily on wholesale, inventory sits longer waiting for shipments to retail partners, which adds to DIO.
Result – DIO shrinks, which directly reduces the CCC.

3.2 Days Sales Outstanding (DSO)

Immediate payment methods – DTC transactions are typically paid by credit card, digital wallet, or financing at the point of sale. The cash is captured at the point of sale and posted to the balance sheet almost instantly.
Lower credit terms to retailers – In a wholesale model the company often extends 30‑90‑day credit terms to retail partners, inflating DSO. With DTC the need for extended credit disappears.
Result – DSO drops markedly, further lowering the CCC.

3.3 Days Payable Outstanding (DPO)

Potential for stronger bargaining – As SGI’s sales volumes increase, the company can negotiate better terms with raw‑material suppliers (e.g., longer pay‑out periods, volume discounts). However, any improvement is usually neutral to slightly positive for the CCC, because DPO is already relatively high in the manufacturing sector.
Potential downside – If the company invests heavily in fast‑delivery logistics (e.g., last‑mile delivery partners) it may have to pay suppliers faster to meet tighter service levels. This could modestly increase DPO (i.e., reduce DPO), but the net effect is still positive because DIO/DSO improvements dominate.

3.4 Net impact on CCC

Because DIO and DSO both shrink dramatically while any DPO change is modest, the overall CCC will shrink substantially. A shorter CCC frees up cash that can be used for:
* Re‑investing in growth (e.g., new distribution centers, technology).
* Reducing working‑capital financing (lower borrowings or lower interest expense).
* Improving margins (less need for working‑capital loans, lower financing costs).

4. Quantitative illustration (using rough assumptions)

Metric	Prior period (approx.)	Q2 2025 (estimated)	Effect
DIO	90 days (typical for a wholesale‑heavy mattress manufacturer)	55‑60 days (after DTC shift)	−30‑35 days
DSO	45‑60 days (retail credit terms)	15‑20 days (cash‑sale)	−30‑45 days
DPO	45 days (supplier terms)	45‑50 days (maybe slightly higher)	~0‑+5 days
Δ CCC	~90 days	30‑35 days	~‑55 days

Interpretation: A reduction of 50‑60 days in the cash‑conversion cycle can translate into $20‑$30 million of cash freed (assuming an average daily operating cash requirement of ~\$600 M). In a year with 53% sales growth, that cash can fund the growth without additional debt.

5. Conditions & Risks that Could Mitigate the Benefit

Risk	Why it matters	Mitigation
Supply‑chain bottlenecks (e.g., raw‑material shortage) could force SGI to hold more inventory, eroding DIO gains.	Maintain strong supplier contracts and safety‑stock strategies.
Customer‑credit financing (e.g., “buy now, pay later” offers) could increase DSO if the company assumes the financing risk.	Use third‑party financing or limit credit exposure.
Higher fulfillment costs (e.g., last‑mile logistics) may increase working‑capital outlay if cash must be spent earlier on distribution.	Optimize fulfillment network (regional hubs) and negotiate carrier terms.
Rapid expansion can lead to temporary increases in inventory and receivables while the new DTC infrastructure ramps up.	Use rolling forecasts and maintain a modest cash buffer.
Integration of Mattress Firm – If integration creates temporary double‑stacked inventory (old wholesale inventory + new DTC inventory).	Careful inventory de‑duplication and demand‑planning systems.

Overall, the direction is strongly positive for cash conversion; the magnitude will be dictated by execution in the next 6‑12 months.

6. Bottom‑line answer to the user’s question

Yes. The move to 66 % direct‑sales (up from 23 %) will significantly improve SGI’s cash‑conversion cycle and working‑capital efficiency because:

Lower inventory levels (shorter DIO) due to a “make‑to‑order” or “quick‑ship” model.
Immediate cash collection (much lower DSO) from direct‑to‑consumer payments.
Potentially better supplier terms (stable DPO) and the ability to fund growth internally.

Provided the company maintains the operational discipline needed to keep inventory low, avoids expanding customer credit beyond what the DTC model already provides, and manages any temporary supply‑chain or integration hiccups, the higher direct‑sales proportion should translate into a significant reduction in the cash‑conversion cycle and a more efficient, cash‑generating balance sheet. This will be a key driver behind the raised full‑year guidance that SGI announced in its Q2 release.