Have a question on the below part on write-offs. Are these write-offs old phones that no longer have re-sale value? How does a company mitigate the risk of write-offs? Is it an issue that they are unable to offload old stock in their inventory or they purhcased a bulk of phones that came with a mix of profitable and unprofitable “write-off” models?
“Write-offs rose from $6.6m in 2023 to $11.6m in 2024. To put that into perspective, that’s a little over MTR Group’s total 2024 inventory. In absolute terms though, the 2024 write-off, at 9.2% of total stock is lower than in 2023 at 13.9%.”
Hi Sheng, thanks for the comment! Yes, some inventory may have become unsellable and some unsellable at expected values (including below residuals). Those devices (not just phones) may have come from auction purchases where devices are bought as a mix, and some devices may have just been on the books too long. 13.9% and 9.2% seems to me to be too high, but, when you expand inventory as quickly as Alchemy have, this is going to be a risk. In normal circumstances, the mitigations are inventory management, quick turnaround and in some cases using insurance. However this is relatively new and not well understood by insurance companies, generally.
Got it, thanks. Would you agree that on a macro level, the core issue is that there is too much 2nd hand device inventory hitting the market and are devaluing at a much faster rate than before?
That is why suppliers like Alchemy are writing off more inventory on their books (meaning they can't liquidate the ageing stock fast enough) or purchasing stocks at auction that are a mix of profitable and unprofitabe stock (meaning their suppliers also are holding too much stock).
It would also be interesting to know how accurate or robust of depreciation method companies like Alchemy use to accurately gauge the book value of their inventory vs what the value actually is if they liquidate in a short time frame. This is an issue all companies that deal with ageing inventory has to deal with though.
I don't have the macro data to give you a definitive answer. Certainly for UK, Europe and other English speaking countries, I don't believe that to be the case. I think most people would say there's not enough quality stock, especially Apple. One reason for the gross margin compression.
I've haven't noticed write-offs being prominent in any other company accounts, so I don't have the data to validate your second point. In Alchemy's case the write offs as a percentage of inventory, decreased compared to the previous year.
Got it, thanks. You also mentioned in the article that their cash flow position actually improved despite taking on more inventory, so increased write-offs seem to just be naturally from growing the inventory and business overall.
Thanks for sharing, very detailed information.
Have a question on the below part on write-offs. Are these write-offs old phones that no longer have re-sale value? How does a company mitigate the risk of write-offs? Is it an issue that they are unable to offload old stock in their inventory or they purhcased a bulk of phones that came with a mix of profitable and unprofitable “write-off” models?
“Write-offs rose from $6.6m in 2023 to $11.6m in 2024. To put that into perspective, that’s a little over MTR Group’s total 2024 inventory. In absolute terms though, the 2024 write-off, at 9.2% of total stock is lower than in 2023 at 13.9%.”
Hi Sheng, thanks for the comment! Yes, some inventory may have become unsellable and some unsellable at expected values (including below residuals). Those devices (not just phones) may have come from auction purchases where devices are bought as a mix, and some devices may have just been on the books too long. 13.9% and 9.2% seems to me to be too high, but, when you expand inventory as quickly as Alchemy have, this is going to be a risk. In normal circumstances, the mitigations are inventory management, quick turnaround and in some cases using insurance. However this is relatively new and not well understood by insurance companies, generally.
Got it, thanks. Would you agree that on a macro level, the core issue is that there is too much 2nd hand device inventory hitting the market and are devaluing at a much faster rate than before?
That is why suppliers like Alchemy are writing off more inventory on their books (meaning they can't liquidate the ageing stock fast enough) or purchasing stocks at auction that are a mix of profitable and unprofitabe stock (meaning their suppliers also are holding too much stock).
It would also be interesting to know how accurate or robust of depreciation method companies like Alchemy use to accurately gauge the book value of their inventory vs what the value actually is if they liquidate in a short time frame. This is an issue all companies that deal with ageing inventory has to deal with though.
I don't have the macro data to give you a definitive answer. Certainly for UK, Europe and other English speaking countries, I don't believe that to be the case. I think most people would say there's not enough quality stock, especially Apple. One reason for the gross margin compression.
I've haven't noticed write-offs being prominent in any other company accounts, so I don't have the data to validate your second point. In Alchemy's case the write offs as a percentage of inventory, decreased compared to the previous year.
Got it, thanks. You also mentioned in the article that their cash flow position actually improved despite taking on more inventory, so increased write-offs seem to just be naturally from growing the inventory and business overall.
Correct.