CHAPTER 6 2 1 Financial Strategy CHAPTER 06

CHAPTER 6 2 1 Financial Strategy CHAPTER 06 Mc. Graw-Hill/Irwin Retailing Management 8 e Copyright © 2012 by The Mc. Graw-Hill Companies, Inc. All rights reserved. © The Mc. Graw-Hill Companies, All rights reserved. 6 -

Retailing Strategy CHAPTER 6 2 1 6 -

Objectives and Goals CHAPTER 6 2 1 • Financial – not necessarily profits, but return on investment (ROI) – primary focus • Societal – helping to improve the world around us • Personal – self-gratification, status, respect 6 -

Components of the Strategic Profit Model CHAPTER 6 2 1 6 -

The Strategic Profit Model: An Overview CHAPTER 6 2 1 Profit Margin x Asset turnover Net profit Net sales (crossed out) = Net profit x Net sales (crossed out) Total assets = Return on assets Total assets Net Profit Margin: reflects the profits generated from each dollar of sales Asset Turnover: assesses the productivity of a firm’s investment in its assets 6 -

Fiscal Annual Income Statement for Family Dollar and Nordstrom ** CHAPTER 6 2 1 ** ** ($ millions) 6 -

Profit Management Path for Family Dollar Stores and Nordstrom CHAPTER 6 2 1 6 -

Profit Margin Management Path CHAPTER 6 2 1 • Net Sales = Gross Sales + Promotional Allowances - Return • Cost of Good Sold (COGs) • Gross Margin (GM) = Net Sales - COGs 6 -

Profit Margin Management Path CHAPTER 6 2 1 • Operating Expense • Variable (e. g. . sales commissions) • Fixed (rent, depreciation, staff salaries) • Selling, general, and administrative (SG&A) expenses 6 -

Profit Margin Management Path CHAPTER 6 2 1 • Operating profit margin = Gross margin Operating expenses - Extraordinary (recurring) operating expenses • Net profit margin = Operating profit margin Taxes - Interest - Extraordinary nonrecurring expenses 6 -

Profit Margin Management Path CHAPTER 6 2 1 • Gross margin percentage is gross margin divided by net sales. • Retailers use to compare • the performance of various types of merchandise • their own performance with that of other retailers with higher or lower levels of sales. Gross margin Net sales = Gross margin % 6 -

Profit Margin Management Path CHAPTER 6 2 1 • SG & A or operating expenses can be expressed as a percentage of net sales to facilitate comparisons across items, stores, and merchandise categories within and between firms. Operating expenses Net sales = Operating expenses % 6 -

Profit Margin Management Path CHAPTER 6 2 1 • Net operating profit percentage is gross margin minus operating expenses divided by net sales Gross margin - Operating expenses Net sales = Net operating profit % 6 -

Asset Management Path CHAPTER 6 2 1 • Assets: • Economic Resources (e. g. , inventory, buildings, computers, store fixtures) owned or controlled by a firm • Current Asset and Fixed Asset • Current Assets = Cash + Account Receivable + Inventory + Other current assets 6 -

Asset Management Path CHAPTER 6 2 1 • Accounts receivable are primarily the monies owed to the retailer by customers that have bought merchandise on credit. • Fixed Assets = Fixture, Stores (owned) • Asset Turnover = Sales/Total Assets Net sales = Asset turnover Total assets • Inventory Turnover = COGS/Avg. Inventory (cost) Cost of goods sold = Inventory turnover Average inventory at cost 6 -

Asset Information from Family Dollar Stores’ and Nordstrom’s Balance Sheets * CHAPTER 6 2 1 * * ($ millions) 6 -

Asset Management Path for Family Dollar and Nordstrom CHAPTER 6 2 1 6 -

Inventory Turnover CHAPTER 6 2 1 • A Measure of the Productivity of Inventory: • It is used to evaluate how effectively retailers utilize their investment in inventory • Shows how many times, on average, inventory cycles through the store during a specific period of time (usually a year) Inventory Turnover = COGS/avg inventory (cost) Inventory Turnover = Sales/ avg inventory (retail) 6 -

Strategic Profit Model Ratios for Selected Retailers CHAPTER 6 2 1 6 -

Income Statement Information for Gifts To Go Stores and Proposed Gifts-To-www. Go. com Internet Channel CHAPTER 6 2 1 6 -

Balance Sheet Information for Gifts To Go Stores and Proposed Gifts-To-www. Go. com Internet Channel CHAPTER 6 2 1 6 -

Analysis of Financial Strength CHAPTER 6 2 1 • Cash-Flow Analysis • Retailers need cash to meet their obligations — i. e. , salary, rent, vendors, etc. • Cash flow is calculated by making adjustments to net profit involving adding or subtracting differences in revenue and expenses that occur from one period to the next. 6 -

Analysis of Financial Strength CHAPTER 6 2 1 • Debt-Equity Ratio • The retailer’s short- and long-term debt divided by the value of the owners’ or stockholders’ equity. • Current Ratio • The is short-term assets divided by short-term liabilities, it evaluates the retailer’s ability to pay its short-term debt obligations. 6 -

Analysis of Financial Strength CHAPTER 6 2 1 • Quick Ratio • “acid-test ratio” • More stringent test because it removes inventory from the short-term assets. • If a retailer needs cash to pay its short-term liabilities, it cannot rely on inventory to provide an immediate source for cash. 6 -

Setting and Measuring Performance Objectives CHAPTER 6 2 1 • Retailers will be better able to gauge performance if it has specific objectives in mind to compare performance. • Should include: • numerical index of performance desired • time frame for performance • necessary resources to achieve objectives 6 -

Setting Objectives in Large Retail Organizations CHAPTER 6 2 1 Top-Down Planning Corporate Developmental Strategy Category, Departments and sales associates implement strategy 6 -

Setting Objectives in Large Retail Organizations CHAPTER 6 2 1 Corporate Bottom-Up Planning Buyers and Store managers estimate what they can achieve Operation managers must be involved in objective setting process 6 -

Productivity Measures CHAPTER 6 2 1 Input Measures – assess the amount of resources or money used by the retailer to achieve outputs such as sales Output measures – asses the results of a retailer’s investment decisions Productivity measure – determines how effectively retailers use their resource – what return (e. g. , profits) they get on their investments (e. g. , expenses) 6 -

Financial Performance of Retailers CHAPTER 6 2 1 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 6 -

Examples of Performance Measures Used by Retailers CHAPTER 6 2 1 6 -

Assessing Performance CHAPTER 6 2 1 • Growth in Stockholder Value – Stock Price • Accounting Measures – ROA (Risk adjusted) • Benchmark • Performance Over Time • Compare performance indicator for three years • Performance Compared to Competitors • Compare performance indicators with major competitors for one year, most recent 6 -