1. Chapter 6
Financial Strategy

2. Retailing Strategy Human Resource Management Chapter 9
Retail Locations Chapters 7,8
Retail Market Strategy Chapter 5
Financial Strategy Chapter 6
Information and Distribution Systems Chapter 10
Customer Relationship Management Chapter 11

3. Retailer Objectives
Financial – not necessarily profits, but return on investment (ROI) – primary focus
Societal – helping to improve the world around us
Personal – self-gratification, status, respect

4. Financial Tradeoff Made by Retailers to Increase ROI
Net Profit Margin
Asset Turnover

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

6. Components of the Strategic Profit Model

7. The Strategic Profit Model: Profit Management
Net Profit Margin
Sales
Net Profit
Gross Margin
Total Expenses
Cost of Goods Sold
15% 15 40
100 60 25 -

8. 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

9. The Strategic Profit Model: Return on Assets
Net Profit Margin
Sales
Net Profit
Gross Mar
Total Exp.
Cost Goods Sold
15% 15 40
100 60 25 -
Asset Turnover
Total Assets
Current Assets
Fixed Assets
Inventory
A/R
2.5 10 5 4 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 ( )

10. Financial Implications of Strategies Used By a Bakery and Jewelry Store
Net Profit X Asset = Return on Assets Margin Turnover
La Madeline Bakery % X times = %
Kalame Jewelry % X time = %

11. Income Statements for Federated Department Stores and Costco

12. Profit Management Path for Federated and Costco

13. Components of Gross Margin
Gross Sales
Less Returns
Less customer allowances
Gross Margin
Gross Margin
Net Sales
COGS

14. Gross Margin for Federated and Costco
Gross Margin = Gross Margin %
Net Sales
Federated: $ 6,333 = %
$15,630
Costco: $ 6,014 = %
$48,107
Why does Federated have higher margins than Costco?
Does the higher margins mean the Federated’s is more profitable?

15. Operating Expenses Operating Expenses = Operating Expenses % Net sales
Federated: $4,933 = %
$15,630
Costco: $4,629 = 9.6%
$48,107

16. 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

17. Net Profit Net Profit = Net Profit % Net sales Federated: $689 = 4.4%
$15,630
Costco: $ = 1.8%
$48,107

18. Asset Information from Federated’s and Costco’s Balance Sheet

19. Asset Management Path for Federated and Costco

20. Inventory Turnover Cost of Goods = Inventory Turnover
Average inventory
Federated: $9, = 3.0
$3,120
Costco: $42,093 =
$ 3,644

21. Inventory Turnover

22. Asset Turnover Net Sales = Asset Turnover Total Assets
Federated: $15,630 = 1.1
$14,885
Costco: $48,107 = 3.2
$15,093

23. Return on Assets Federated: 4.41 x 1.05 = 4.63%
Net Profit Margin x Asset Turnover = Return on Assets
Federated: x = %
Costco: x = %

24. Strategic Profit Model Ratios for Selected Retailers

25. Income Statement for Gifts to Go

26. Gross Margin Percent Gross Margin = Gross Margin Percent Net Sales
Stores: $350, = %
$700,000
GiftstoGo.com $220, = %
$440,000

27. Operating Expense Percent
Operating Expenses = Operating Expenses %
Net Sales
Stores: $250, = %
$700,000
GiftstoGo.com: $150, %
$440,000

28. Net Profit Percentage Net Profit = Net Profit Percentage Net Sales
Stores: $ 59, = %
$700,000
GiftstoGo.com: $ 45, = %
$440,000

29. Balance Sheet Information for Gifts to Go and Proposed Internet Channel

30. Inventory Turnover Cost of Goods = Inventory Turnover
Average Inventory
Stores: $350, =
$175,000
GiftstoGo.com: $220, =
$ 70,000

31. Asset Turnover Net Sales = Asset Turnover Total Assets
Stores: $700, =
$380,000
GiftstoGo.com: $440, = 2.09
$211,000

32. Return on Assets Stores: 8.54 x 1.84 = 15.7%
Net Profit Margin x Asset Turnover = Return on Assets
Stores: x = %
Giststgo.com x = %

33. The Strategic Profit Model
Net Sales
Cost of goods sold
Variable expenses
Fixed expenses
Gross margin
Total expenses
Net profit
Net profit margin
Asset turnover
Return on assets - +
Inventory
Accounts receivable
Other current assets
Total current assets
Fixed assets
Net sales
Total assets x
Profit Management
Asset Management

34. 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 they get on their investments

35. 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

36. Setting Objectives in Large Retail Organizations
Top Down Planning
Corporate Developmental Strategy
Category, Departments and sales associates implement strategy

37. Setting Objectives in Large Retail Organizations
Corporate
Bottom Up Planning
Buyers and Store managers estimate what they can achieve
Operation managers must be involved in objective setting process

38. Financial Performance of Retailers
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

39. Productivity - Outputs/Input
Corporate Level
ROA = Profits/Assets (ROE = Profit/Equity)
Overhead/Sales
Buyers (Inventory, Pricing, Advertising)
Gross Margin % = Gross Margin/Sales
Inv Turnover = COGS/ Avg. Inventory (cost)
GMROI – Gross Margin/Average Inventory
Advertising/sales
Stores (Real Estate, Employees)
Sales/Square Feet inv. Shrinkage/sales
Sales/Employee

40. Performance Objectives and Measures Used by Retailers

41. 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

42. 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.

43. 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.

44. 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

45. Benchmarks
Performance of retailer over time – retailer can compare its recent performance to its performance in the preceding months, quarters or years.
Performance of a retailer compared to its competitors

46. Sources of Information
Balance Sheet (Snap Shot at One Time)
Asset Management
Income Statement (Summary Over Time)
Margin Management
Annual Reports/ SEC Filings

47. Federated’s and Costco’s Financial Performance Over Three Years

48. Financial Performance of Federated and Other National Department Store Chains