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Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 -
CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6
Financial StrategyCHAPTER 06
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6
Retailing Strategy
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Objectives and Goals
• Financial – not necessarily profits, but return on investment (ROI) – primary focus
• Societal – helping to improve the world around us
• Personal – self-gratification, status, respect
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Components of the Strategic Profit Model
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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
Net Profit Margin: reflects the profits generated from each dollar of salesAsset Turnover: assesses the productivity of a firm’s investment in its assets
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Fiscal Annual Income Statement for Family Dollar and Nordstrom
** ($ millions)
** **
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Profit Management Path for Family Dollar Stores and Nordstrom
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Profit Margin Management Path
• Net Sales = Gross Sales + Promotional Allowances - Return
• Cost of Good Sold (COGs) • Gross Margin (GM) = Net Sales - COGs
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Profit Margin Management Path
• Operating Expense• Variable (e.g.. sales commissions)• Fixed (rent, depreciation, staff salaries)• Selling, general, and administrative (SG&A)
expenses
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Profit Margin Management Path
• Operating profit margin• Operating profit margin = Gross margin -
Operating expenses - Extraordinary (recurring) operating expenses
• Net profit margin = Operating profit margin - Taxes - Interest - Extraordinary nonrecurring expenses
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Profit Margin Management Path
• 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 %
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Profit Margin Management Path
• 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 %
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Profit Margin Management Path
• Net operating profit percentage is gross margin minus operating expenses divided by net salesGross margin - Operating expenses
Net sales= Net operating profit %
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Asset Management Path
• 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
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Asset Management Path
• 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
• Inventory Turnover = COGS/Avg. Inventory (cost)
Net sales
Total assets= Asset turnover
Cost of goods sold
Average inventory at cost= Inventory turnover
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Asset Information from Family Dollar Stores’ and Nordstrom’s Balance Sheets
* ($ millions)
* *
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Asset Management Path for Family Dollar and Nordstrom
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Inventory Turnover
• 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)
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Strategic Profit Model Ratios for Selected Retailers
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Income Statement Information for Gifts To Go Stores and Proposed Gifts-To-www.Go.com Internet Channel
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Balance Sheet Information for Gifts To Go Stores and Proposed Gifts-To-www.Go.com Internet Channel
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Analysis of Financial Strength
• 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.
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Analysis of Financial Strength
• 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.
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Analysis of Financial Strength
• 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.
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Setting and Measuring Performance Objectives
• 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
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Setting Objectives in Large Retail Organizations
Top-Down PlanningCorporate Developmental Strategy
Category, Departments and sales associates implement strategy
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Setting Objectives in Large Retail Organizations
Bottom-Up PlanningBuyers and Store managers estimate what they can achieve
Corporate
Operation managers must be involved in objective setting process
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Productivity Measures
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)
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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
Financial Performance of Retailers
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Examples of Performance Measures Used by Retailers
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Assessing Performance
• 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
