Financial Strategy 1224048921895583 8 Levis

8/7/2019 Financial Strategy 1224048921895583 8 Levis

1/46

McGraw-Hill/IrwinRetailing Management, 6/e Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 6

Financial Strategy


2/46

6-2

Retailing Strategy

Retail Market StrategyChapter 5

Financial StrategyChapter 6

Retail LocationsChapters 7,8

Human ResourceManagement

Chapter 9

Information andDistribution

SystemsChapter 10

CustomerRelationshipManagementChapter 11


3/46

6-3

Retailer Objectives

Financial not necessarily profits, but returnon investment (ROI) primary focus

Societal helping to improve the worldaround us

Personal self-gratification, status, respect


4/46

6-4

Financial Tradeoff Made by Retailers toIncrease ROI

Asset Turnover

Net Profit Margin


5/46

6-5

The Strategic Profit Model:An Overview

Profit Margin x Asset turnover = Return on assets

Net profit x Net sales (crossed out) = Net profit

Net sales (crossed out) Total assets Total assets


6/46

6-6

Components of the Strategic Profit Model


7/46

6-7

The Strategic Profit Model:Profit Management

Net ProfitMargin

Sales

Net Profit

GrossMargin

Total

Expenses

Sales

Cost ofGoods Sold

15%

15

40

100

60

100 25

-

z

-


8/46

6-8

The Strategic Profit Model:Asset Management

Asset

Turnover

Total Assets

Sales

CurrentA

ssets

Fixed Assets

Inventory

Accounts

Receivable

2.5

100

10

5

4

40

30

+ +

z

+

Other CurrentAssets

1


9/46

6-9

The Strategic Profit Model:Return on Assets

Net Profit Margin

Sales

Net ProfitGross Mar

Total Exp.

Sales

Cost Goods Sold

15%

15 40

100

60

100 25

-

-

Asset Turnover

Total Assets

Sales

Current Assets

Fixed Assets

Inventory

A/R2.5

100

10

5

4

40

30

+ +

+

Other Cur Assets

1

Return onAssets

37.5%

Times

Net Profit Net Profit Net Sales

Total Assets=

Net Salesx

Total Assets

Net Sales

Total Assets( )

Net Profit

Net Sales( )

Net Profit

Total Assets( )


10/46

6-10Financial Implications of Strategies Used Bya Bakery and Jewelry Store

Net Profit X Asset = Return on AssetsMargin Turnover

La Madeline Bakery 1% X 10 times = 10%

Kalame Jewelry 10% X 1 time = 10%


11/46

6-11

Income Statements forFederated Department Stores and Costco


12/46

6-12

Profit Management Pathfor Federated and Costco


13/46

6-13

NetSales

Gross MarginGross Margin

Gross Sales

Less ReturnsLesscustomerallowances

COGS

Components of Gross Margin


14/46

6-14

Gross Margin forFederated and Costco

Gross Margin = Gross Margin %Net Sales

Federated: $ 6,333 = 40.5%$15,630

Costco: $ 6,014 = 12.5%$48,107

Why does Federated have higher margins thanCostco?

Does the higher margins mean the Federateds is

more profitable?


15/46

6-15

Operating Expenses

Operating Expenses = Operating Expenses %Net sales

Federated: $4,933 = 31.6%$15,630

Costco: $4,629 = 9.6%

$48,107


16/46

6-16

Types of RetailOperating Expenses

Selling expenses = Sales staff salaries + Commissions +Benefits

General expenses = Rent + Utilities + Miscellaneousexpenses

Administrative expenses = Salaries of all employees other thansalespeople + Operations of buyingoffices + Other administrative expenses


17/46

6-17

Net Profit

Net Profit = Net Profit %Net sales

Federated: $689 = 4.4%$15,630

Costco: $882 = 1.8%$48,107


18/46

6-18

Asset Information fromFederateds and Costcos Balance Sheet


19/46

6-19

Asset Management Path forFederated and Costco


20/46

6-20

Inventory Turnover

Cost of Goods = Inventory TurnoverAverage inventory

Federated: $9,297 = 3.0$3,120

Costco: $42,093 = 11.6$ 3,644


21/46

6-21

Inventory Turnover


22/46

6-22

Asset Turnover

Net Sales = Asset TurnoverTotal Assets

Federated: $15,630 = 1.1$14,885

Costco: $48,107 = 3.2

$15,093


23/46

6-23

Return on Assets

Net Profit Margin x Asset Turnover = Return on Assets

Federated: 4.41 x 1.05 = 4.63%

Costco: 1.83 x 3.29 = 5.84%


24/46

6-24

Strategic Profit Model Ratiosfor Selected Retailers


25/46

6-25

Income Statement for Gifts to Go


26/46

6-26

Gross Margin Percent

Gross Margin = Gross Margin PercentNet Sales

Stores: $350,000 = 50%$700,000

GiftstoGo.com $220,000 = 50%$440,000


27/46

6-27

Operating Expense Percent

Operating Expenses = Operating Expenses %Net Sales

Stores: $250,000 = 35.7%$700,000

GiftstoGo.com: $150,000 34.1%$440,000


28/46

6-28

Net Profit Percentage

Net Profit = Net Profit PercentageNet Sales

Stores: $ 59,800 = 8.5%$700,000

GiftstoGo.com: $ 45,500 = 10.3%$440,000


29/46

6-29

Balance Sheet Information for Gifts to Goand Proposed Internet Channel


30/46

6-30

Inventory Turnover

Cost of Goods = Inventory TurnoverAverage Inventory

Stores: $350,000 = 2.0$175,000

GiftstoGo.com: $220,000 = 3.1$ 70,000


31/46

6-31

Asset Turnover

Net Sales = Asset TurnoverTotal Assets

Stores: $700,000 = 1.84$380,000

GiftstoGo.com: $440,000 = 2.09$211,000


32/46

6-32

Return on Assets

Net Profit Margin x Asset Turnover = Return on Assets

Stores: 8.54 x 1.84 = 15.7%Giststgo.com 10.3 x 2.09 = 21.3%


33/46

6-33

Profit Management

Asset Management

The Strategic Profit Model

Net Sales

Cost ofgoods sold

Variableexpenses

Fixedexpenses

Grossmargin

Totalexpenses

Net profit

Net Sales

Net profitmargin

Assetturnover

Return onassets

z

-

-

+

Inventory

Accountsreceivable

Other currentassets

Total currentassets

Fixed assets

Net sales

Total assets

+

+ +

z

x


34/46

6-34

Productivity Measures

Input Measures assess the amount of resources ormoney used by the retailer to achieve outputs such assales

Output measures asses the results of a retailersinvestment decisions

Productivity measure determines how effectivelyretailers use their resource what return they get on theirinvestments


35/46

6-35

Setting and Measuring PerformanceObjectives

Retailers will be better able to gauge performance if it hasspecific objectives in mind to compare performance.

Should include: numerical index of performance desired time frame for performance necessary resources to achieve objectives


36/46

6-36

Setting Objectives in Large Retail Organizations

Top Down PlanningCorporate Developmental Strategy

Category, Departmentsand sales associatesimplement strategy


37/46

6-37

Setting Objectives in Large Retail Organizations

Bottom Up PlanningBuyers and Storemanagers estimatewhat they canachieve

Corporate

Operation managersmust be involved inobjective setting

process


38/46

6-38

Financial Performance of Retailers

Outputs - Performance

Sales

Profits

Cash flow

Growth in sales,profits Same store

sales growth

Inputs Used by Retailers

Inventory ($)

Real Estate (sq. ft.)

Employees (#) Overhead (Corporate

Staff and Expenses)

Advertising Energy Costs

MIS expenses


39/46

6-39

Productivity - Outputs/Input

Corporate Level

ROA = Profits/Assets (ROE = Profit/Equity)

Overhead/Sales

Buyers (Inventory, Pricing, Advertising) Gross Margin % = Gross Margin/Sales

Inv Turnover = COGS/ Avg. Inventory (cost)

GMROI Gross Margin/Average Inventory

Advertising/sales Stores (Real Estate, Employees)

Sales/Square Feet inv. Shrinkage/sales

Sales/Employee


40/46

6-40

Performance Objectives and MeasuresUsed by Retailers


41/46

6-41

Examples of PerformanceMeasures Used by Retailers

Level of Output Input Productivity

Organization (Output/Input)

Corporate Net sales Square feet of Return on assets

(measures of store space

entire corporation)Net profits Number of Asset turnover

employees

Growth in sales, Inventory Sales per employee

profits

Advertising Sales per square

expenditures foot

6 42


42/46

6-42

Examples of PerformanceMeasures Used by Retailers



Merchandise Net sales Inventory level Gross Margin

management Return on

(measures for a Investment (GMROI)

merchandise

category) Gross margin Markdowns Inventory turnover

Growth in sales Advertising Advertising as a

expenses percentage of

sales *

Cost of Markdown as a

merchandise percentage of

sales*

* These productivity measures are commonly expressed as an input/output.

6 43E l f P f


43/46

6-43Examples of PerformanceMeasures Used by Retailers



Store operations Net sales Square feet of Net sales per

(measures for a selling areas square foot

store ordepartment Gross margin Expenses for Net sales per

within a store) utilities sales associate

or per selling hour

Growth in sales Number of sales Utility expenses as

associates a percentage ofsales *

* These productivity measures are commonly expressed as an input/output.

6 44Ill t ti P d ti it M


44/46

6-44Illustrative Productivity MeasuresUsed by Retailing Organizations



Corporate Net profit Owners equity Net profit /

(chief executive owners equity =

officer) return on owners

equity

Merchandising Gross margin Inventory * Gross margin /

(merchandise inventory* =manager and GMROI

buyer)

Store operations Net sales Square foot Net sales /

(director of stores, square foot

store manager)

*Inventory = Average inventory at cost

6 45


45/46

6-45

Benchmarks

Performance of retailer over time retailercan compare its recent performance to itsperformance in the preceding months,

quarters or years.

Performance of a retailer compared to its

competitors

6 46


46/46

6-46

Sources of Information

Balance Sheet (Snap Shot at One Time)

Asset Management

Income Statement (Summary Over Time) Margin Management

Annual Reports/ SEC Filings

http://www.sec.gov/edgar/searchedgar/companysearch.html

Financial Strategy 1224048921895583 8 Levis

Documents