Financial Strategy CHAPTER 06 6 - CHAPTER 6 CHAPTER 1 CHAPTER 1 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 6 - Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.

Retailing Strategy CHAPTER 6 CHAPTER 1 CHAPTER 1 CHAPTER 2 6 -

Objectives and Goals CHAPTER 6 CHAPTER 1 CHAPTER 2 CHAPTER 1 Financial – not necessarily profits, but return on investment (ROI) – primary focus Societal – helping to improve the world around us Personal – self-gratification, status, respect 6 -

Components of the Strategic Profit Model CHAPTER 6 CHAPTER 1 CHAPTER 1 CHAPTER 2 6 -

The Strategic Profit Model: An Overview CHAPTER 6 CHAPTER 1 CHAPTER 1 CHAPTER 2 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 sales Asset Turnover: assesses the productivity of a firm’s investment in its assets 6 -

Fiscal Annual Income Statement for Family Dollar and Nordstrom CHAPTER 6 CHAPTER 1 CHAPTER 2 CHAPTER 1 ** ($ millions) ** 6 -

Profit Management Path for Family Dollar Stores and Nordstrom CHAPTER 6 CHAPTER 1 CHAPTER 1 CHAPTER 2 6 -

Profit Margin Management Path CHAPTER 6 CHAPTER 1 CHAPTER 2 CHAPTER 1 Net Sales = Gross Sales + Promotional Allowances - Return Cost of Good Sold (COGs) Gross Margin (GM) = Net Sales - COGs 6 -

Profit Margin Management Path CHAPTER 6 CHAPTER 1 CHAPTER 2 CHAPTER 1 Operating Expense Variable (e.g.. sales commissions) Fixed (rent, depreciation, staff salaries) Selling, general, and administrative (SG&A) expenses 6 -

Profit Margin Management Path CHAPTER 6 CHAPTER 1 CHAPTER 2 CHAPTER 1 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 6 -

Profit Margin Management Path CHAPTER 6 CHAPTER 1 CHAPTER 1 CHAPTER 2 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 % 6 -

Profit Margin Management Path CHAPTER 6 CHAPTER 1 CHAPTER 1 CHAPTER 2 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 % 6 -

Profit Margin Management Path CHAPTER 6 CHAPTER 1 CHAPTER 1 CHAPTER 2 Net operating profit percentage is gross margin minus operating expenses divided by net sales Gross margin - Operating expenses Net sales = Net operating profit % 6 -

Asset Management Path Assets: CHAPTER 6 CHAPTER 1 CHAPTER 2 CHAPTER 1 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 6 -

Average inventory at cost Asset Management Path CHAPTER 1 CHAPTER 6 CHAPTER 1 CHAPTER 2 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 6 -

Asset Information from Family Dollar Stores’ and Nordstrom’s Balance Sheets CHAPTER 6 CHAPTER 1 CHAPTER 2 CHAPTER 1 * ($ millions) * 6 -

Asset Management Path for Family Dollar and Nordstrom CHAPTER 6 CHAPTER 1 CHAPTER 1 CHAPTER 2 6 -

Inventory Turnover A Measure of the Productivity of Inventory: CHAPTER 6 CHAPTER 1 CHAPTER 1 CHAPTER 2 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) 6 -

Strategic Profit Model Ratios for Selected Retailers CHAPTER 6 CHAPTER 1 CHAPTER 1 CHAPTER 2 6 -

Income Statement Information for Gifts To Go Stores and Proposed Gifts-To-www.Go.com Internet Channel CHAPTER 6 CHAPTER 1 CHAPTER 1 CHAPTER 2 6 -

Balance Sheet Information for Gifts To Go Stores and Proposed Gifts-To-www.Go.com Internet Channel CHAPTER 6 CHAPTER 1 CHAPTER 1 CHAPTER 2 6 -

Analysis of Financial Strength CHAPTER 6 CHAPTER 1 CHAPTER 2 CHAPTER 1 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. 6 -

Analysis of Financial Strength CHAPTER 6 CHAPTER 1 CHAPTER 2 CHAPTER 1 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. 6 -

Analysis of Financial Strength CHAPTER 6 CHAPTER 1 CHAPTER 2 CHAPTER 1 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. 6 -

Setting and Measuring Performance Objectives CHAPTER 6 CHAPTER 1 CHAPTER 2 CHAPTER 1 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 6 -

Setting Objectives in Large Retail Organizations CHAPTER 6 CHAPTER 1 CHAPTER 1 CHAPTER 2 Top-Down Planning Corporate Developmental Strategy Category, Departments and sales associates implement strategy 6 -

Setting Objectives in Large Retail Organizations CHAPTER 1 CHAPTER 6 CHAPTER 1 CHAPTER 2 Corporate Bottom-Up Planning Buyers and Store managers estimate what they can achieve Operation managers must be involved in objective setting process 6 -

Productivity Measures CHAPTER 6 CHAPTER 1 CHAPTER 2 CHAPTER 1 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) 6 -

Financial Performance of Retailers CHAPTER 6 CHAPTER 1 CHAPTER 1 CHAPTER 2 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 6 -

Examples of Performance Measures Used by Retailers CHAPTER 6 CHAPTER 1 CHAPTER 1 CHAPTER 2 6 -

Assessing Performance CHAPTER 6 CHAPTER 1 CHAPTER 2 CHAPTER 1 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 6 -