Chapter 6

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Nov 18, 2013 (3 years and 6 months ago)

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PPT 6
-
1

5
th

Edition

PPT 6
-
2

Chapter 6

Financial Strategy

McGraw
-
Hill/Irwin

Levy/Weitz: Retailing Management, 5/e

Copyright © 2004 by The McGraw
-
Hill Companies, Inc. All rights reserved.

PPT 6
-
3

Retailing Strategy

Retail Market Strategy
Chapter 5

Financial Strategy
Chapter 6

Retail Locations
Chapters 7,8

Human Resource
Management
Chapter 9

Information and
Distribution
Systems
Chapter 10

Customer
Relationship
Management
Chapter 11

PPT 6
-
4

Financial Tradeoff Made by Retailers to
Increase ROI

Net Profit Margin

Asset Turnover

PPT 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



PPT 6
-
6

The Strategic Profit Model:

Margin Management

Net Profit
Margin

Sales

Net Profit

Gross
Margin

Total
Expenses

Sales

Cost of
Goods Sold

15%

15

40

100

60

100

25

-




-

PPT 6
-
7

The Strategic Profit Model:

Asset Management

Asset
Turnover

Total Assets

Sales

Current
Assets

Fixed Assets

Inventory

Accounts
Receivable

2.5

100

10

5

4

40

30

+


+




+

Other Current
Assets

1

PPT 6
-
8

The Strategic Profit Model:

Return on Assets

Net Profit Margin

Sales

Net Profit

Gross 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/R

2.5

100

10

5

4

40

30

+



+

+

Other Cur Assets

1

Return on

Assets

37.5%

Times


Net Profit Net Profit Net Sales

Total Assets
=


Net Sales
x

Total Assets


Net Sales

Total Assets

(

)


Net Profit


Net Sales

(

)


Net Profit

Total Assets

(

)

÷


÷


PPT 6
-
9

Financial Implications of Strategies Used By


a Bakery and Jewelry Store




Net Profit X Asset = Return on Assets



Margin Turnover


La Madeline Bakery 1% X 10 times = 10%


Kalame Jewelry


10% X 1 time = 10%

PPT 6
-
10

Income Statements for Wal
-
Mart Stores, Inc.

and Tiffany & Co.

2002($in millions)

PPT 6
-
11

Components of Gross Margin

Gross Sales

Less Returns

Less
customer
allowances

Net
Sales

COGS

Gross Margin

PPT 6
-
12

Profit Margin Models for Wal
-
Mart Stores, Inc.,

and Tiffany & Co. ($ in millions)

Net Sales

$139,208

$ 1,173

Cost of goods
sold

$108,725

$ 515

Operating
expenses

$ 22,363

$ 493

Interest
expenses

$ 950

$ 9

Gross margin

$ 30,483

$ 658

Total expenses

$ 23,313

$ 502

Net profit before
tax

$ 7,170

$ 156

Taxes

$ 2,740

$ 66

Net profit after
taxes

$ 4,430

$ 90

Net sales

$139,208

$ 1,173

Net profit
margin


3.18%


7.68%



-

-

-

+

Top number = Wal
-
Mart

Bottom Number = Tiffany

PPT 6
-
13

Gross Margin for

Wal
-
Mart and Tiffany

Gross Margin


=

Gross Margin %

Net Sales


Wal
-
Mart:

$ 48,250

=


21.95%



$219,812


Tiffany:

$ 944

=


58.75%



$1,607

Why does Tiffany’s have higher margins than Wal
-
Mart?

Does the higher margins mean the Tiffany’s is more
profitable?

PPT 6
-
14

Total Expenditures / Net Sales

Ratios for Wal
-
Mart and Tiffany


Total Expenses

= Total Expenses/Net sales ratio

Net Sales


Wal
-
Mart:

$ 37,499

=

17.06%



$219,812


Tiffany:

$ 653

=

40.65%



$1,607

Why does Tiffany’s have higher expenses than Wal
-
Mart?

PPT 6
-
15

Types of Retail

Operating Expenses

Selling expenses




=

Sales staff salaries + Commissions +








Benefits


General expenses



=
Rent + Utilities + Miscellaneous


expenses

Administrative expenses

=
Salaries of all employees other than









salespeople + Operations of buying


offices + Other administrative expenses

PPT 6
-
16

Balance Sheets for Wal
-
Mart Stores, Inc. and

Tiffany & Co. 2002 ($ in millions)

PPT 6
-
17

Balance Sheets for Wal
-
Mart Stores, Inc. and

Tiffany & Co. 2002 ($ in millions)

PPT 6
-
18

Balance Sheets for Wal
-
Mart Stores, Inc. and

Tiffany & Co. 2002 ($ in millions)

PPT 6
-
19

Asset Turnover Model for Wal
-
Mart Stores, Inc.

and Tiffany & Co. and Subsidiaries ($ in millions)


Accounts
receivable

$ 1,118

$ 108

Merchandise
inventory

$ 17,076

$ 481

Cash

$ 1,878

$ 189

Other current
assets

$ 1,059

$ 37

Total current
assets

$21,123

$ 816

Fixed
assets

$28,864

$ 241

Net sales

$139,208

$ 1,173

Total assets

$ 49,996

$ 1,057

Assets
turnover


2.78


1.11

-

+

+

Top number = Wal
-
Mart

Bottom Number = Tiffany

+

+

PPT 6
-
20

Inventory Analysis


Inventory

Total assets

Wal
-
Mart:

$22,614

= 27.10%



$83,451


Tiffany:


$ 612


= 37.53%



$1,630


Net sales

= Inventory turnover

Avg. inventory

Wal
-
Mart:

$219,812

= 7.59



$28,974


Tiffany:


$1,607

= 1.08



$1,484


PPT 6
-
21

Inventory Turnover

PPT 6
-
22

Asset Turnover for Different Fixtures

Net Sales

= Asset turnover

Total assets

Antique cabinet:

$50,000

=

10




$ 5,000


Plywood cabinet

$40,000

=

80




$ 500

PPT 6
-
23

Asset Turnover for

Wal
-
Mart and Tiffany

Net Sales

= Asset turnover

Total assets

Wal
-
Mart:

$219,812

=

2.63



$ 83,451


Tiffany:

$1,607

=

0.99



$1,630

PPT 6
-
24

The Strategic Profit Model

Net Sales

Cost of
goods sold

Variable
expenses

Fixed
expenses

Gross
margin

Total
expenses

Net profit

Net Sales

Net profit
margin

Asset
turnover

Return on
assets




-

-

+

Inventory

Accounts
receivable

Other current
assets

Total current
assets

Fixed assets

Net sales

Total assets

+

+

+


x

Margin Management

Asset Management

PPT 6
-
25

Return on Assets

Return on assets = Net profit margin X Asset


turnover





=
Net profit

X
Net sales





Net sales Total assets





=
Net profit





Total assets

Wal
-
Mart:

$ 6,854

=

8.21%



$83,451


Tiffany:

$ 175

=

10.74%



$1,630

PPT 6
-
26

Strategic Profit Models

for Selected Retailers (2001)

DISCOUNT STORES









(
1)




(2)




(3)






Net Profit Margin

Asset Turnover Return on Assets





(Net Profit


(Net Sales


(Net Profit Margin x



Net Sales)(%)


Total Assets)


Asset Turnover)(%)




Costco Companies, Inc. 1.73%




3.45




5.94%


Wal
-
Mart




3.03



2.64




8.00


Target




3.43




1.65




5.66





PPT 6
-
27

Strategic Profit Models

for Selected Retailers (2001)

Supermarket Chains







(
1)




(2)




(3)






Net Profit Margin


Asset Turnover

Return on Assets






(Net Profit



(Net Sales


(Net Profit Margin x







Net Sales)(%)


Total Assets)


Asset Turnover)(%)




Safeway





3.66




1.92




7.18


The Kroger Co.



2.08




2.62




5.44


Albertson’s.




1.32




2.38




3.14




PPT 6
-
28

Strategic Profit Models

for Selected Retailers (2001)

DEPARTMENT STORES







(
1)




(2)




(3)






Net Profit Margin


Asset Turnover

Return on Assets






(Net Profit



(Net Sales


(Net Profit Margin x







Net Sales)(%)


Total Assets)


Asset Turnover)(%)


May Department



4.92




1.19




5.90%



Stores


Nordstrom




2.23




1.39



3.08




JCPenney




0.36 1.77 0.63


Kohl’s


6.62 1.52 10.06




















.




PPT 6
-
29

Strategic Profit Models

for Selected Retailers (2001)

Category Killers






(
1)




(2)




(3)






Net Profit Margin


Asset Turnover

Return on Assets






(Net Profit



(Net Sales


(Net Profit Margin x







Net Sales)(%)


Total Assets)


Asset Turnover)(%)


Circuit City




1.76




2.82


4.87


Stores, Inc.


Best Buy





2.96




2.66




7.73


Staples.





2.43




2.63




6.47


Home Depot




5.68




3.03



11.53


Lowe’s






4.63




1.61




7.45







PPT 6
-
30

Strategic Profit Models

for Selected Retailers (2001)

Drug Stores








(
1)




(2)




(3)






Net Profit Margin


Asset Turnover

Return on Assets






(Net Profit



(Net Sales


(Net Profit Margin x







Net Sales)(%)


Total Assets)


Asset Turnover)(%)




Walgreen.




3.60%


2.79%



10.03%


CVS.






1.86



2.58



4.79




PPT 6
-
31

Income Statements for Gifts

To Go and Giftstogo.com









Gifts To Go


Giftstogo.com














(Projected)
















Net Sales






$ 200,000


$ 200,000


Less: Cost of goods sold



110,000



110,000

Gross margin






90,000



90,000


Less: Total expenses




30,000



50,000

Net profit, pretax






60,000



40,000


Less: Taxes






27,000



18,000

Tax rate









45%




45%

Net profit after tax







33,000



22,000

PPT 6
-
32

Gross Margin for Gifts

To Go and Giftstogo.com

Gross margin %

=

Gross margin







Net sales



Gifts To Go:



$ 90,000



=

45%







$200,000


Giftstogo.com:



$ 90,000



=

45%







$200,000

PPT 6
-
33

Balance Sheets for Gifts

To Go and Giftstogo.com

ASSETS






Gifts To Go


Giftstogo.com





















Current assets


Merchandise inventory


$ 44,000


$ 22,000


Cash







2,000



0


Other current assets




3,000



2,500


Total current assets




49,000



24,500

Fixed assets







125,000



70,000

Total assets






$ 174,000


$ 94,500


PPT 6
-
34

Balance Sheets for Gifts

To Go and Giftstogo.com

LIABILITIES





Gifts To Go


Giftstogo.com





















Current liabilities


Accounts payable




$ 35,000


$ 30,000


Notes payable





7,000




5,000

Total current liabilities





42,000



35,000

Long
-
term liabilities





10,000



12,000

Total liabilities





$


52,000


$ 47,000

PPT 6
-
35

Balance Sheets for Gifts

To Go and Giftstogo.com

OWNERS’ EQUITY




Gifts To Go


Giftstogo.com




















Owners’ equity





$ 122,000


$ 47,500

Total liabilities and




$ 174,000


$ 94,500


owners’ equity

PPT 6
-
36

Total Expenses/Net Sales Ratio

for Gifts To Go and Giftstogo.com

Total expenses/

=

Total Expenses

net sales ratio



Net sales



Gifts To Go:



$ 30,000










$200,000

=

15%


Giftstogo.com:



$ 50,000










$200,000

=

25%

PPT 6
-
37

Net Profit Margins for Gifts

To Go and Giftstogo.com

Net profit margin

=

Net profit







Net sales



Gifts To Go:



$ 33,000

=

16.5%







$200,000


Giftstogo.com:



$ 22,000

=

11%







$200,000

PPT 6
-
38

Inventory Turnover for Gifts

To Go and Giftstogo.com

Inventory turnover

=

Net sales







Average inventory



Gifts To Go:



$ 200,000










$ 80,000

=

2.5


Giftstogo.com:



$ 200,000










$ 40,000

=

5

PPT 6
-
39

Asset Turnover For Gifts

To Go and Giftstogo.com

Asset turnover


=

Net sales







Total assets



Gifts To Go:



$ 200,000










$ 174,000

=

1.15


Giftstogo.com:



$ 200,000









$ 94,500

=

2.12

PPT 6
-
40

Return on Assets for Gifts

To Go and Giftstogo.com

Return on assets

=

Net profit







Total assets



Gifts To Go:



$ 33,000










$174,000

=

19%


Giftstogo.com:



$ 22,000









$94,500

=

23%

PPT 6
-
41

Productivity Measures

Returns on Investments


vs.


Absolute Profits

PPT 6
-
42

Examples of Performance

Measures 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





PPT 6
-
43

Examples of Performance

Measures Used by Retailers

Level of


Output


Input


Productivity

Organization





(Output/Input)


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.

PPT 6
-
44

Examples of Performance

Measures Used by Retailers

Level of


Output


Input


Productivity

Organization





(Output/Input)


Store operations

Net sales


Square feet of

Net sales per

(measures for a



selling areas

square foot

store or

department

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 of







sales
*




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

PPT 6
-
45

Illustrative Productivity Measures

Used by Retailing Organizations

Level of


Output


Input


Productivity

Organization





(Output/Input)


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

PPT 6
-
46

Activity
-
Based Costing Profitability Statement

for Pepperidge Farm and


Private
-
Label Cookies at Safeway









Pepperidge

Private
-
Label














cookies















Retail price per case





$ 31.20



$ 27.00

Cost per case






24.00



18.00

Gross margin






7.20



9.00

Other “relevant” costs





1.50



5.00

Contribution margin





5.70



4.00


PPT 6
-
47

A Simplified Cash Flow Diagram

Cash

Inventory

Accounts
Receivable

Sales