Pet Retail Performance Report: Identify Profit Opportunities Michael Becher, CPA Vice President Industry Insights, Inc. mbecher@industryinsights.com

The Importance of Information “Information is the oil of the 21st century, and analytics is the combustion engine.” - Peter Sondergaard, Senior Vice President at Gartner “(This) is surely the century of data.” - David Donoho, Professor of statistics as Stanford University “It’s amazing how much data is out there. The question is how do we put it in a form that’s usable?” - Bill Ford Jr., Ford

Objectives About the Study How Benchmarks Work and Why They’re Important for Your Business Most Relevant Measures for Your Store Highlights of Survey Results Analysis of a Hypothetical Company Discussion/Q&A

Survey Sent to Pet Retailers in the U.S. and Canada 4-Page Survey Form About Survey Sent to Pet Retailers in the U.S. and Canada 4-Page Survey Form 118 Participating Companies Representing 257 Locations Easy-to-Understand, Actionable Tool for Companies to: Evaluate their own company’s operating results Pinpoint strengths and weaknesses, and improvement opportunities Provide information that will enable retailers to better manage their businesses

WPA Retail Operating Performance Reports Overall Industry Report

WPA Retail Operating Performance Reports Confidential, Company Performance Report

WPA Retail Operating Performance Reports Online Reporting Tools

Ratios must be compared against some standard How Benchmarks Work Financial information is more useful as a ratio than as an absolute figure Ratios create a common platform for reviewing information and basing decisions Ratios must be compared against some standard Industry Peers Historical Performance Budgets

Why Benchmarks are Important Measure Performance & Productivity Profit Margins Return on Investments Employee Productivity Can be Dangerous to Only Look at Profits Gauge Health Balance Sheet Ratios (Liquidity, Leverage, Cash Cycle) Hybrid Ratios (ROA, RONW, Inventory Turnover)

Keep in Mind… Industry statistics should be regarded as “guidelines” rather than absolute standards Major deviations between your own firm’s performance and industry norms are not necessarily good or bad, but signals areas of further analysis EVEN A RELATIVELY SIMPLE ANALYSIS CAN RESULT IN SIGNIFICANT INSIGHTS ABOUT YOUR BUSINESS

Most Relevant Measures for Your Store What is your goal and what is your strategy? Improving lives Pets Customers Employees Maximizing financial success

Most Relevant Measures for Your Store Overall Key Performance Measures Net Profit Margin Operating Margin Asset Turnover Return on Assets Return on Net Worth Management Ratios Inventory Turnover Turn & Earn Profitability Index Financial Leverage Debt to Equity Days in Inventory Cash Cycle Current Ratio Quick Ratio Employee Productivity Ratios Revenue per Employee Operating Margin per Employee Payroll as a % of Total Revenue Payroll per Employee Value Add per Employee Employee Turnover Sales Measures Sales Growth Forecasted Sales Growth Revenue per Square Foot Revenue per Selling Square Foot Operating Margin per Square Foot Operating Margin per Selling Square Foot Sale Price per Transaction

Real GDP Growth

Retail Sales Growth Excluding motor vehicle and parts dealers

Retail Sales Growth Other Miscellaneous Store Retailers

Unemployment and Disposable Income

Respondent Demographics All Respondents 40.2% Pet Store with Animals 35.9% Pet Store – Dry Goods Only 18.8% Grooming Store with Retail Sales 5.1% Other

Respondent Demographics Pet Stores with Animals Pet Stores Dry Goods Only Grooming Stores w/ Retail All High Profit Sales Volume $2.2MM $1.4MM $3.4MM $4.7MM $644K $583K Total Employees 15.7 16.3 22.9 34.9 8.6 9.4 Years in Operation 29 years 35 years 17 years 15 years 10 years Total Square Feet 4,800 6,600 3,000 2,760 2,000 Number of Register Transactions 48,225 37,769 98,483 127,359 27,817 24,320

Revenue Growth 2016 vs. 2015 All High Profit Pet Stores with Animals Pet Stores Dry Goods Only All High Profit Grooming Stores w/ Retail

Revenue per Selling Square Foot All High Profit Pet Stores with Animals All High Profit Pet Stores Dry Goods Only All High Profit Grooming Stores w/ Retail

Sales Price per Transaction All High Profit Pet Stores with Animals All High Profit Pet Stores Dry Goods Only All High Profit Grooming Stores w/ Retail

Operating Margin All High Profit Pet Stores with Animals Pet Stores Dry Goods Only All High Profit Grooming Stores w/ Retail

Total Operating Expenses All High Profit Pet Stores with Animals All High Profit Pet Stores Dry Goods Only All High Profit Grooming Stores w/ Retail

Net Operating Profit Before Taxes All High Profit Pet Stores with Animals All High Profit Pet Stores Dry Goods Only All High Profit Grooming Stores w/ Retail

Summary Income Statement Pet Stores with Animals Pet Stores Dry Goods Only Grooming Stores w/ Retail All High Profit Total Revenues 100.0% Total Cost of Goods Sold 58.0% 57.1% 59.8% 53.3% 17.8% 22.4% Operating Margin 42.0% 42.9% 40.2% 46.7% 82.3% 77.6% Total Payroll Expenses 17.0% 12.9% 16.8% 15.1% 41.9% 35.5% Total Occupancy Expenses 12.5% 10.9% 8.9% 10.3% 17.2% Total G & A Expenses 6.5% 4.6% 7.9% 8.6% 13.9% 13.8% Total Operating Expenses 35.9% 28.4% 33.6% 34.1% 73.0% 61.8% Net Operating Profit 6.1% 14.6% 6.6% 12.7% 9.3% 15.8%

Summary Income Statement Pet Stores with Animals Pet Stores Dry Goods Only Grooming Stores w/ Retail All High Profit Total Revenues 100.0% Total Cost of Goods Sold 58.0% 57.1% 59.8% 53.3% 17.8% 22.4% Operating Margin 42.0% 42.9% 40.2% 46.7% 82.3% 77.6% Total Payroll Expenses 17.0% 12.9% 16.8% 15.1% 41.9% 35.5% Total Occupancy Expenses 12.5% 10.9% 8.9% 10.3% 17.2% Total G & A Expenses 6.5% 4.6% 7.9% 8.6% 13.9% 13.8% Total Operating Expenses 35.9% 28.4% 33.6% 34.1% 73.0% 61.8% Net Operating Profit 6.1% 14.6% 6.6% 12.7% 9.3% 15.8%

Inventory Turnover Cost of Goods Sold / Inventory All High Profit Pet Stores with Animals All High Profit Pet Stores Dry Goods Only All High Profit Grooming Stores w/ Retail

Days in Inventory 365 days / (COGS / Average Inventory) All High Profit Pet Stores with Animals All High Profit Pet Stores Dry Goods Only All High Profit Grooming Stores w/ Retail

Asset Turnover Sales / Total Assets All High Profit Pet Stores with Animals All High Profit Pet Stores Dry Goods Only All High Profit Grooming Stores w/ Retail

Return on Assets Net Operating Profit Before Taxes / Total Assets All High Profit Pet Stores with Animals All High Profit Pet Stores Dry Goods Only All High Profit Grooming Stores w/ Retail

Financial Leverage Total Assets / Net Worth All High Profit Pet Stores with Animals All High Profit Pet Stores Dry Goods Only All High Profit Grooming Stores w/ Retail

Return on Net Worth Net Operating Profit Before Taxes / Net Worth All High Profit Pet Stores with Animals All High Profit Pet Stores Dry Goods Only All High Profit Grooming Stores w/ Retail

Pathway to Profitability DuPont Profit Model Profit before Tax Asset Turnover Return on Assets Profit Before Taxes Total Revenue Profit Before Taxes Total Revenue Total Revenue Total Assets Total Revenue Total Assets Profit Before Taxes Total Assets = X

Pathway to Profitability DuPont Profit Model Profit before Tax Asset Turnover Return on Assets Financial Leverage Return on Net Worth Profit Before Taxes Total Revenue Total Revenue Total Assets Profit Before Taxes Total Assets Profit Before Taxes Total Assets Total Assets Total Net Worth Total Assets Total Net Worth Profit Before Taxes Total Net Worth = = X X

Pathway to Profitability DuPont Profit Model Profit before Tax Asset Turnover Return on Assets Financial Leverage Return on Net Worth Profit Before Taxes Total Revenue Total Revenue Total Assets Profit Before Taxes Total Assets Profit Before Taxes Total Assets Total Assets Total Net Worth Total Assets Total Net Worth Profit Before Taxes Total Net Worth = = X X

Current Ratio Current Assets / Current Liabilities All High Profit Pet Stores with Animals All High Profit Pet Stores Dry Goods Only All High Profit Grooming Stores w/ Retail

Quick Ratio (Current Assets – Inventory) / Current Liabilities All High Profit Pet Stores with Animals All High Profit Pet Stores Dry Goods Only All High Profit Grooming Stores w/ Retail

Revenue per Employee All High Profit Pet Stores with Animals Pet Stores Dry Goods Only All High Profit Grooming Stores w/ Retail

Operating Margin per Employee All High Profit Pet Stores with Animals All High Profit Pet Stores Dry Goods Only All High Profit Grooming Stores w/ Retail

Payroll per Employee All High Profit Pet Stores with Animals Pet Stores Dry Goods Only All High Profit Grooming Stores w/ Retail

Employee Turnover All High Profit Pet Stores with Animals Pet Stores Dry Goods Only All High Profit Grooming Stores w/ Retail

Profit Leader Overview High Profit Company’s Generally Reported: Above Average Revenue Growth Better Expense Control Higher Revenue per Selling Square Foot Higher Sales per Transaction More Productive Asset Usage Better Inventory Control More Leveraged Higher Operating Margin per Employee Lower Payroll Expenses as % of Sales Lower Employee Turnover

Which Metrics Should You Track? By Tracking These Inputs Revenue Cost of Goods Sold Profit Before Taxes Current Assets Inventory Total Assets Current Liabilities Total Liabilities Total Equity You Can Calculate These Ratios Sales Growth Net Profit Margin Operating Margin Asset Turnover Inventory Turnover Return on Assets Return on Net Worth Turn & Earn Profitability Index Financial Leverage Debt to Equity Days in Inventory Current Ratio Quick Ratio

Hypothetical Company Case Example Your Company Pet Stores with Animals OVERALL KEY PERFORMANCE MEASURES Net Profit Margin 6.0% 6.1% Operating Margin 48.8% 42.0% Asset Turnover 5.0 5.3 Return on Assets 20.9% 13.1% MANAGEMENT RATIOS Inventory Turnover 6.2 6.6 Financial Leverage 2.0 1.4 Debt to Equity 1.0 0.5

Hypothetical Company Case Example Your Company Pet Stores with Animals LIQUIDITY RATIOS Current Ratio 2.3 1.9 Quick Ratio 0.8 0.6 EMPLOYEE PRODUCTIVITY RATIOS Total Revenues Per Employee $161,646 $150,000 Total Payroll as a % of Total Revenues 23.1% 24.0% SPACE PRODUCTIVITY RATIOS Total Revenues Per Selling Square Foot $257 $310 Operating Margin Per Selling Square Foot $105 $131

Sample Report Card

EVEN A RELATIVELY SIMPLE ANALYSIS CAN RESULT IN SIGNIFICANT INSIGHTS Closing Thoughts Make a plan of the metrics to monitor Compare these to your historical performance and industry norms Major deviations between your own firm’s performance and industry norms are not necessarily good or bad, but are signals of areas for further analysis EVEN A RELATIVELY SIMPLE ANALYSIS CAN RESULT IN SIGNIFICANT INSIGHTS ABOUT YOUR BUSINESS

Questions and Comments Michael Becher, CPA Vice President 614-389-2100 x 114 mbecher@industryinsights.com Industry Insights, Inc. 6235 Emerald Parkway Dublin, OH 43016