Retailing Financial Strategy

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Adrian Richardson
6 years ago
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1 3 ways to increase the value of money turnover model Financial objectives and the strategic profit model ROI model Gross margin return on investment Monitoring retail performance Direct product profitability How much will your own portfolio be worth if You start investing 10 years after graduation, & invest $2000 per 10%, every year til you retire? You start now, & invest $2000 per 10%, but only for 10 years, then stop? Investment Returns Cash Inventory Accounts Receivable Sales Page 6-1

2 You have $1000. You ve found a no-risk investment for which you will get a certain 20 percent ROI in 4 months. Your parents have offered to lend you $10,000 more, for 1 year. By how much can you grow your $1000 in a one-year period? And what s your ROI? Margin Leveraging Our Investment Adding Stock Turnover ( turns ) Strategic Element Margin (no leverage or turnover) 20% = $200 in Leverage (no turnover) ROI (/ Investment) $200 = 20% $1000 Investment = $1000 ( = profit) Result Margin = 20% Turnover (no leverage) Margin, Leverage, Turnover Strategic Profit Model ROI = Margin Leverage Turnover = 20% = 800% Gross Sales Less Returns Less customer allowances Net Sales Gross Margin COGS Page 6-2

3 Increase Volume Increase Price Decrease COGS Decrease Epenses! " #!$ Base Period Sales $1,000,000 $1,050,000 $1,050,000 COGS 700, , ,000 Gross margin 300, , ,000 Epenses 280, , ,000 Profit 20,000 35,000 70,000 Profit increase $ ,000 50,000 Profit increase % % 250% Decrease COGS 5% Decrease Epenses 5% Sales $1,000,000 $1,000,000 COGS 665, ,000 Gross margin 335, ,000 Epenses 280, ,000 Profit 55,000 34,000 Profit increase $ 35,000 14,000 Profit increase % 175% 70% Increase Prices 5% %&' The Objectives Themselves The Plan to Meet the Objectives Profits? How should they be measured? ( $ Store JCPenney Dayton s Toys R Us Home Depot Total Sales Growth % Comp Store Growth % Gross Margin % Inventory Turnover Sales per Sq Ft $ na 348 Circuit City The Limited Wal-Mart Kmart Costco , na Data Page 6-3

4 )*! & Level of Output Input Productivity Organization (Output/Input) Corporate Net sales Square feet of (measures of store space entire corporation) Net profits Number of turnover employees Growth in sales, Inventory Sales per employee profits Advertising ependitures Sales per square foot )*! & Level of Output Input Productivity Organization (Output/Input) Corporate Net profit Owners equity Net profit / (chief eecutive 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!, Page 6-4

5 "( -. / Wal-Mart Tiffany Net sales $ 139,208 $ 1,173 Less: Cost of goods sold $ 108,725 $ 515 Gross margin $ 30,483 $ 658 Less: Operating epense $ 22,363 $ 493 Less: Interest epense $ 950 $ 9 Total epense $ 23,313 $ 502 Net profit, preta $ 7,170 $ 156 Less: Taes* $ 2,740 $ 66 Ta rate 38.21% 42.31% Net profit after ta $ 4,430 $ 90 * Effective ta rates often differ among corporations due to different ta breaks and advantages. Which has the higher net margin? Source: Levy & Weitz! "( -. / $139,208 $1,173 - Cost of goods sold $108,725 $515 Operating $22,363 $493 Interest $950 $9 Gross margin $30,493 $658 - Total $23,313 $502 Top Number = Wal-Mart Bottom Number = Tiffany Net profit before ta $7,170 $156 - Taes $2,740 $66 Net profit after taes $4,430 $90 Net sales $139,208 $1,173 Net profit margin 3.18% 7.68% X = Margin Turnover s Provo Bakery 10% X 9 times = 90% Zales Jewelry 90% X 1 time = 90% Page 6-5

6 %". High Turnover Albertson s Unattainable Wal-Mart 7-Eleven Low Margin J.C. Penney Nordstrom High Margin Failure Low Turnover Losee s. "( -. / Accounts receivable $1,118 $108 Merchandise inventory $17,076 $481 Cash $1,878 $189 Other current $1,059 $37 Total current $21,123 $816 Fied $28,864 $241 Top Number = Wal-Mart Bottom Number = Tiffany Net sales $139,208 $1,173 Total $49,996 $1,057 From income statement turnover From balance sheet What does this represent? The sales $ generated by each $ of %&'".! Investment = s Leverage Ratio Total s Total s s = Turnover Margin Total s Total s The $ sales generated by each $ of The net profit generated by each $ of sales and so... Page 6-6

7 .! ". %&'4! Rate of s Investment = Margin Turnover Leverage Ratio Total s Total s The Financial Objective The Financial Program (The SPM) Implications for Profitability? s Current Cash & other $ 50,000 Inventory 500,000 Accounts receivable 200,000 Total 750,000 Fied 250,000 Total s $1,000, Balance Sheet Liabilities Current Accounts payable $ 300,000 Notes payable 25,000 Other 25,000 Total 350,000 Long term 125,000 Total liabilities 475,000 Net worth 525,000 Total liab. & NW $1,000,000 Income Statement Dollars Percent Net sales $2,500, Less: cost of sales 2,000, Gross margin 500, Less: Variable $250,000 Fied 200,000 Total 450, Net profit $50,000 2 What is the ROI?. 56" % Simple Way: ROI = = $50k = 9.5% $525k Diagnostic Way, Using the SPM: ROI = Margin Turnover Leverage Page 6-7

8 % 2.! Gross - margin Cost of goods sold - Variable Total Fied Inventory Accounts Total current receivable Other current Fied Which is the income statement? Balance sheet? SPM? Net profit Net sales Total Income Statement Balance Sheet Strategic Profit Model Net profit margin turnover Financial Leverage = )! % Investment = Margin Turnover Leverage Ratio Basic Eample: 9.5% = 2% Leverage Increased: 15% = 2% Profit Margin Increased: 23.75% = 5% ROA Reduced: 3.8% = 2% 1 1.9!)* Investment = Margin % Turnover Leverage Ratio Big Lots: 24.6% Albertson s: 18.9% The Dress Barn: 32.4% Land s End: 40.2% The Limited: 32.3% The Gap: 25.5% data Page 6-8

5 7 Shows number of units which must be produced & sold at a given price to cover all costs. Formulation: BE = Fied Cost. Unit Contribution Eample (women s top coats): Avg. variable cost: $100 Tot.

9 5 7 Shows number of units which must be produced & sold at a given price to cover all costs. Formulation: BE = Fied Cost. Unit Contribution Eample (women s top coats): Avg. variable cost: $100 Tot. fied cost: $200,000 Selling price: $ Unit contribution: $66.67 BE = $200,000 = 3000 units $ )* / 3! Customer Feedback Store Level Market Share Analysis Operating Ratios Sales Variance (Actual vs Planned) Department Level Sales-to-Epense Ratios Analysis of Allocation of Costs Direct Product Profitability Page 6-9

10 )882!! Dollars per Case Retail $ l8.70 Less: Cost Gross margin 3.74 Plus: Discounts and allowances Payment discount 0.30 Merchandising allowance 0.50 Backhaul allowance 0.00 Less: Direct handling costs Warehouse direct labor 0.41 Warehouse inventory epense 0.18 Warehouse operating epense 0.12 Transportation to stores 0.14 Retail direct labor 1.78 Retail inventory epense 0.15 Retail operating epense 0.81 Direct product profit $ 0.95!! Item A Item B Gross margin per case $9.33 $8.02 Less direct costs per case Plus discounts and allowances per case DPP per case Multiplied by cases per week DPP per week Divided by square feet of shelf facing DPP per week per square foot of shelf space !! & The per-unit profit of products: unit price less all direct unit costs High DPP per unit Low Unit Volume High Unit Volume Low DPP Page 6-10

Corporate Finance. Week 3 Financial Statement Analysis II

Corporate Finance. Week 3 Financial Statement Analysis II Corporate Finance 1-1 Week 3 Financial Statement Analysis II 1-1 Asset Efficiency or Turnover Measures 1-2 A first broad measure of efficiency is asset turnover: Sales Asset Turnover = Total Assets Fixed