Retail Financial Modeling

Retail Financial Model
Prepared for
October 19th, 2001
Why Create a Financial Model
Helps to determine if a new business can create positive value. Positive value
means that the cash inflows from a new business venture exceed the costs of
creating and growing it.
Allows the user to look at various situations or scenarios to see which strategy will
create the most value.
Reveals
the minimum financial performance targets (e.g. sales growth, gross

margins) that the new business must achieve in order to create positive value.
KSA: Share
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How the retail financial model works
This particular model is based on a soft goods retailer, however it can be

customized to fit the financial analysis of almost any retailer. It is structured to
provide a strong framework as a platform for further customization.
The model provides for two channels of distribution: stores and catalog.
We have found that these channels have significantly different drivers of sales and
expenses.
The only common elements between the two channels are merchandise mix, product pricing
and product costs.
There are two areas in which the user will need to input information:
Merchandise Mix
Various category worksheets
Merchandise & GM* for Store (number of styles and colors)

Merchandise & GM* for Catalog (number of styles and colors)
*GM stands for
Gross Margin;
NPV stands for
Net Present
Value
Input page
From these two areas, several worksheets are generated:

Financial Highlights
Total Stores Rollout
NPV* Analysis Entire Business
Store Format P&L
NPV* Analysis Stores Business

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Format Occupancy
Expenses
Catalog Revenue
Model
Catalog Production
Costs
Catalog Income
Contribution
A map of how the model flows
NPV - Entire Business

Created by
figures
entered into
the input page
and the
merchandise
worksheets
below.
NPV - Stores
Business
Total Stores
Rollout
Catalog Income
Contribution
Catalog Revenue
Model
Catalog
Production Costs
Total Merchandise
Revenues & Gross Profit for
Catalog
Single Store P&L

Format 1, 2,
3
Total Merchandise
Revenues & Gross Profit for
a Single Store
Merchandise Categories Assortment, Price, Costs &

Promotion
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Occup. Exp.
Format 1, 2, 3
Input Area One:

Merchandise Mix
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Merchandise Categories - Assortment, Price, Cost & Promotion
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Revenues and gross margins are derived from detailed analysis of each product
category. This analysis is broken down for the two channels, stores and catalog.
Within each category, an average item of a certain style and color is represented
and the following details are determined based on client feedback and market
research:
Price
Cost
Size assortment
Promotional markdowns and sell through percentages
Merchandise Mix by Category

M e r c h a n d is in g , P r ic in g a n d P r o m o tio n b y C a te g o r y - W o v e n C a s u a l S h o r ts
Example
Category:
Woven Casual
Shorts
Yellow
represents
cells where
the user
inputs
numbers.
F o r S to r e O p e r a tio n s :
S iz e s
U n i ts
30
32
34
36
38
40
42
S iz e
1. The total of the

units is pulled into
these two boxes.
S iz e
14
FALL
S P R IN G
T o ta l A v e r a g e S K U s P e r A v e r a g e S ty l e / C o l o r :
14
A v e ra g e P ric e :
49.50
49.50
C o st:
17.00
17.00
I n i ti a l G M % :
65.7%
65.7%
2. (Average PriceCost)/Average Price

= Initial Gross
Margin (%)
FALL:
S e a so n a l S e l l T h r o u g h :
S e llin g S t a g e s
% S e ll T h ru
U n i ts
0%
49.50
40%
# D IV / 0 !
F irs t M D
30%
34.65
20%
# D IV / 0 !
S ec ond M D
50%
24.75
15%
# D IV / 0 !
Th ird M D
65%
17.33
15%
# D IV / 0 !
O u t le t S a le
75%
12.38
10%
# D IV / 0 !
#D IV /0!
In it ia l
3. The
following sell
through charts
by season
determine
how many
units will be
sold at full
price or at
marked down
prices.
% OFF
P ric e
Re ve n u e
G r o ss P r o fi t
GM%
M a i n ta i n e d
GM%
S P R IN G :
S e a so n a l S e l l T h r o u g h :
S e llin g S t a g e s
% S e ll T h ru
U n i ts
0%
49.50
40%
5.6
277.20
182.00
65.7%
F irs t M D
30%
34.65
20%
2.8
97.02
49.42
50.9%
S ec ond M D
50%
24.75
15%
2.1
51.98
16.28
31.3%
Th ird M D
65%
17.33
15%
2.1
36.38
0.68
1.9%
O u t le t S a le
75%
12.38
10%
1.4
17.33
(6 . 4 8 )
-3 7 . 4 %
14
479.90
In it ia l
% OFF
P ric e
Re ve n u e
G r o ss P r o fi t
241.90
GM%
50.4%
M a i n ta i n e d
GM%
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4. A maintained
margin is
determined after
calculating total
gross profit/total
revenues for this
category.
Total merchandise revenues and gross margins for store and

catalog
Sample of a
season for a
single store or
catalog
Each category is then multiplied by a number of styles and colors to determine total
revenues and gross profit for a single store and catalog operation.
FALL:
A ve ra g e
A ve ra g e
S e a so n a l
Ave . # o f
A ve ra g e # o f
S e a so n a l
S e a so n a l
M a i n ta i n e d
co lo rs p e r
sty l e / c o l o r
T o ta l # o f
Re ve n u e p e r
G r o ss P r o fi t
GM % per
T o ta l R e v e n u e
P r o fi t fo r
T o ta l G M %
# o f sty l e s
sty l e
i te m s
S K U 's
sty l e / c o l o r
p e r sty l e / c o l o r
sty l e / c o l o r
fo r C a te g o r y
C a te g o r y
fo r C a te g o r y
W o ve n C a s u a l B o t t o m s
21
84
1512
990.97
486.97
49.1%
83,241.27
40,905.27
49.1%
S w e a t e rs
30
120
960
747.90
363.90
48.7%
89,748.00
43,668.00
48.7%
K n it C a s u a l To p s
36
216
2592
660.65
372.65
56.4%
142,699.32
80,491.32
56.4%
W o ve n C a s u a l To p s
12
48
288
394.73
202.73
51.4%
18,946.80
9,730.80
51.4%
S p o rt S h irt s
15
60
1140
782.87
383.87
49.0%
46,972.28
23,032.28
49.0%
D re s s S h irt s
16
64
1600
1,203.22
628.22
52.2%
77,006.00
40,206.00
52.2%
D re s s S la c k s
24
96
1344
1,308.83
636.83
48.7%
125,647.20
61,135.20
48.7%
S p o rt c o a t s
18
36
864
5,817.00
2,937.00
50.5%
209,412.00
105,732.00
S u it s
8,361.94
(1 , 2 9 8 . 0 6 )
-1 5 . 5 %
C a s u a l O u t e rw e a r
12
72
1,142.63
602.63
52.7%
To p c o a t s
1,385.00
689.00
49.7%
Nec k wear
70
280
1120
188.36
108.36
57.5%
U n d e rw e a r
68.56
38.56
56.2%
56.2%
T-s h irt s
83.10
57.60
69.3%
69.3%
S oc k s
10
60
39.47
22.97
58.2%
F ootw ear
2,354.50
1,249.50
53.1%
B e lt s
18
252
605.94
381.94
63.0%
O t h e r2
38.09
18.09
47.5%
TO TA L
256
46
1044
11804
M e r c h a n d i se C a te g o r i e s
The average number of styles and

colors are inputted for each
category for fall and spring and for
a store and for catalog operations,
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A ve ra g e
T o ta l G r o ss
13,711.50
52,740.80
394.73
10,906.88
871,426.77
$
$
$
$
$
$
$
$
$
7,231.50
30,340.80
229.73
6,874.88
449,577.77
50.5%
-1 5 . 5 %
52.7%
49.7%
57.5%
58.2%
53.1%
63.0%
47.5%
51.6%
Input Area Two:

Input Page
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Input Page - Stores
The first section of the input page allows you to enter sales growth, gross
margin, expenses and their percentage of sales as well as working capital turns
for a single store.
Checks and balances: The gross margin entered is matched by the gross
margin in blue which is derived from the merchandise mix.
INP UT VA R IA B L E S
O n ly en ter in fo rm atio n in th e b lu e text cells!!!
P e rio d
Ye a r
2002
2003
2004
2005
S T O RE S :
S a le s G ro w t h
9.0%
6.0%
17.5%
17.0%
3.0%
3.0%
2.9%
F ie ld S u p e rvis io n
2.0%
2.0%
2.0%
M a rk e t in g
4.0%
4.0%
3.0%
P la n n in g / D is t rib u t io n / D e live ry
1.0%
1.0%
1.0%
O ther 1
1.0%
1.0%
1.0%
O ther 2
0.5%
0.5%
0.5%
O ther 3
0.0%
0.0%
0.0%
38.5%
38.5%
38.5%
S t o re
2.00
2.00
2.10
C a t a lo g
2.00
2.00
2.10
7.00
7.00
7.00
10.00
10.00
10.00
S t o re R e t u rn s (% o f G ro s s S a le s )
18.0%
G ro s s M a rg in (% ) - Y e a r 1 O n ly
51.6%
C h e c k a g a in s t M e rc h a n d is e M ix G M %
51.6%
O p e ra t in g E x p e n s e s a s a % o f S a le s
O t h e r S u p p o rt in g E x p e n s e s (% o f s a le s ):
Ta x R a t e
38.5%
W o rk in g C a p it a l:
A n n u a l In ve n t o ry Tu rn s
A n n u a l R e c e iva b le s Tu rn s
A n n u a l P a y a b le s Tu rn s
D e p re c ia t io n S t ra ig h t L in e S c h e d u le - Y e a rs
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Input Page - Store Formats

The
model allows the user to create different P&L statements from three separate
store types or locations (e.g. Mall, Strip center or A location, B location, etc.)
S to r e F o r m a t O n e :
S t rip C e n t e r
Y e a r 1 N e t S a le s / S e llin g S F
500
C u rre n t p ro d u c t m ix s u p p o rt s :
433
F o u r W a ll E x p e n s e s (e x c l. o p e ra t in g e x p e n s e s ):
P a y ro ll
12.0%
11.8%
11.7%
11.6%
11.6%
O c c u p a n c y E x p e n s e s (b a s e d o n G ro s s S F )
Rent
60.00
CA M
16.00
10.00
% A n n u a l G ro w t h in C A M
60.00
60.00
65.00
65.00
4.0%
R e a l E s t a t e Ta x
% A n n u a l G ro w t h in R e a l E s t a t e Ta x
4.0%
P ro m o / M e rc h
% A n n u a l G ro w t h in P ro m o / M e rc h
2.50
4.0%
O t h e r O c c u p a n c y E x p e n s e s (In c l. U t ilit ie s ) - To t a l $
% A n n u a l G ro w t h in O t h e r O c c u p a n c y E x p .
5,000
4.0%
% Rent
5%
B u ild o u t / G ro s s S F
G ro s s S F
155
3,800
% S e llin g S F o f G ro s s S F
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82%
L a n d lo rd A llo w a n c e
75,000
P re -O p e n in g / C o n s t ru c t io n E x p e n s e s
100,000
10
5%
5%
5%
5%
Input Page - Store Rollout

The
last step in creating financial projections for this bricks and mortar channel is to
determine the appropriate rollout schedule of the 1 to 3 different store types. As you
enter the number of each type of store in each year, the model will automatically
calculate what percentage of the mix.
S TORE ROLLOUT
C u m u l a ti v e n u m b e r o f sto r e s
11
21
S t rip C e n t e r
36
6
L ife s t y le C e n t e r
11
17
M a ll
12
S t rip C e n t e r
M a ll
N u m b e r o f n e w sto r e s o p e n e d d u r i n g th e y e a r :
% o f S to r e M i x :
S t rip C e n t e r
M a ll
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11
0.0%
0.0%
9.1%
14.3%
16.7%
100.0%
50.0%
45.5%
52.4%
47.2%
0.0%
33.3%
36.4%
28.6%
33.3%
Input Page - Catalog
The first step is to determine total customer demand, which is the total amount of orders
from catalogs on a dollar basis in that year. The factors that go into this figure include:
Response Rate X Circulation = Number of Orders
Units per Order X Average Retail Sold = Average Order Value
Number of Orders X Average Order Value = Total Customer Demand
C a ta lo g
Num ber of B ook s P er Y ear
C irc u la t io n S iz e / B o o k
A ve ra g e n u m b e r o f p a g e s / b o o k
1,000,000
1,000,000
1,000,000
16.00
36.00
43.00
C i r c u l a ti o n B r e a k d o w n : (B e g . O f Y e a r )
P ro s p e c t
0.0%
C u rre n t M is s y C u s t o m e r/ S p o u s e
12.5%
16.7%
100.0%
R e p e a t C u s t o m e r*
0.0%
R es pons e R ates :
P ro s p e c t
0.00%
0.60%
0.70%
0.30%
0.75%
0.90%
M e n s C u s t o m e r*
0.00%
2.60%
2.60%
A ve ra g e U n it s / O rd e r:
P ro s p e c t
1.20
1.30
1.30
1.80
1.85
1.90
2.00
2.30
A ve ra g e R e t a il S o ld :
P ro s p e c t
85.00
85.00
90.00
90.00
90.00
95.00
95.00
* R e p e a t c u s t o m e r is a n y c u s t o m e r t h a t h a s p u rc h a s e d f ro m t h e c a t a lo g b e f o re .
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12
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The model does allow for the user to split the circulation into three separate profiles of
mailing targets. For example, one group may be customers of the clients other existing
businesses. Another group may be totally new targets of prospects. Inevitably after the
first year of a new catalog and new business, there will be a group labeled repeat customers
who have purchased from the catalog before. In this example, all three of these groups may
be assigned different metrics for the factors of the above equation.
13
Catalog production costs consist of postage, paper and printing, which are usually calculated
on a per page circulated basis. For example, with a 50 page catalog that is circulated to a
million people, the total pages circulated is 50 million. Paper, printing and postage would be
a certain figure per page circulated, say $.000889, times the 50 million circulated pages.
Also included in production costs are creative costs, which are the marketing expenses to
design and create each page, and these are calculated on a per page basis.
P o s t a g e C o s t s / C irc u la t e d P a g e
0.004000
0.004000
0.004000
0.004000
0.004000
0.004000
P rin t in g C o s t s / C irc u la t e d P a g e
0.002000
0.002000
0.002000
0.002000
0.002000
0.002000
P a p e r C o s t s / C irc u la t e d P a g e
0.002903
0.002903
0.002903
0.002903
0.002903
0.002903
O t h e r C o s t s / C irc u la t e d P a g e
To t a l V a ria b le C o s t s / C irc u la t e d P a g e
0.008903
0.008903
0.008903
0.008903
0.008903
0.008903
C re a t ive C o s t s / C a t a lo g P a g e (n o t p e r c irc u la t e d p a g e )
4,750
4,750
4,750
4,750
4,750
4,750
L is t R e n t a l E x p e n s e / 1 0 0 0 n e w n a m e s
50
50
50
50
50
50
O t h e r C a t a lo g O p e ra t in g E x p e n s e s (% o f s a le s ):
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Te le m a rk e t in g
5.0%
5.0%
5.0%
5.0%
5.0%
C a t a lo g O p e ra t io n s / F u lfillm e n t
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
N e t S h ip p in g / H a n d lin g In c o m e
-3 . 0 %
-3 . 0 %
-3 . 0 %
-3 . 0 %
-3 . 0 %
-3 . 0 %
O ther E x pens es
1.5%
1.5%
1.5%
1.5%
1.5%
1.5%
14
5.0%
Discount Rate
Lastly, a rate must be entered to allow the model to discount future cash flows back to
the present year.
Discount Rate for NPV Analysis:
12.5%
This percentage is a strong driver of increases or decreases in the models estimated

value of the new business.
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15
Example Scenarios:
Discount Rate
Store Rollout Schedule
Merchandise Mix/ Gross Margin
Changing the discount rate

This is one of the most significant determinants of the value of the projected
business.
Decreasing the discount rate means lowering the rate at which the future net cash
flows of the business are calculated back to the present year, year zero. This would
result in a higher NPV (net present value).
Increasing the discount rate means increasing the rate at which future cash flows
are calculated back to the present year. This leads to a lower NPV.
Example:
Record the NPV for the entire business in the financial highlights worksheet - cell B33
Change the rate on the input worksheet (cell B256) to 11.0% from 10.0%
Look back at the NPV in the financial highlights worksheet
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17
Accelerating the store rollout schedule

Increasing the number of stores opened each year increases the capital investment
required to support the business.
Accelerating the store rollout also increases the size of cash flows in future years as
higher sales from a larger footprint support fixed operating expenses.
Example:
Record the NPV (net present value) for the entire business in the financial highlights
worksheet - cell B33
Increase the number of stores (as shown in red) in the rollout schedule in the input
page (row 113) as follows:
S TORE ROLLOUT
C u m u l a ti v e n u m b e r o f sto r e s
13
26
40
59
79
99
126
154
S t rip C e n t e r
12
15
19
182
23
10
20
30
40
50
60
75
90
105
M a ll
12
20
26
35
44
53
N u m b e r o f n e w sto r e s o p e n e d d u r i n g th e y e a r :
S t rip C e n t e r
10
10
10
10
10
10
15
15
15
M a ll
% o f S to r e M i x :
S t rip C e n t e r
M a ll
0.0%
0.0%
3.8%
7.5%
10.2%
10.1%
12.1%
11.9%
12.3%
12.6%
100.0%
76.9%
76.9%
75.0%
67.8%
63.3%
60.6%
59.5%
58.4%
57.7%
0.0%
15.4%
15.4%
15.0%
20.3%
25.3%
26.3%
27.8%
28.6%
29.1%
Look back at the NPV in the financial highlights worksheet and notice the improvement
in NPV
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The cash flows generated by higher sales offset the increased investment to build
out the extra stores.
18
Changing gross margin in year 1

Gross margin (sales less cost of goods sold) is a significant driver of value in any
business and even slight changes will have a strong impact on NPV.
Within the input page, cells c12 and c13, there are two figures for gross margin.
The first cell allows the user to enter a maintained year 1 gross margin.
The second cell shows the gross margin generated by the merchandise mix section of the
model.
51.6%
51.6%
Example:
Observe the NPV in the financial highlights page - cell B33.
Suppose the merchandise mix was changed slightly and generated a lower gross
margin. The input page may look like this:
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51.6%
48.0%
The next step would be to manually change the gross margin in the first cell to match the
gross margin that your merchandise mix supports:
48.0%
48.0%
Once again, check the NPV in the financial highlights page and you can see that it becomes
dramatically lower.
19
How do I use this model after

today?
Applying the model to your clients needs
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While this model is a strong base for creating financial projections for a new
business, there are still important questions to ask that will help refine the model to
better match the particular type of client and business endeavor.
The following pages list several of the questions we asked to create this retail
financial model that can also be a guide to revising and customizing this model.
21
Structure
What
timeframe should our projections cover? (5 years, 10 years?). There may be a

standard timeframe that the client uses when examining all new businesses or it may
depend on the type of business.
What
format does the client currently use for an internal profit and loss statement?
How are expenses organized and what levels of profitability are broken out between
expense lines? Should this new business expenses be organized any differently?
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22
Channels
What channels will be used to sell the product? (bricks and mortar, catalog, etc.)
What expenses are specifically allocated to a certain channel, a single store or a

single catalog and vice versa, what expenses are indirect and are only included in a
roll-up P&L of all or some of the above?
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Within the bricks and mortar channel:
Will there be different types of store formats or location types? If yes, what financial metrics
will be different between each format/location type? (e.g. payroll, rent, etc.)
How much will sales grow each year? (The answer to this is derived from market research
and competitive analysis as well as client feedback.)
What are the four wall expense categories for a single store?
What other operating expenses will exist for a single store?
What are the up-front investment requirements to start a new store? (e.g. build-out,
inventory purchase, pre-opening costs, etc.)
23
Catalog
Within catalog:
What are the financial inputs for determining catalog revenues? Examples include:
What will the circulation mix look like? What percent of the circulation will be prospects
(names that are purchased from an outside source?) versus customers of certain
existing businesses?
The following metrics below may or may not be different depending on which type of
circulation group (e.g. prospect, existing customer of another business, repeat
customer of this particular business)
Response rates (percent of the circulation that actually places an order)
Average number of orders
Average retail sold (average dollar value of a single unit purchased)
What percentage of gross demand/customer demand will be items that are no longer
available (NLA)?
What percentage of reported demand (customer demand less NLA) will be cancelled
backorder shipments?
What percentage of gross shipments (reported demand less cancelled backorder shipments)
will be returned?
What costs are calculated on a per page circulated basis? What costs are calculated
on a per page basis? What costs are calculated as a percent of revenues?
What other operating expenses will exist for catalog operations?
KSA: Share
the Wealth
24
Merchandise Mix
KSA: Share
the Wealth
What will the merchandise mix look like?
This area of planning and questions may require close examination of the offerings of
various competitors within the particular industry.
What are the categories that will make up each SKU? For example, an apparel
merchandise mix might consist of styles, colors and sizes but a music store mix may include
type of music, artist and form of media (CD, cassette, etc.)
How will these SKUs be assorted within these categories? (e.g. 70% tops/30% bottoms or
60% Classical/40% Jazz)
What will be the pricing structure within each category?
What will be the costs to make or source product within each category?
What do the promotional markdown schedules and sell through rates look like for each
category?
25
Working capital
KSA: Share
the Wealth
What are expected turns for inventory, accounts receivable and accounts payable
each year? (The answer to this may require analysis of industry competitors in
addition to client feedback).
26
Populating the Expenses
Before the expense categories are populated with numbers, the information learned
from asking structural questions should be used to get all of the line items set up in
the model.
Once the model is set up, the expense items and other variables must be populated.
This is usually an iterative process between KSA and the client. For example, what
percentage of net sales do marketing expenses make up? Does this percentage
increase or decrease over time? Additional conversations with the client should
help fill in the blanks.
Note: if the model is used for an existing business that is looking to enter into a new
venture, then it is important to determine which resources can be leveraged from the
existing business. Only costs that are incremental to those of the existing business
should be included included in the models calculations. It is important to determine
this early in the process. For example, there may be certain individuals in marketing
who will continue in their current role and support this new business as well. Their
salaries would NOT be an expense for the new business.
KSA: Share
the Wealth
27
Examples of Output
Financial Highlights
F IN A N C IA L H IG H L IG H T S - EN T IR E B U S IN ES S :
(D o lla rs in t h o u s a n d s )
2003
2004
2005
2006
2007
2008
2009
S t o re s
11
21
36
56
76
C a t a lo g
R o llo u t :
S a le s
S t o re
1,090,600
6,960,603
13,829,174
27,075,629
47,835,308
75,282,273
C a t a lo g
358,279
1,749,530
3,282,530
3,492,137
3,871,571
4,132,029
To t a l
1,448,879
8,710,133
17,111,703
30,567,766
51,706,879
79,414,301
$ 109,184,883
G ro s s P ro fit
718,644
4,334,313
8,557,974
15,308,292
25,925,545
39,853,568
G ro s s M a rg in
49.6%
49.8%
50.0%
50.1%
50.1%
$ 105,062,350
$
50.2%
4,122,533
54,890,742
50.3%
D ire c t E x p e n s e s
KSA: Share
the Wealth
S t o re
468,250
2,966,090
5,756,497
11,314,611
19,498,042
30,353,110
42,133,127
C a t a lo g
241,736
1,109,235
1,999,601
2,013,226
2,037,889
2,054,819
2,054,202
D ire c t P ro fit
8,658
258,987
801,876
1,980,455
4,389,613
7,445,639
10,703,413
In d ire c t E x p e n s e s
1,444,873
1,647,625
1,731,641
1,866,202
2,421,133
2,995,282
3,558,788
O p e ra t in g In c o m e
(1 , 4 3 6 , 2 1 5 )
(9 2 9 , 7 6 5 ) $
114,253
1,968,481
4,450,357
7,144,625
T o ta l A n n u a l I n i ti a l I n v e stm e n t
4,161,033
13,050,432
17,022,354
17,249,169
21,296,795
C a sh F l o w
(9 7 3 , 3 8 7 )
(1 , 2 7 0 , 3 1 4 ) $
(7 6 4 , 9 7 1 ) $
121,255
1,695,576
4,083,734
6,804,790
N e t C a sh F l o w
(5 , 1 3 4 , 4 2 1 )
(5 , 6 2 0 , 4 5 8 )
(1 , 3 8 8 , 6 3 8 ) $
4,350,144
29
8,548,881
(9 , 3 1 3 , 8 5 2 )
(1 2 , 9 2 9 , 1 7 7 )
(1 5 , 3 2 6 , 7 7 8 )
(1 3 , 1 6 5 , 4 3 5 )
(1 4 , 4 9 2 , 0 0 5 )
DCF Analysis
D C F A N A L YS IS :
To t a l A n n u a l S t o re N e t B u ild o u t
438,000
2,266,000
2,342,000
4,608,000
To t a l A n n u a l In it . In ve n t o ry P u rc h . - S t o re
263,925
1,395,033
1,508,144
2,940,881
To t a l A n n u a l P re -o p e n in g E x p e n s e s & C o n s t r.
100,000
500,000
500,000
1,000,000
T o ta l A n n u a l I n i ti a l I n v e stm e n t
801,925
4,161,033
4,350,144
8,548,881
A ft e r-t a x D ire c t P ro fit
44,703
302,401
701,418
A d d : D e p re c ia t io n
54,750
338,000
630,750
S u b t ra c t : R e n o va t io n
C h a n g e in In ve n t o ry
10,906
81,538
41,482
C h a n g e in R e c e iva b le s
155,800
540,260
1,279,536
C h a n g e s in P a y a b le s
54,966
295,314
342,936
P e rp e t u it y o f C F 's b e y o n d y e a r 1 0
N e t C a sh F l o w
P r e se n t V a l u e F a c to r :
M o d e l Ye a r
(8 0 1 , 9 2 5 )
(4 , 1 7 3 , 3 2 0 )
$
$
(4 , 0 3 6 , 2 2 7 )
$
$
(8 , 1 9 4 , 7 9 5 )
100.00%
88.89%
79.01%
70.23%
1 2 .5 %
KSA: Share
the Wealth
D i sc o u n te d N e t C a sh F l o w s
NP V
(8 0 1 , 9 2 5 )
1 1 ,5 6 7 ,3 8 9
30
(3 , 7 0 9 , 6 1 8 )
(3 , 1 8 9 , 1 1 8 )
(5 , 7 5 5 , 4 6 7 )
Single Store P&L

Sample of a
P&L for a strip
center
S in g le S to r e P r o fit a n d L o s s /D C F P r o fo r m a
Strip C enter
% of
C a le n d a r Ye a r
M o d e l Ye a r
2002
% of
sa l e s
2003
% of
sa l e s
2004
G r o ss S a l e s
$ 1,900,000.00
S to r e R e tu r n s (1 8 % to 1 5 % o f G r o ss)
N e t S a le s
$ 1,558,000.00
342,000.00
2005
2
122.0%
22.0%
100.0%
$ 2,071,000.00
$
362,425.00
$ 1,708,575.00
R e v e n u e G r o w th R a te
A v e r a g e S to r e S e l l i n g S F (8 2 % o f G r o ss)
% of
sa l e s
% of
sa l e s
2006
3
121.2%
21.2%
100.0%
$ 2,195,260.00
$
373,194.20
$ 1,822,065.80
9.0%
% of
sa l e s
2007
4
120.5%
20.5%
100.0%
$ 2,305,023.00
$
380,328.80
$ 1,924,694.21
6.0%
sa l e s
5
119.8%
19.8%
100.0%
$ 2,385,698.81
$
381,711.81
$ 2,003,987.00
5.0%
119.0%
19.0%
100.0%
3.5%
3,116
N e t S a l e s/ S e l l i n g S F
500.00
548.32
584.75
617.68
G r o ss P r o fi t
772,768.00
A d j u ste d G P / V o l u m e B e n e fi ts
772,768.00
P a y ro ll
O c c upanc y
O p e ra t io n s
643.13
49.6%
846,748.03
49.6%
855,080.28
49.6%
902,992.63
50.0%
917,349.61
49.6%
953,853.96
50.3%
973,864.70
49.6%
993,150.46
49.6%
50.6%
$ 1,017,534.54
50.8%
186,960.00
12.0%
405,550.00
26.0%
201,611.85
11.8%
410,082.00
24.0%
213,181.70
11.7%
414,795.28
22.8%
223,264.53
11.6%
232,462.49
11.6%
438,697.09
22.8%
443,794.97
46,740.00
3.0%
48,609.60
3.0%
50,553.98
2.9%
22.1%
52,576.14
2.9%
54,679.19
4 -W a ll E x p e n s e s
639,250.00
41.0%
660,303.45
38.6%
678,530.96
37.2%
714,537.76
37.1%
730,936.66
36.5%
4 -W a l l C o n tr i b u ti o n
133,518.00
8.6%
194,776.83
11.4%
238,818.65
13.1%
259,326.94
13.5%
286,597.89
14.3%
F ie ld S u p e rvis io n
M a rk e t in g
31,160
2.0%
62,320
4.0%
34,172
2.0%
68,343
4.0%
36,441
2.0%
38,494
2.0%
40,080
2.0%
54,662
3.0%
57,741
3.0%
40,080
P la n n in g / D is t rib u t io n / D e live ry
15,580
1.0%
17,086
1.0%
2.0%
18,221
1.0%
19,247
1.0%
20,040
O ther 1
15,580
1.0%
17,086
1.0%
1.0%
18,221
1.0%
19,247
1.0%
20,040
O ther 2
7,790
0.5%
1.0%
8,543
0.5%
9,110
0.5%
9,623
0.5%
10,020
O ther 3
0.0%
0.5%
0.0%
0.0%
0.0%
2.8%
S u p p o r ti n g E x p e n se s:
KSA: Share
the Wealth
0.0%
T o ta l S to r e S u p p o r ti n g E x p e n se s
132,430.00
8.5%
145,228.88
8.5%
136,654.94
7.5%
144,352.07
7.5%
130,259.15
6.5%
S to r e D i r e c t P r o fi t (C a sh F l o w )
1,088.00
0.1%
49,547.95
2.9%
102,163.71
5.6%
114,974.87
6.0%
156,338.73
7.8%
31
Catalog Revenue Model
C a ta lo g Re v e n u e M o d e l - An n u a l
M o d e l Ye a r
2004
2005
2006
2007
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
To t a l C irc u la t io n S iz e
3,000,000
1,000,000
2,000,000
3,000,000
3,000,000
A V G P ages /B ook
16
36
43
43
43
To t a l P a g e s
16
72
129
129
129
A ve ra g e O rd e r V a lu e
KSA: Share
the Wealth
1
2003
162.00
161.05
165.55
168.73
171.47
R es pons e R ate
0.30%
0.74%
0.90%
0.99%
1.08%
N u m b e r o f O rd e rs
3,000
14,736
26,897
29,634
32,330
T o ta l C u sto m e r D e m a n d
486,000
2,373,210
4,452,699
5,000,196
5,543,486
T o ta l C u sto m e r D e m a n d P e r B o o k
486,000
1,186,605
1,484,233
1,666,732
1,847,829
T o ta l C u sto m e r D e m a n d P e r P a g e
30,375
32,961
34,517
38,761
42,973
32
Catalog P&L
C a ta lo g In c o m e C o n tr ib u tio n
M o d e l Ye a r
0
2002
2003
2004
2005
2006
T o ta l C u sto m e r D e m a n d
486,000
135.6%
NLA
24,300
6.8%
T o ta l R e p o r te d D e m a n d
461,700
128.9%
C a n c e lle d B a c k o rd e r S h ip m e n t s
13,851
3.9%
G r o ss S h i p m e n ts
447,849
125.0%
To t a l C a t a lo g R e t u rn s
89,570
25.0%
N e t C a ta l o g S a l e s
358,279
100.0%
G r o w th i n T o ta l C u sto m e r D e m a n d
KSA: Share
the Wealth
2,373,210
135.6%
118,661
6.8%
2,254,550
128.9%
67,636
3.9%
2,186,913
125.0%
437,383
25.0%
1,749,530
100.0%
388.31%
4,452,699
135.6%
222,635
6.8%
5,000,196
4,230,064
128.9%
4,500,176
126,902
3.9%
135,005
4,103,162
125.0%
4,365,171
820,632
25.0%
873,034
3,282,530
100.0%
3,492,137
500,020
87.62%
12.30%
G r o ss P r o fi t
177,706
49.6%
876,515
50.1%
1,660,960
50.6%
1,784,482
C a t a lo g P ro d u c t io n
218,448
61.0%
983,016
56.2%
1,761,237
53.7%
1,761,237
L is t R e n t a l E x p e n s e
0.0%
12,500
0.7%
25,000
0.8%
25,000
M a r k e ti n g E x p e n se s
218,448
61.0%
995,516
56.9%
1,786,237
54.4%
1,786,237
Te le m a rk e t in g
17,914
5.0%
87,477
5.0%
164,126
5.0%
174,607
C a t a lo g O p e ra t io n s / F u lfillm e n t
10,748
3.0%
52,486
3.0%
98,476
3.0%
104,764
N e t S h ip p in g / H a n d lin g In c o m e
(1 0 , 7 4 8 )
-3 . 0 %
(5 2 , 4 8 6 )
-3 . 0 %
(9 8 , 4 7 6 )
-3 . 0 %
(1 0 4 , 7 6 4 )
O ther E x pens es
5,374
1.5%
26,243
1.5%
49,238
1.5%
52,382
O p e r a ti n g E x p e n se s
23,288
6.5%
113,719
6.5%
213,364
6.5%
226,989
D i r e c t E x p e n se s fo r C a ta l o g
241,736
67.5%
1,109,235
63.4%
1,999,601
60.9%
2,013,226
D i r e c t P r o fi t fo r C a ta l o g
(6 4 , 0 3 0 )
-1 7 . 9 %
-1 3 . 3 %
-1 0 . 3 %
33
(2 3 2 , 7 2 1 )
(3 3 8 , 6 4 1 )
(2 2 8 , 7 4 4 )
Catalog Cost Schedule

C a ta l o g P r o d u c ti o n C o st S c h e d u l e s:
M o d e l Ye a r
2003
2004
2005
2006
2007
2008
2009
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
To t a l C irc u la t io n S iz e
1,000,000
2,000,000
3,000,000
3,000,000
3,000,000
3,000,000
3,000,000
P ages /B ook
16.0
36.0
43.0
43.0
43.0
43.0
43.0
To t a l P a g e s
16
72
129
129
129
129
129
16,000,000
72,000,000
129,000,000
129,000,000
129,000,000
129,000,000
129,000,000
To t a l P a g e s C irc u la t e d
To t a l C o s t P e r P a g e C irc u la t e d
0.008903
0.008903
0.008903
0.008903
0.008903
0.008903
0.008903
To t a l V a ria b le P ro d u c t io n C o s t s
142,448
641,016
1,148,487
1,148,487
1,148,487
1,148,487
1,148,487
C re a t ive C o s t s / P a g e
4,750
4,750
4,750
4,750
4,750
4,750
4,750
To t a l C re a t ive C o s t s
76,000
342,000
612,750
612,750
612,750
612,750
612,750
To t a l C a t a lo g P ro d u c t io n C o s t s
218,448
983,016
1,761,237
1,761,237
1,761,237
1,761,237
1,761,237
V a ria b le c o s t s in c lu d e p a p e r, p rin t in g , a n d p o s t a g e .
KSA: Share
the Wealth
34
Appendix
Glossary of definitions and ratios

DCF: Discounted cash flow - the sum of annual net cash flow which have been
discounted back to zero by a certain rate of return.
OCF: Operating cash flow
Rate of Return/Discount Rate/Hurdle Rate: Rate at which annual net cash flows are
discounted back to year zero.
CAM: Common area maintenance
Response Rate: Percentage of a catalog circulation which purchases from the catalog
Total Customer Demand: Total dollar value of annual orders from catalog(s)
List Rental Expense: Cost to rent names and addresses for a catalog mailing; usually
in the form of $/1,000 names.
KSA: Share
the Wealth
36
Financial Glossary
Income
Statement
Sales Growth =
(Salesn - Salesn-1)
Salesn-1
Gross Profit =
Gross Margin =
Sales - COGs
Sales - COGs
Sales
or
Gross Profit
Sales
EBIT = Sales - COGs - SG&A = Operating Income

EBITDA* = Sales - COGs - SG&A + Depreciation + Amortization
Sales - COGS = Gross Profit - SG&A (operating expenses) = Operating Income
For catalog operations:

Total Customer Demand
- NLA (No longer available)
Total Reported Demand

- Cancelled Backordered Shipment
Gross Shipments
- Total Catalog Returns
Net Catalog Sales

*Proxy for operating cash flow
KSA: Share
the Wealth
37
Financial Glossary
Balance Sheet
Inventory Turnover =
Inventory Day =
Accounts Receivable
Turnover =
Accounts Receivable
Days =
Accounts Payable
Turnover =
Accounts Payable Days
=
COGs n
Average Inv. (n, n-1)
Average Inv. (n, n-1)
COGsn
OR
365
Sales n
Avg. A/R (n, n-1)
Average A/R (n, n-1)
Avg. A/R (n, n-1)
OR
OR
365
Property, Plant & Equipment - Depreciation = Net Property, Plant & Equipment
KSA: Share
the Wealth
38
Sales
A/R
365
COGs n
Avg. A/P (n, n-1)
Average A/P (n, n-1)
COGs (n, n-1)
COGS
Inventory
COGS
A/P
Financial Glossary
Cash Flow
Annual Cash Flow:
Total Annual Initial Investment*
After-tax Operating Income**
Depreciation
Renovation
+/- Change in Inventory

+/- Change in Receivables
+/- Change in Payables
Net Operating Cash Flow
Note: Increase in inventory = cash flow (-)

Increase in receivables = cash outflow (-)
Decrease in payables = cash outflow (-)
* Definition on following page
** Operating Income * (1-tax rate)
KSA: Share
the Wealth
39
Financial Glossary
Cash Flow
+
Annual Store Net Buildout
Annual Initial Inventory Purchase - Store
Annual Initial Inventory Purchase - Catalog
Annual Pre-opening/Construction Expenses
Annual Catalog Initial Investment
Total Annual Initial Investment
KSA: Share
the Wealth
40
Financial Glossary
DCF/NPV
Analysis
NPV =
Net OCF0
(1 + r)0
Where r = discount rate
KSA: Share
the Wealth
41
Net OCF1
(1 + r)1
Net OCFn + OCFn/r

(1 + r)n
Disclaimer
This type of financial model assumes that a new business is created organically,
and not through a merger or acquisition. It cannot be used for evaluating M&A
opportunities.
All financial models require some level of customization. It is impossible for one
single model to be standardized across all industries and types of businesses.
This particular model in discussion is simplified to only create profit and loss (P&L)
statements and the required balance sheet items to determine accurate cash flows
over time. Long term assets and liabilities, debt and equity, and interest expense
are not taken into consideration.
Note: To assist you with understanding certain financial terms and calculations
referenced in this presentation, a glossary of ratios is listed in the appendix.
KSA: Share
the Wealth
42

Retail Financial Modeling

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Retail Financial Modeling

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Retail Financial Model

October 19th, 2001

Why Create a Financial Model

the minimum financial performance targets (e.g. sales growth, gross

How the retail financial model works

This particular model is based on a soft goods retailer, however it can be

Merchandise & GM* for Store (number of styles and colors)

From these two areas, several worksheets are generated:

Total Stores Rollout

NPV* Analysis Entire Business

Store Format P&L

NPV* Analysis Stores Business

A map of how the model flows

NPV - Entire Business

Single Store P&L

Merchandise Categories Assortment, Price, Costs &

Input Area One:

Merchandise Categories - Assortment, Price, Cost & Promotion

Promotional markdowns and sell through percentages

Merchandise Mix by Category

1. The total of the

2. (Average PriceCost)/Average Price

Total merchandise revenues and gross margins for store and

The average number of styles and

Input Area Two:

Input Page - Stores

Input Page - Store Formats

Input Page - Store Rollout

Input Page - Catalog

Input Page - Catalog

Input Page - Catalog

Discount Rate for NPV Analysis:

This percentage is a strong driver of increases or decreases in the models estimated

Changing the discount rate

Accelerating the store rollout schedule

Changing gross margin in year 1

How do I use this model after

Applying the model to your clients needs

timeframe should our projections cover? (5 years, 10 years?). There may be a

What expenses are specifically allocated to a certain channel, a single store or a

Within the bricks and mortar channel:

What other operating expenses will exist for a single store?

Response rates (percent of the circulation that actually places an order)

Average number of orders

Average retail sold (average dollar value of a single unit purchased)

What will the merchandise mix look like?

What will be the pricing structure within each category?

Populating the Expenses

A ft e r-t a x D ire c t P ro fit

Single Store P&L

Catalog Revenue Model

Num ber of B ook s P er Y ear

Catalog Cost Schedule

Glossary of definitions and ratios

OCF: Operating cash flow

CAM: Common area maintenance

EBIT = Sales - COGs - SG&A = Operating Income

For catalog operations:

Total Reported Demand

Net Catalog Sales

Annual Cash Flow:

Total Annual Initial Investment*

After-tax Operating Income**

+/- Change in Inventory