Retail Financial Modeling

Retail Financial Model

October 19th, 2001

Prepared for

K

KSA: Share

the Wealth 1

Why Create a Financial Model

Helps to determine if a new business can create positive value. Positive value

means that the cash inflows from a new business venture exceed the costs of

creating and growing it.

Allows the user to look at various situations or scenarios to see which strategy will

create the most value.

Reveals the minimum financial performance targets (e.g. sales growth, gross

margins) that the new business must achieve in order to create positive value.

KSA: Share

the Wealth 2

How the retail financial model works

This particular model is based on a soft goods retailer, however it can be

customized to fit the financial analysis of almost any retailer. It is structured to

provide a strong framework as a platform for further customization.

The model provides for two channels of distribution: stores and catalog.

We have found that these channels have significantly different drivers of sales and

expenses.

The only common elements between the two channels are merchandise mix, product pricing

and product costs.

There are two areas in which the user will need to input information:

Merchandise Mix

Various category worksheets

Merchandise & GM* for Store (number of styles and colors)

Merchandise & GM* for Catalog (number of styles and colors)

Input page

From these two areas, several worksheets are generated:

Financial Highlights

NPV* Analysis -

Entire Business

NPV* Analysis -

Stores Business

Total Stores Rollout

Store Format P&L

Format Occupancy

Expenses

Catalog Revenue

Model

Catalog Production

Costs

Catalog Income

Contribution

*GM stands for

Gross Margin;

NPV stands for

Net Present

Value

KSA: Share

the Wealth 3

A map of how the model flows

NPV - Entire Business

NPV - Stores

Business

Occup. Exp.

Format 1, 2, 3

Total Stores

Rollout

Single Store P&L - Format 1, 2,

3

Total Merchandise

Revenues & Gross Profit for

a Single Store

Catalog

Production Costs

Catalog Revenue

Model

Total Merchandise

Revenues & Gross Profit for

Catalog

Merchandise Categories -

Assortment, Price, Costs &

Promotion

Catalog Income

Contribution

Created by

figures

entered into

the input page

and the

merchandise

worksheets

below.

KSA: Share

the Wealth 4

Input Area One:

Merchandise Mix

KSA: Share

the Wealth 5

Merchandise Categories - Assortment, Price, Cost & Promotion

Revenues and gross margins are derived from detailed analysis of each product

category. This analysis is broken down for the two channels, stores and catalog.

Within each category, an average item of a certain style and color is represented

and the following details are determined based on client feedback and market

research:

Price

Cost

Size assortment

Promotional markdowns and sell through percentages

KSA: Share

the Wealth 6

M erch an d is in g , P r ic in g an d P ro m o tio n b y C a teg o ry - Wo ven C asu a l S h o rts

F o r S to re O p era tio n s :

S iz e s U n i ts

3 0 1

3 2 2

3 4 3

3 6 4

3 8 2

4 0 1

4 2 1

S iz e 0

S iz e

1 4

F A L L S P R IN G

T o ta l A v e ra g e S K U s P e r A v e ra g e S ty le /C o lo r: 0 1 4

A v e ra g e P r ic e : 4 9 .5 0$ 4 9 .5 0$

C o st: 1 7 .0 0$ 1 7 .0 0$

In i tia l G M %: 6 5 .7 % 6 5 .7 %

F A L L :

S e a so n a l S e l l T h ro u g h :

S e ll in g S ta g e s % O F F P ric e % S e l l T h ru U n i ts R e v e n u e G ro ss P ro fi t G M %

In it ia l 0 % 4 9 .5 0$ 4 0 % 0 -$ -$ # D IV /0 !

F irs t M D 3 0 % 3 4 .6 5$ 2 0 % 0 -$ -$ # D IV /0 !

S e c o n d M D 5 0 % 2 4 .7 5$ 1 5 % 0 -$ -$ # D IV /0 !

Th ird M D 6 5 % 1 7 .3 3$ 1 5 % 0 -$ -$ # D IV /0 !

O u t le t S a le 7 5 % 1 2 .3 8$ 1 0 % 0 -$ -$ # D IV /0 !

0 -$ -$ # D IV /0 !

M a in ta in e d

G M %

S P R IN G :

S e a so n a l S e l l T h ro u g h :

S e ll in g S ta g e s % O F F P ric e % S e l l T h ru U n i ts R e v e n u e G ro ss P ro fi t G M %

In it ia l 0 % 4 9 .5 0$ 4 0 % 5 .6 2 7 7 .2 0$ 1 8 2 .0 0$ 6 5 .7 %

F irs t M D 3 0 % 3 4 .6 5$ 2 0 % 2 .8 9 7 .0 2$ 4 9 .4 2$ 5 0 .9 %

S e c o n d M D 5 0 % 2 4 .7 5$ 1 5 % 2 .1 5 1 .9 8$ 1 6 .2 8$ 3 1 .3 %

Th ird M D 6 5 % 1 7 .3 3$ 1 5 % 2 .1 3 6 .3 8$ 0 .6 8$ 1 .9 %

O u t le t S a le 7 5 % 1 2 .3 8$ 1 0 % 1 .4 1 7 .3 3$ (6 .4 8 )$ -3 7 .4 %

1 4 4 7 9 .9 0$ 2 4 1 .9 0$ 5 0 .4 %

M a in ta in e d

G M %

Merchandise Mix by Category

Example

Category:

Woven Casual

Shorts

1. The total of the

units is pulled into

these two boxes.

2. (Average Price-

Cost)/Average Price

= Initial Gross

Margin (%)

3. The

following sell

through charts

by season

determine

how many

units will be

sold at full

price or at

marked down

prices.

Yellow

represents

cells where

the user

inputs

numbers.

4. A maintained

margin is

determined after

calculating total

gross profit/total

revenues for this

category.

KSA: Share

the Wealth 7

Total merchandise revenues and gross margins for store and catalog

Each category is then multiplied by a number of styles and colors to determine total

revenues and gross profit for a single store and catalog operation.

Sample of a

season for a

single store or

catalog

The average number of styles and

colors are inputted for each

category for fall and spring and for

a store and for catalog operations,

F AL L :

M e rch a n d ise C a te g o rie s # o f sty le s

A ve . # o f

co lo rs p e r

sty le

A v e ra g e # o f

sty le /co lo r

i te m s

T o ta l # o f

S K U 's

A ve ra g e

S e a so n a l

R e ve n u e p e r

sty le /co lo r

A ve ra g e

S e a so n a l

G ro ss P ro fi t

p e r sty le /co lo r

A ve ra g e

S e a so n a l

M a in ta in e d

G M % p e r

sty le /co lo r

T o ta l R e ve n u e

fo r C a te g o ry

T o ta l G ro ss

P ro fi t fo r

C a te g o ry

T o ta l G M %

fo r C a te g o ry

W oven C as ua l B o t tom s 2 1 4 8 4 1 5 1 2 990 .97$ 486 .97$ 49 .1% 83 ,241 .27$ 40 ,905 .27$ 49 .1%

S w ea te rs 3 0 4 1 2 0 9 6 0 747 .90$ 363 .90$ 48 .7% 89 ,748 .00$ 43 ,668 .00$ 48 .7%

K n it C as ua l Tops 3 6 6 2 1 6 2 5 9 2 660 .65$ 372 .65$ 56 .4% 142 ,699 .32$ 80 ,491 .32$ 56 .4%

W oven C as ua l Tops 1 2 4 4 8 2 8 8 394 .73$ 202 .73$ 51 .4% 18 ,946 .80$ 9 ,730 .80$ 51 .4%

S po rt S h irts 1 5 4 6 0 1 1 4 0 782 .87$ 383 .87$ 49 .0% 46 ,972 .28$ 23 ,032 .28$ 49 .0%

D res s S h irts 1 6 4 6 4 1 6 0 0 1 ,203 .22$ 628 .22$ 52 .2% 77 ,006 .00$ 40 ,206 .00$ 52 .2%

D res s S lac k s 2 4 4 9 6 1 3 4 4 1 ,308 .83$ 636 .83$ 48 .7% 125 ,647 .20$ 61 ,135 .20$ 48 .7%

S po rtc oa ts 1 8 2 3 6 8 6 4 5 ,817 .00$ 2 ,937 .00$ 50 .5% 209 ,412 .00$ 105 ,732 .00$ 50 .5%

S u its 0 0 0 0 8 ,361 .94$ (1 ,298 .06 )$ -15 .5% -$ -$ -15 .5%

C as ua l O u te rw ea r 6 2 1 2 7 2 1 ,142 .63$ 602 .63$ 52 .7% 13 ,711 .50$ 7 ,231 .50$ 52 .7%

Topc oa ts 0 0 0 0 1 ,385 .00$ 689 .00$ 49 .7% -$ -$ 49 .7%

N ec k w ea r 7 0 4 2 8 0 1 1 2 0 188 .36$ 108 .36$ 57 .5% 52 ,740 .80$ 30 ,340 .80$ 57 .5%

U nde rw ea r 0 0 0 0 68 .56$ 38 .56$ 56 .2% -$ -$ 56 .2%

T-s h irts 0 0 0 0 83 .10$ 57 .60$ 69 .3% -$ -$ 69 .3%

S oc k s 2 5 1 0 6 0 39 .47$ 22 .97$ 58 .2% 394 .73$ 229 .73$ 58 .2%

F oo tw ea r 0 0 0 0 2 ,354 .50$ 1 ,249 .50$ 53 .1% -$ -$ 53 .1%

B e lts 6 3 1 8 2 5 2 605 .94$ 381 .94$ 63 .0% 10 ,906 .88$ 6 ,874 .88$ 63 .0%

O the r2 0 0 0 0 38 .09$ 18 .09$ 47 .5% -$ -$ 47 .5%

TO TA L 2 5 6 4 6 1 0 4 4 1 1 8 0 4 871 ,426 .77$ 449 ,577 .77$ 51 .6%

KSA: Share

the Wealth 8

Input Area Two:

Input Page

KSA: Share

the Wealth 9

Input Page - Stores

The first section of the input page allows you to enter sales growth, gross

margin, expenses and their percentage of sales as well as working capital turns

for a single store.

Checks and balances: The gross margin entered is matched by the gross

margin in blue which is derived from the merchandise mix.

INPUT VARIABLES

Only enter inform ation in the blue text cells!!!

P e rio d 0 1 2 3

Ye a r 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5

S T O RE S :S a le s G ro w th 9 .0 % 6 .0 %

S to re R e tu rn s (% o f G ro s s S a le s ) 1 8 .0 % 1 7 .5 % 1 7 .0 %

G ro s s M a rg in (% ) - Y e a r 1 O n ly 5 1 .6 %

C h e c k a g a in s t M e rc h a n d is e M ix G M % 5 1 .6 %

O p e ra t in g E x p e n s e s a s a % o f S a le s 3 .0 % 3 .0 % 2 .9 %

O th e r S u p p o rt in g E x p e n s e s (% o f s a le s ):

F ie ld S u p e rvis io n 2 .0 % 2 .0 % 2 .0 %

M a rk e t in g 4 .0 % 4 .0 % 3 .0 %

P la n n in g /D is t rib u t io n /D e live ry 1 .0 % 1 .0 % 1 .0 %

O th e r 1 1 .0 % 1 .0 % 1 .0 %

O th e r 2 0 .5 % 0 .5 % 0 .5 %

O th e r 3 0 .0 % 0 .0 % 0 .0 %

Ta x R a te 3 8 .5 % 3 8 .5 % 3 8 .5 % 3 8 .5 %

W o rk in g C a p ita l:

A n n u a l In ve n to ry Tu rn s

S to re 2 .0 0 2 .0 0 2 .1 0

C a ta lo g 2 .0 0 2 .0 0 2 .1 0

A n n u a l R e c e iva b le s Tu rn s 7 .0 0 7 .0 0 7 .0 0

A n n u a l P a y a b le s Tu rn s 1 0 .0 0 1 0 .0 0 1 0 .0 0

D e p re c ia t io n S t ra ig h t L in e S c h e d u le - Y e a rs 8

KSA: Share

the Wealth 10

Input Page - Store Formats

The model allows the user to create different P&L statements from three separate

store types or locations (e.g. Mall, Strip center or A location, B location, etc.)

S to re F o rm a t O n e :S trip C en te r

Y ea r 1 N e t S a les /S e lling S F 5 0 0$

C u rren t p roduc t m ix s u ppo rts : 4 3 3$

F ou r W a ll E x pens e s (ex c l. ope ra t ing ex pens es ):

P ay ro ll 1 2 .0% 1 1 .8% 1 1 .7 % 1 1 .6 % 11 .6%

O c c upanc y E x pe ns es (bas ed on G ros s S F )

R en t 6 0 .00$ 60 .00$ 60 .0 0$ 6 5 .0 0$ 65 .00$

C A M 1 6 .00$

% A nnua l G row th in C A M 4 .0%

R ea l E s ta te Tax 1 0 .00$

% A nnua l G row th in R ea l E s ta te Tax 4 .0%

P rom o /M erc h 2 .5 0$

% A nnua l G row th in P rom o /M erc h 4 .0%

O the r O c c upanc y E x p ens es (Inc l. U t ilit ie s ) - To ta l $ 5 ,0 00$

% A nnua l G row th in O the r O c c upanc y E x p . 4 .0%

% R en t 5 % 5 % 5 % 5 % 5 %

B u ildou t /G ros s S F 1 5 5$

G ros s S F 3 ,8 00

% S e lling S F o f G ros s S F 8 2 %

Land lo rd A llow anc e 7 5 ,00 0$

P re -O pen ing /C ons t ruc t io n E x pens es 10 0 ,00 0$

KSA: Share

the Wealth 11

Input Page - Store Rollout

The last step in creating financial projections for this bricks and mortar channel is to

determine the appropriate rollout schedule of the 1 to 3 different store types. As you

enter the number of each type of store in each year, the model will automatically

calculate what percentage of the mix.

S T O R E R O L L O U T

C u m u la tive n u m b e r o f sto re s 1 6 1 1 2 1 3 6

S t rip C en te r 0 0 1 3 6

L ifes ty le C en te r 1 3 5 1 1 1 7

M a ll 0 2 4 6 1 2

N u m b e r o f n e w sto re s o p e n e d d u rin g th e ye a r:

S trip C en te r 0 0 1 2 3

L ifes ty le C en te r 1 3 2 6 6

M a ll 0 2 2 2 6

% o f S to re M ix :

S trip C en te r 0 .0% 0 .0% 9 .1% 14 .3% 16 .7%

L ifes ty le C en te r 100 .0% 50 .0% 45 .5% 52 .4% 47 .2%

M a ll 0 .0% 33 .3% 36 .4% 28 .6% 33 .3%

KSA: Share

the Wealth 12

Input Page - Catalog

The first step is to determine total customer demand, which is the total amount of orders

from catalogs on a dollar basis in that year. The factors that go into this figure include:

Response Rate X Circulation = Number of Orders

Units per Order X Average Retail Sold = Average Order Value

Number of Orders X Average Order Value = Total Customer Demand

C ata lo g

N u m b e r o f B o o k s P e r Y e a r 1 2 3

C irc u la t io n S iz e /B o o k 1 ,0 0 0 ,0 0 0 1 ,0 0 0 ,0 0 0 1 ,0 0 0 ,0 0 0

A ve ra g e n u m b e r o f p a g e s /b o o k 1 6 .0 0 3 6 .0 0 4 3 .0 0

C irc u la tio n B re a k d o w n : (B e g . O f Ye a r)

P ro s p e c t 0 .0 % 1 2 .5 % 1 6 .7 %

C u rre n t M is s y C u s to m e r/S p o u s e 1 0 0 .0 %

R e p e a t C u s to m e r* 0 .0 %

R e s p o n s e R a te s :

P ro s p e c t 0 .0 0 % 0 .6 0 % 0 .7 0 %

C u rre n t M is s y C u s to m e r/S p o u s e 0 .3 0 % 0 .7 5 % 0 .9 0 %

M e n s C u s to m e r* 0 .0 0 % 2 .6 0 % 2 .6 0 %

A ve ra g e U n its /O rd e r:

P ro s p e c t 1 .2 0 1 .3 0 1 .3 0

C u rre n t M is s y C u s to m e r/S p o u s e 1 .8 0 1 .8 5 1 .9 0

R e p e a t C u s to m e r* - 2 .0 0 2 .3 0

A ve ra g e R e ta il S o ld :

P ro s p e c t -$ 8 5 .0 0$ 8 5 .0 0$

C u rre n t M is s y C u s to m e r/S p o u s e 9 0 .0 0$ 9 0 .0 0$ 9 0 .0 0$

R e p e a t C u s to m e r* -$ 9 5 .0 0$ 9 5 .0 0$

*R e p e a t c u s to m e r is a n y c u s to m e r th a t h a s p u rc h a s e d f ro m th e c a ta lo g b e fo re .

KSA: Share

the Wealth 13


The model does allow for the user to split the circulation into three separate profiles of

mailing targets. For example, one group may be customers of the clients other existing businesses. Another group may be totally new targets of prospects. Inevitably after the first year of a new catalog and new business, there will be a group labeled repeat customers

who have purchased from the catalog before. In this example, all three of these groups may

be assigned different metrics for the factors of the above equation.

KSA: Share

the Wealth 14


Catalog production costs consist of postage, paper and printing, which are usually calculated

on a per page circulated basis. For example, with a 50 page catalog that is circulated to a million people, the total pages circulated is 50 million. Paper, printing and postage would be

a certain figure per page circulated, say $.000889, times the 50 million circulated pages.

Also included in production costs are creative costs, which are the marketing expenses to

design and create each page, and these are calculated on a per page basis.

P o s ta g e C o s ts /C irc u la te d P a g e 0 .0 0 4 0 0 0$ 0 .0 0 4 0 0 0$ 0 .0 0 4 0 0 0$ 0 .0 0 4 0 0 0$ 0 .0 0 4 0 0 0$ 0 .0 0 4 0 0 0$ P rin t in g C o s ts /C irc u la te d P a g e 0 .0 0 2 0 0 0$ 0 .0 0 2 0 0 0$ 0 .0 0 2 0 0 0$ 0 .0 0 2 0 0 0$ 0 .0 0 2 0 0 0$ 0 .0 0 2 0 0 0$

P a p e r C o s ts /C irc u la te d P a g e 0 .0 0 2 9 0 3$ 0 .0 0 2 9 0 3$ 0 .0 0 2 9 0 3$ 0 .0 0 2 9 0 3$ 0 .0 0 2 9 0 3$ 0 .0 0 2 9 0 3$

O th e r C o s ts /C irc u la te d P a g e -$ -$ -$ -$ -$ -$

To ta l V a ria b le C o s ts /C irc u la te d P a g e 0 .0 0 8 9 0 3$ 0 .0 0 8 9 0 3$ 0 .0 0 8 9 0 3$ 0 .0 0 8 9 0 3$ 0 .0 0 8 9 0 3$ 0 .0 0 8 9 0 3$

C re a t ive C o s ts /C a ta lo g P a g e (n o t p e r c irc u la te d p a g e ) 4 ,7 5 0$ 4 ,7 5 0$ 4 ,7 5 0$ 4 ,7 5 0$ 4 ,7 5 0$ 4 ,7 5 0$

L is t R e n ta l E x p e n s e / 1 0 0 0 n e w n a m e s 5 0$ 5 0$ 5 0$ 5 0$ 5 0$ 5 0$

O th e r C a ta lo g O p e ra t in g E x p e n s e s (% o f s a le s ):

Te le m a rk e t in g 5 .0 % 5 .0 % 5 .0 % 5 .0 % 5 .0 % 5 .0 %

C a ta lo g O p e ra t io n s /F u lfi l lm e n t 3 .0 % 3 .0 % 3 .0 % 3 .0 % 3 .0 % 3 .0 %

N e t S h ip p in g /H a n d lin g In c o m e -3 .0 % -3 .0 % -3 .0 % -3 .0 % -3 .0 % -3 .0 %

O th e r E x p e n s e s 1 .5 % 1 .5 % 1 .5 % 1 .5 % 1 .5 % 1 .5 %

KSA: Share

the Wealth 15

Discount Rate

Lastly, a rate must be entered to allow the model to discount future cash flows back to

the present year.

This percentage is a strong driver of increases or decreases in the models estimated value of the new business.

Discount Rate for NPV Analysis: 12.5%

Example Scenarios: Discount Rate Store Rollout Schedule Merchandise Mix/ Gross Margin

KSA: Share

the Wealth 17

Changing the discount rate

This is one of the most significant determinants of the value of the projected

business.

Decreasing the discount rate means lowering the rate at which the future net cash

flows of the business are calculated back to the present year, year zero. This would

result in a higher NPV (net present value).

Increasing the discount rate means increasing the rate at which future cash flows

are calculated back to the present year. This leads to a lower NPV.

Example:

Record the NPV for the entire business in the financial highlights worksheet - cell B33

Change the rate on the input worksheet (cell B256) to 11.0% from 10.0%

Look back at the NPV in the financial highlights worksheet

KSA: Share

the Wealth 18

Accelerating the store rollout schedule

Increasing the number of stores opened each year increases the capital investment

required to support the business.

Accelerating the store rollout also increases the size of cash flows in future years as

higher sales from a larger footprint support fixed operating expenses.

Example:

Record the NPV (net present value) for the entire business in the financial highlights worksheet - cell B33

Increase the number of stores (as shown in red) in the rollout schedule in the input page (row 113) as follows:

Look back at the NPV in the financial highlights worksheet and notice the improvement in NPV

The cash flows generated by higher sales offset the increased investment to build

out the extra stores.

S T O R E R O L L O U T

C u m u la tive n u m b e r o f sto re s 1 13 26 40 59 79 99 126 154 182

S t rip C en te r 0 0 1 3 6 8 12 15 19 23

L ifes ty le C en te r 1 10 20 30 40 50 60 75 90 105

M a ll 0 2 4 6 12 20 26 35 44 53

N u m b e r o f n e w sto re s o p e n e d d u rin g th e ye a r:

S trip C en te r 0 0 1 2 3 2 4 3 4 4

L ifes ty le C en te r 1 10 10 10 10 10 10 15 15 15

M all 0 2 2 2 6 8 6 9 9 9

% o f S to re M ix :

S trip C en te r 0 .0% 0 .0% 3 .8% 7 .5% 10 .2% 10 .1% 12 .1% 11 .9% 12 .3% 12 .6%

L ifes ty le C en te r 100 .0% 76 .9% 76 .9% 75 .0% 67 .8% 63 .3% 60 .6% 59 .5% 58 .4% 57 .7%

M a ll 0 .0% 15 .4% 15 .4% 15 .0% 20 .3% 25 .3% 26 .3% 27 .8% 28 .6% 29 .1%

KSA: Share

the Wealth 19

Changing gross margin in year 1

Gross margin (sales less cost of goods sold) is a significant driver of value in any

business and even slight changes will have a strong impact on NPV.

Within the input page, cells c12 and c13, there are two figures for gross margin.

The first cell allows the user to enter a maintained year 1 gross margin.

The second cell shows the gross margin generated by the merchandise mix section of the

model.

Example:

Observe the NPV in the financial highlights page - cell B33.

Suppose the merchandise mix was changed slightly and generated a lower gross margin. The input page may look like this:

The next step would be to manually change the gross margin in the first cell to match the

gross margin that your merchandise mix supports:

Once again, check the NPV in the financial highlights page and you can see that it becomes

dramatically lower.

G ros s M arg in (% ) - Y ear 1 O n ly 51 .6%

C hec k aga ins t M erc hand is e M ix G M % 51.6%





How do I use this model after

today?

KSA: Share

the Wealth 21

Applying the model to your clients needs

While this model is a strong base for creating financial projections for a new

business, there are still important questions to ask that will help refine the model to

better match the particular type of client and business endeavor.

The following pages list several of the questions we asked to create this retail

financial model that can also be a guide to revising and customizing this model.

KSA: Share

the Wealth 22

Structure

What timeframe should our projections cover? (5 years, 10 years?). There may be a

standard timeframe that the client uses when examining all new businesses or it may

depend on the type of business.

What format does the client currently use for an internal profit and loss statement?

How are expenses organized and what levels of profitability are broken out between

expense lines? Should this new business expenses be organized any differently?

KSA: Share

the Wealth 23

Channels

What channels will be used to sell the product? (bricks and mortar, catalog, etc.)

What expenses are specifically allocated to a certain channel, a single store or a

single catalog and vice versa, what expenses are indirect and are only included in a

roll-up P&L of all or some of the above?

Within the bricks and mortar channel:

Will there be different types of store formats or location types? If yes, what financial metrics

will be different between each format/location type? (e.g. payroll, rent, etc.)

How much will sales grow each year? (The answer to this is derived from market research

and competitive analysis as well as client feedback.)

What are the four wall expense categories for a single store?

What other operating expenses will exist for a single store?

What are the up-front investment requirements to start a new store? (e.g. build-out,

inventory purchase, pre-opening costs, etc.)

KSA: Share

the Wealth 24

Catalog

Within catalog:

What are the financial inputs for determining catalog revenues? Examples include:

What will the circulation mix look like? What percent of the circulation will be prospects (names that are purchased from an outside source?) versus customers of certain

existing businesses?

The following metrics below may or may not be different depending on which type of circulation group (e.g. prospect, existing customer of another business, repeat

customer of this particular business)

Response rates (percent of the circulation that actually places an order)

Average number of orders

Average retail sold (average dollar value of a single unit purchased)

What percentage of gross demand/customer demand will be items that are no longer

available (NLA)?

What percentage of reported demand (customer demand less NLA) will be cancelled

backorder shipments?

What percentage of gross shipments (reported demand less cancelled backorder shipments)

will be returned?

What costs are calculated on a per page circulated basis? What costs are calculated on a per page basis? What costs are calculated as a percent of revenues?

What other operating expenses will exist for catalog operations?

KSA: Share

the Wealth 25

Merchandise Mix

What will the merchandise mix look like?

This area of planning and questions may require close examination of the offerings of

various competitors within the particular industry.

What are the categories that will make up each SKU? For example, an apparel

merchandise mix might consist of styles, colors and sizes but a music store mix may include

type of music, artist and form of media (CD, cassette, etc.)

How will these SKUs be assorted within these categories? (e.g. 70% tops/30% bottoms or 60% Classical/40% Jazz)

What will be the pricing structure within each category?

What will be the costs to make or source product within each category?

What do the promotional markdown schedules and sell through rates look like for each

category?

KSA: Share

the Wealth 26

Working capital

What are expected turns for inventory, accounts receivable and accounts payable

each year? (The answer to this may require analysis of industry competitors in

addition to client feedback).

KSA: Share

the Wealth 27

Populating the Expenses

Before the expense categories are populated with numbers, the information learned

from asking structural questions should be used to get all of the line items set up in

the model.

Once the model is set up, the expense items and other variables must be populated.

This is usually an iterative process between KSA and the client. For example, what

percentage of net sales do marketing expenses make up? Does this percentage

increase or decrease over time? Additional conversations with the client should

help fill in the blanks.

Note: if the model is used for an existing business that is looking to enter into a new

venture, then it is important to determine which resources can be leveraged from the

existing business. Only costs that are incremental to those of the existing business

should be included included in the models calculations. It is important to determine this early in the process. For example, there may be certain individuals in marketing

who will continue in their current role and support this new business as well. Their

salaries would NOT be an expense for the new business.

Examples of Output

KSA: Share

the Wealth 29

Financial Highlights

F IN A N C IA L H IG H L IG H T S - EN T IR E B U S IN ES S :

(D o lla rs in th o u s a n d s ) 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9

R o llo u t :

S to re s 1 6 1 1 2 1 3 6 5 6 7 6

C a ta lo g 1 2 3 3 3 3 3

S a le s

S to re 1 ,0 9 0 ,6 0 0$ 6 ,9 6 0 ,6 0 3$ 1 3 ,8 2 9 ,1 7 4$ 2 7 ,0 7 5 ,6 2 9$ 4 7 ,8 3 5 ,3 0 8$ 7 5 ,2 8 2 ,2 7 3$ 1 0 5 ,0 6 2 ,3 5 0$

C a ta lo g 3 5 8 ,2 7 9$ 1 ,7 4 9 ,5 3 0$ 3 ,2 8 2 ,5 3 0$ 3 ,4 9 2 ,1 3 7$ 3 ,8 7 1 ,5 7 1$ 4 ,1 3 2 ,0 2 9$ 4 ,1 2 2 ,5 3 3$

To ta l 1 ,4 4 8 ,8 7 9$ 8 ,7 1 0 ,1 3 3$ 1 7 ,1 1 1 ,7 0 3$ 3 0 ,5 6 7 ,7 6 6$ 5 1 ,7 0 6 ,8 7 9$ 7 9 ,4 1 4 ,3 0 1$ 1 0 9 ,1 8 4 ,8 8 3$

G ro s s P ro fit 7 1 8 ,6 4 4$ 4 ,3 3 4 ,3 1 3$ 8 ,5 5 7 ,9 7 4$ 1 5 ,3 0 8 ,2 9 2$ 2 5 ,9 2 5 ,5 4 5$ 3 9 ,8 5 3 ,5 6 8$ 5 4 ,8 9 0 ,7 4 2$

G ro s s M a rg in 4 9 .6 % 4 9 .8 % 5 0 .0 % 5 0 .1 % 5 0 .1 % 5 0 .2 % 5 0 .3 %

D ire c t E x p e n s e s

S to re 4 6 8 ,2 5 0$ 2 ,9 6 6 ,0 9 0$ 5 ,7 5 6 ,4 9 7$ 1 1 ,3 1 4 ,6 1 1$ 1 9 ,4 9 8 ,0 4 2$ 3 0 ,3 5 3 ,1 1 0$ 4 2 ,1 3 3 ,1 2 7$

C a ta lo g 2 4 1 ,7 3 6$ 1 ,1 0 9 ,2 3 5$ 1 ,9 9 9 ,6 0 1$ 2 ,0 1 3 ,2 2 6$ 2 ,0 3 7 ,8 8 9$ 2 ,0 5 4 ,8 1 9$ 2 ,0 5 4 ,2 0 2$

D ire c t P ro fit 8 ,6 5 8$ 2 5 8 ,9 8 7$ 8 0 1 ,8 7 6$ 1 ,9 8 0 ,4 5 5$ 4 ,3 8 9 ,6 1 3$ 7 ,4 4 5 ,6 3 9$ 1 0 ,7 0 3 ,4 1 3$

In d ire c t E x p e n s e s 1 ,4 4 4 ,8 7 3$ 1 ,6 4 7 ,6 2 5$ 1 ,7 3 1 ,6 4 1$ 1 ,8 6 6 ,2 0 2$ 2 ,4 2 1 ,1 3 3$ 2 ,9 9 5 ,2 8 2$ 3 ,5 5 8 ,7 8 8$

O p e ra t in g In c o m e (1 ,4 3 6 ,2 1 5 )$ (1 ,3 8 8 ,6 3 8 )$ (9 2 9 ,7 6 5 )$ 1 1 4 ,2 5 3$ 1 ,9 6 8 ,4 8 1$ 4 ,4 5 0 ,3 5 7$ 7 ,1 4 4 ,6 2 5$

T o ta l A n n u a l In i tia l In v e stm e n t 4 ,1 6 1 ,0 3 3$ 4 ,3 5 0 ,1 4 4$ 8 ,5 4 8 ,8 8 1$ 1 3 ,0 5 0 ,4 3 2$ 1 7 ,0 2 2 ,3 5 4$ 1 7 ,2 4 9 ,1 6 9$ 2 1 ,2 9 6 ,7 9 5$

C a sh F lo w (9 7 3 ,3 8 7 )$ (1 ,2 7 0 ,3 1 4 )$ (7 6 4 ,9 7 1 )$ 1 2 1 ,2 5 5$ 1 ,6 9 5 ,5 7 6$ 4 ,0 8 3 ,7 3 4$ 6 ,8 0 4 ,7 9 0$

N e t C a sh F lo w (5 ,1 3 4 ,4 2 1 )$ (5 ,6 2 0 ,4 5 8 )$ (9 ,3 1 3 ,8 5 2 )$ (1 2 ,9 2 9 ,1 7 7 )$ (1 5 ,3 2 6 ,7 7 8 )$ (1 3 ,1 6 5 ,4 3 5 )$ (1 4 ,4 9 2 ,0 0 5 )$

KSA: Share

the Wealth 30

DCF Analysis

D C F A N A L YS IS :

To ta l A n n u a l S to re N e t B u ild o u t 4 3 8 ,0 0 0$ 2 ,2 6 6 ,0 0 0$ 2 ,3 4 2 ,0 0 0$ 4 ,6 0 8 ,0 0 0$

To ta l A n n u a l In it . In ve n to ry P u rc h . - S to re 2 6 3 ,9 2 5$ 1 ,3 9 5 ,0 3 3$ 1 ,5 0 8 ,1 4 4$ 2 ,9 4 0 ,8 8 1$

To ta l A n n u a l P re -o p e n in g E x p e n s e s & C o n s t r. 1 0 0 ,0 0 0$ 5 0 0 ,0 0 0$ 5 0 0 ,0 0 0$ 1 ,0 0 0 ,0 0 0$

T o ta l A n n u a l In i tia l In v e stm e n t 8 0 1 ,9 2 5$ 4 ,1 6 1 ,0 3 3$ 4 ,3 5 0 ,1 4 4$ 8 ,5 4 8 ,8 8 1$

A fte r-ta x D ire c t P ro fit -$ 4 4 ,7 0 3$ 3 0 2 ,4 0 1$ 7 0 1 ,4 1 8$

A d d : D e p re c ia t io n -$ 5 4 ,7 5 0$ 3 3 8 ,0 0 0$ 6 3 0 ,7 5 0$

S u b t ra c t : R e n o va t io n -$ -$ -$ -$

C h a n g e in In ve n to ry -$ 1 0 ,9 0 6$ 8 1 ,5 3 8$ 4 1 ,4 8 2$

C h a n g e in R e c e iva b le s -$ 1 5 5 ,8 0 0$ 5 4 0 ,2 6 0$ 1 ,2 7 9 ,5 3 6$

C h a n g e s in P a y a b le s -$ 5 4 ,9 6 6$ 2 9 5 ,3 1 4$ 3 4 2 ,9 3 6$

P e rp e tu ity o f C F 's b e y o n d y e a r 1 0 -$ -$ -$ -$

N e t C a sh F lo w (8 0 1 ,9 2 5 )$ (4 ,1 7 3 ,3 2 0 )$ (4 ,0 3 6 ,2 2 7 )$ (8 ,1 9 4 ,7 9 5 )$

P re se n t V a lu e F a c to r: 1 0 0 .0 0 % 8 8 .8 9 % 7 9 .0 1 % 7 0 .2 3 %

M o d e l Ye a r 0 1 2 3

12.5%

D isc o u n te d N e t C a sh F lo w s (8 0 1 ,9 2 5 )$ (3 ,7 0 9 ,6 1 8 )$ (3 ,1 8 9 ,1 1 8 )$ (5 ,7 5 5 ,4 6 7 )$

NPV 11 ,567 ,389$

KSA: Share

the Wealth 31

Single Store P&L

S in g le S to re P ro fit an d L o ss /D C F P ro fo rm a

Strip Center

C a le n d a r Ye a r 2 0 0 2

% o f

sa le s 2 0 0 3

% o f

sa le s 2 0 0 4

% o f

sa le s 2 0 0 5

% o f

sa le s 2 0 0 6

% o f

sa le s 2 0 0 7

% o f

sa le s

M o d e l Ye a r 0 1 2 3 4 5

G ro ss S a le s 1 ,9 0 0 ,0 0 0 .0 0$ 1 2 2 .0 % 2 ,0 7 1 ,0 0 0 .0 0$ 1 2 1 .2 % 2 ,1 9 5 ,2 6 0 .0 0$ 1 2 0 .5 % 2 ,3 0 5 ,0 2 3 .0 0$ 1 1 9 .8 % 2 ,3 8 5 ,6 9 8 .8 1$ 1 1 9 .0 %

S to re R e tu rn s (1 8 % to 1 5 % o f G ro ss) 3 4 2 ,0 0 0 .0 0$ 2 2 .0 % 3 6 2 ,4 2 5 .0 0$ 2 1 .2 % 3 7 3 ,1 9 4 .2 0$ 2 0 .5 % 3 8 0 ,3 2 8 .8 0$ 1 9 .8 % 3 8 1 ,7 1 1 .8 1$ 1 9 .0 %

N e t S a le s 1 ,5 5 8 ,0 0 0 .0 0$ 1 0 0 .0 % 1 ,7 0 8 ,5 7 5 .0 0$ 1 0 0 .0 % 1 ,8 2 2 ,0 6 5 .8 0$ 1 0 0 .0 % 1 ,9 2 4 ,6 9 4 .2 1$ 1 0 0 .0 % 2 ,0 0 3 ,9 8 7 .0 0$ 1 0 0 .0 %

R e v e n u e G ro w th R a te 9 .0 % 6 .0 % 5 .0 % 3 .5 %

A v e ra g e S to re S e l l in g S F (8 2 % o f G ro ss) 3 ,1 1 6

N e t S a le s/ S e l l in g S F 5 0 0 .0 0$ 5 4 8 .3 2$ 5 8 4 .7 5$ 6 1 7 .6 8$ 6 4 3 .1 3$

G ro ss P ro fi t 7 7 2 ,7 6 8 .0 0$ 4 9 .6 % 8 4 6 ,7 4 8 .0 3$ 4 9 .6 % 9 0 2 ,9 9 2 .6 3$ 4 9 .6 % 9 5 3 ,8 5 3 .9 6$ 4 9 .6 % 9 9 3 ,1 5 0 .4 6$ 4 9 .6 %

A d ju ste d G P /V o lu m e B e n e fi ts 7 7 2 ,7 6 8 .0 0$ 4 9 .6 % 8 5 5 ,0 8 0 .2 8$ 5 0 .0 % 9 1 7 ,3 4 9 .6 1$ 5 0 .3 % 9 7 3 ,8 6 4 .7 0$ 5 0 .6 % 1 ,0 1 7 ,5 3 4 .5 4$ 5 0 .8 %

P a y ro ll 1 8 6 ,9 6 0 .0 0$ 1 2 .0 % 2 0 1 ,6 1 1 .8 5$ 1 1 .8 % 2 1 3 ,1 8 1 .7 0$ 1 1 .7 % 2 2 3 ,2 6 4 .5 3$ 1 1 .6 % 2 3 2 ,4 6 2 .4 9$ 1 1 .6 %

O c c u p a n c y 4 0 5 ,5 5 0 .0 0$ 2 6 .0 % 4 1 0 ,0 8 2 .0 0$ 2 4 .0 % 4 1 4 ,7 9 5 .2 8$ 2 2 .8 % 4 3 8 ,6 9 7 .0 9$ 2 2 .8 % 4 4 3 ,7 9 4 .9 7$ 2 2 .1 %

O p e ra t io n s 4 6 ,7 4 0 .0 0$ 3 .0 % 4 8 ,6 0 9 .6 0$ 3 .0 % 5 0 ,5 5 3 .9 8$ 2 .9 % 5 2 ,5 7 6 .1 4$ 2 .9 % 5 4 ,6 7 9 .1 9$ 2 .8 %

4 -W a ll E x p e n s e s 6 3 9 ,2 5 0 .0 0$ 4 1 .0 % 6 6 0 ,3 0 3 .4 5$ 3 8 .6 % 6 7 8 ,5 3 0 .9 6$ 3 7 .2 % 7 1 4 ,5 3 7 .7 6$ 3 7 .1 % 7 3 0 ,9 3 6 .6 6$ 3 6 .5 %

4 -W a l l C o n tr ib u tio n 1 3 3 ,5 1 8 .0 0$ 8 .6 % 1 9 4 ,7 7 6 .8 3$ 1 1 .4 % 2 3 8 ,8 1 8 .6 5$ 1 3 .1 % 2 5 9 ,3 2 6 .9 4$ 1 3 .5 % 2 8 6 ,5 9 7 .8 9$ 1 4 .3 %

S u p p o rtin g Ex p e n se s:

F ie ld S u p e rvis io n 3 1 ,1 6 0$ 2 .0 % 3 4 ,1 7 2$ 2 .0 % 3 6 ,4 4 1$ 2 .0 % 3 8 ,4 9 4$ 2 .0 % 4 0 ,0 8 0$ 2 .0 %

M a rk e t in g 6 2 ,3 2 0$ 4 .0 % 6 8 ,3 4 3$ 4 .0 % 5 4 ,6 6 2$ 3 .0 % 5 7 ,7 4 1$ 3 .0 % 4 0 ,0 8 0$ 2 .0 %

P la n n in g /D is t rib u t io n /D e live ry 1 5 ,5 8 0$ 1 .0 % 1 7 ,0 8 6$ 1 .0 % 1 8 ,2 2 1$ 1 .0 % 1 9 ,2 4 7$ 1 .0 % 2 0 ,0 4 0$ 1 .0 %

O th e r 1 1 5 ,5 8 0$ 1 .0 % 1 7 ,0 8 6$ 1 .0 % 1 8 ,2 2 1$ 1 .0 % 1 9 ,2 4 7$ 1 .0 % 2 0 ,0 4 0$ 1 .0 %

O th e r 2 7 ,7 9 0$ 0 .5 % 8 ,5 4 3$ 0 .5 % 9 ,1 1 0$ 0 .5 % 9 ,6 2 3$ 0 .5 % 1 0 ,0 2 0$ 0 .5 %

O th e r 3 -$ 0 .0 % -$ 0 .0 % -$ 0 .0 % -$ 0 .0 % -$ 0 .0 %

T o ta l S to re S u p p o rtin g Ex p e n se s 1 3 2 ,4 3 0 .0 0$ 8 .5 % 1 4 5 ,2 2 8 .8 8$ 8 .5 % 1 3 6 ,6 5 4 .9 4$ 7 .5 % 1 4 4 ,3 5 2 .0 7$ 7 .5 % 1 3 0 ,2 5 9 .1 5$ 6 .5 %

S to re D ire c t P ro fi t (C a sh F lo w ) 1 ,0 8 8 .0 0$ 0 .1 % 4 9 ,5 4 7 .9 5$ 2 .9 % 1 0 2 ,1 6 3 .7 1$ 5 .6 % 1 1 4 ,9 7 4 .8 7$ 6 .0 % 1 5 6 ,3 3 8 .7 3$ 7 .8 %

Sample of a

P&L for a strip

center

KSA: Share

the Wealth 32

Catalog Revenue Model

C ata log Revenue M odel - Annual

M o d e l Ye a r 1 2 3 4 5

C a le n d a r Ye a r 2003 2004 2005 2006 2007

N um ber o f B ook s P e r Y ea r 1 2 3 3 3

C irc u la t ion S iz e /B ook 1 ,000 ,000 1 ,000 ,000 1 ,000 ,000 1 ,000 ,000 1 ,000 ,000

To ta l C irc u la t ion S iz e 1 ,000 ,000 2 ,000 ,000 3 ,000 ,000 3 ,000 ,000 3 ,000 ,000

A V G P ages /B ook 16 36 43 43 43

To ta l P ages 16 72 129 129 129

A ve rage O rde r V a lue 162 .00$ 161 .05$ 165 .55$ 168 .73$ 171 .47$

R es pons e R a te 0 .30% 0 .74% 0 .90% 0 .99% 1 .08%

N um ber o f O rde rs 3 ,000 14 ,736 26 ,897 29 ,634 32 ,330

T o ta l C u sto m e r D e m a n d 486 ,000$ 2 ,373 ,210$ 4 ,452 ,699$ 5 ,000 ,196$ 5 ,543 ,486$

T o ta l C u sto m e r D e m a n d P e r B o o k 486 ,000$ 1 ,186 ,605$ 1 ,484 ,233$ 1 ,666 ,732$ 1 ,847 ,829$

T o ta l C u sto m e r D e m a n d P e r P a g e 30 ,375$ 32 ,961$ 34 ,517$ 38 ,761$ 42 ,973$

KSA: Share

the Wealth 33

Catalog P&L

C ata lo g In co m e C o n tr ib u tio n

M o d e l Ye a r 0 1 2 3 4

C a le n d a r Ye a r 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6

T o ta l C u sto m e r D e m a n d 4 8 6 ,0 0 0$ 1 3 5 .6 % 2 ,3 7 3 ,2 1 0$ 1 3 5 .6 % 4 ,4 5 2 ,6 9 9$ 1 3 5 .6 % 5 ,0 0 0 ,1 9 6$

N L A 2 4 ,3 0 0$ 6 .8 % 1 1 8 ,6 6 1 6 .8 % 2 2 2 ,6 3 5 6 .8 % 5 0 0 ,0 2 0

T o ta l R e p o rte d D e m a n d 4 6 1 ,7 0 0$ 1 2 8 .9 % 2 ,2 5 4 ,5 5 0$ 1 2 8 .9 % 4 ,2 3 0 ,0 6 4$ 1 2 8 .9 % 4 ,5 0 0 ,1 7 6$

C a n c e lle d B a c k o rd e r S h ip m e n ts 1 3 ,8 5 1$ 3 .9 % 6 7 ,6 3 6$ 3 .9 % 1 2 6 ,9 0 2$ 3 .9 % 1 3 5 ,0 0 5$

G ro ss S h ip m e n ts 4 4 7 ,8 4 9$ 1 2 5 .0 % 2 ,1 8 6 ,9 1 3$ 1 2 5 .0 % 4 ,1 0 3 ,1 6 2$ 1 2 5 .0 % 4 ,3 6 5 ,1 7 1$

To ta l C a ta lo g R e tu rn s 8 9 ,5 7 0$ 2 5 .0 % 4 3 7 ,3 8 3$ 2 5 .0 % 8 2 0 ,6 3 2$ 2 5 .0 % 8 7 3 ,0 3 4$

N e t C a ta lo g S a le s 3 5 8 ,2 7 9$ 1 0 0 .0 % 1 ,7 4 9 ,5 3 0$ 1 0 0 .0 % 3 ,2 8 2 ,5 3 0$ 1 0 0 .0 % 3 ,4 9 2 ,1 3 7$

G ro w th in T o ta l C u sto m e r D e m a n d 3 8 8 .3 1 % 8 7 .6 2 % 1 2 .3 0 %

G ro ss P ro fi t 1 7 7 ,7 0 6$ 4 9 .6 % 8 7 6 ,5 1 5$ 5 0 .1 % 1 ,6 6 0 ,9 6 0$ 5 0 .6 % 1 ,7 8 4 ,4 8 2$

C a ta lo g P ro d u c t io n 2 1 8 ,4 4 8$ 6 1 .0 % 9 8 3 ,0 1 6$ 5 6 .2 % 1 ,7 6 1 ,2 3 7$ 5 3 .7 % 1 ,7 6 1 ,2 3 7$

L is t R e n ta l E x p e n s e -$ 0 .0 % 1 2 ,5 0 0$ 0 .7 % 2 5 ,0 0 0$ 0 .8 % 2 5 ,0 0 0$

M a rk e tin g Ex p e n se s 2 1 8 ,4 4 8$ 6 1 .0 % 9 9 5 ,5 1 6$ 5 6 .9 % 1 ,7 8 6 ,2 3 7$ 5 4 .4 % 1 ,7 8 6 ,2 3 7$

Te le m a rk e t in g 1 7 ,9 1 4$ 5 .0 % 8 7 ,4 7 7$ 5 .0 % 1 6 4 ,1 2 6$ 5 .0 % 1 7 4 ,6 0 7$

C a ta lo g O p e ra t io n s /F u lfi l lm e n t 1 0 ,7 4 8$ 3 .0 % 5 2 ,4 8 6$ 3 .0 % 9 8 ,4 7 6$ 3 .0 % 1 0 4 ,7 6 4$

N e t S h ip p in g /H a n d lin g In c o m e (1 0 ,7 4 8 )$ -3 .0 % (5 2 ,4 8 6 )$ -3 .0 % (9 8 ,4 7 6 )$ -3 .0 % (1 0 4 ,7 6 4 )$

O th e r E x p e n s e s 5 ,3 7 4$ 1 .5 % 2 6 ,2 4 3$ 1 .5 % 4 9 ,2 3 8$ 1 .5 % 5 2 ,3 8 2$

O p e ra tin g Ex p e n se s 2 3 ,2 8 8$ 6 .5 % 1 1 3 ,7 1 9$ 6 .5 % 2 1 3 ,3 6 4$ 6 .5 % 2 2 6 ,9 8 9$

D i re c t Ex p e n se s fo r C a ta lo g 2 4 1 ,7 3 6$ 6 7 .5 % 1 ,1 0 9 ,2 3 5$ 6 3 .4 % 1 ,9 9 9 ,6 0 1$ 6 0 .9 % 2 ,0 1 3 ,2 2 6$

D i re c t P ro fi t fo r C a ta lo g (6 4 ,0 3 0 )$ -1 7 .9 % (2 3 2 ,7 2 1 )$ -1 3 .3 % (3 3 8 ,6 4 1 )$ -1 0 .3 % (2 2 8 ,7 4 4 )$

KSA: Share

the Wealth 34

Catalog Cost Schedule

C a ta lo g P ro d u ctio n C o st S ch e d u le s:

M o d e l Ye a r 1 2 3 4 5 6 7

C a le n d a r Ye a r 2003 2004 2005 2006 2007 2008 2009

N um ber o f B ook s P e r Y ea r 1 2 3 3 3 3 3

C irc u la t ion S iz e /B ook 1 ,000 ,000 1 ,000 ,000 1 ,000 ,000 1 ,000 ,000 1 ,000 ,000 1 ,000 ,000 1 ,000 ,000

To ta l C irc u la t ion S iz e 1 ,000 ,000 2 ,000 ,000 3 ,000 ,000 3 ,000 ,000 3 ,000 ,000 3 ,000 ,000 3 ,000 ,000

P ages /B ook 16 .0 36 .0 43 .0 43 .0 43 .0 43 .0 43 .0

To ta l P ages 16 72 129 129 129 129 129

To ta l P ages C irc u la ted 16 ,000 ,000 72 ,000 ,000 129 ,000 ,000 129 ,000 ,000 129 ,000 ,000 129 ,000 ,000 129 ,000 ,000

To ta l C os t P e r P age C irc u la ted 0 .008903$ 0 .008903$ 0 .008903$ 0 .008903$ 0 .008903$ 0 .008903$ 0 .008903$

To ta l V a riab le P roduc t ion C os ts 142 ,448$ 641 ,016$ 1 ,148 ,487$ 1 ,148 ,487$ 1 ,148 ,487$ 1 ,148 ,487$ 1 ,148 ,487$

C rea t ive C os ts /P age 4 ,750$ 4 ,750$ 4 ,750$ 4 ,750$ 4 ,750$ 4 ,750$ 4 ,750$

To ta l C rea t ive C os ts 76 ,000$ 342 ,000$ 612 ,750$ 612 ,750$ 612 ,750$ 612 ,750$ 612 ,750$

To ta l C a ta log P roduc t ion C os ts 218 ,448$ 983 ,016$ 1 ,761 ,237$ 1 ,761 ,237$ 1 ,761 ,237$ 1 ,761 ,237$ 1 ,761 ,237$

V ariab le c os ts inc lude pape r, p rin t ing , and pos tage .

Appendix

KSA: Share

the Wealth 36

Glossary of definitions and ratios

DCF: Discounted cash flow - the sum of annual net cash flow which have been

discounted back to zero by a certain rate of return.

OCF: Operating cash flow

Rate of Return/Discount Rate/Hurdle Rate: Rate at which annual net cash flows are

discounted back to year zero.

CAM: Common area maintenance

Response Rate: Percentage of a catalog circulation which purchases from the catalog

Total Customer Demand: Total dollar value of annual orders from catalog(s)

List Rental Expense: Cost to rent names and addresses for a catalog mailing; usually

in the form of $/1,000 names.

KSA: Share

the Wealth 37

Financial Glossary

Sales Growth =

Gross Profit = Sales - COGs

(Salesn - Salesn-1)

Salesn-1

Gross Margin = Sales - COGs

or Sales

EBIT = Sales - COGs - SG&A = Operating Income

Sales - COGS = Gross Profit - SG&A (operating expenses) = Operating Income

EBITDA* = Sales - COGs - SG&A + Depreciation + Amortization

Gross Profit

Sales

Income

Statement

Total Customer Demand

NLA (No longer available)

Total Reported Demand

Cancelled Backordered Shipment

Gross Shipments

Total Catalog Returns

Net Catalog Sales

-

-

-

*Proxy for operating cash flow

For catalog operations:

KSA: Share

the Wealth 38

Financial Glossary

Inventory Day =

Accounts Payable Days

=

Average A/P (n, n-1)X 365

Avg. A/P (n, n-1)

Average A/R (n, n-1)

Avg. A/R (n, n-1)

Accounts Receivable

Turnover =

Accounts Receivable

Days =

Accounts Payable

Turnover =

Inventory Turnover = COGs n

Average Inv. (n, n-1)

Average Inv. (n, n-1)

COGsn

Avg. A/R (n, n-1)

Sales n

X 365

COGS

InventoryOR

OR

Property, Plant & Equipment - Depreciation = Net Property, Plant & Equipment

OR

Sales

A/R

COGS

A/P

COGs (n, n-1)

X 365

COGs n

Balance Sheet

KSA: Share

the Wealth 39

Financial Glossary

Annual Cash Flow:

Total Annual Initial Investment*

After-tax Operating Income**

Depreciation

Renovation

+/- Change in Inventory

+/- Change in Receivables

+/- Change in Payables

Net Operating Cash Flow

Note: Increase in inventory = cash flow (-)

Increase in receivables = cash outflow (-)

Decrease in payables = cash outflow (-)

* Definition on following page

** Operating Income * (1-tax rate)

Cash Flow

KSA: Share

the Wealth 40

Financial Glossary

+ Annual Store Net Buildout

+ Annual Initial Inventory Purchase - Store

+ Annual Initial Inventory Purchase - Catalog

+ Annual Pre-opening/Construction Expenses

+ Annual Catalog Initial Investment

Total Annual Initial Investment

Cash Flow

KSA: Share

the Wealth 41

Financial Glossary

DCF/NPV

Analysis Net OCF1

(1 + r)1

.Net OCFn + OCFn/r

(1 + r)n

NPV = Net OCF0

+(1 + r)

0

Where r = discount rate

KSA: Share

the Wealth 42

Disclaimer

This type of financial model assumes that a new business is created organically,

and not through a merger or acquisition. It cannot be used for evaluating M&A

opportunities.

All financial models require some level of customization. It is impossible for one

single model to be standardized across all industries and types of businesses.

This particular model in discussion is simplified to only create profit and loss (P&L)

statements and the required balance sheet items to determine accurate cash flows

over time. Long term assets and liabilities, debt and equity, and interest expense

are not taken into consideration.

Note: To assist you with understanding certain financial terms and calculations

referenced in this presentation, a glossary of ratios is listed in the appendix.

Documents

Retail Financial Modeling