5th Edition

PPT 6-1

Chapter 6

Financial Strategy

PPT 6-2

Retailing Strategy
Retail Locations Chapters 7,8 Human Resource Management Chapter 9

Retail Market Strategy Chapter 5 Financial Strategy Chapter 6

Information and Distribution Systems Chapter 10

PPT 6-3

Customer Relationship Management Chapter 11

Financial Tradeoff Made by Retailers to Increase ROI

Net Profit Margin

Asset Turnover

PPT 6-4

The Strategic Profit Model: An Overview

Profit Margin x

Asset turnover

= Return on assets

Net profit x Net sales (crossed out)

Net sales (crossed out) = Net profit Total assets Total assets

PPT 6-5

The Strategic Profit Model: Margin Management

Sales Gross Margin

100
Cost of Goods Sold

40
Net Profit Net Profit Margin

15

Sales

Total Expenses

60

15%

100

25

PPT 6-6

The Strategic Profit Model: Asset Management

Inventory

5
Sales
Asset Turnover

100

Total Assets

Current Assets

Accounts Receivable

2.5

10 +
Fixed Assets

4
Other Current Assets

40

30

PPT 6-7

The Strategic Profit Model: Return on Assets

Sales Net Profit Net Profit Margin Gross Mar

100

15
Sales

15%
Return on Assets

40 Total Exp.

Cost Goods Sold

60
Inventory

Net Profit Net Sales

100
Sales

25

Times

37.5%

Net Profit Total Assets

) Asset Turnover
2.5

100
Total Assets

Current Assets

5 + A/R
4 + Other Cur Assets 1

(
Net Profit Total Assets PPT 6-8
=

Net Sales Total Assets

)
x

40
Net Sales Total Assets

10 + Fixed Assets 30

Net Profit Net Sales

Financial Implications of Strategies Used By a Bakery and Jewelry Store

Net Profit Margin

Asset = Return on Assets Turnover

La Madeline Bakery Kalame Jewelry

1% 10%

X X

10 times 1 time

= =

10% 10%

PPT 6-9

Income Statements for Wal-Mart Stores, Inc. and Tiffany & Co. 2002($in millions)

PPT 6-10

Components of Gross Margin

Gross Sales Less Returns Less customer allowances

Net Sales COGS

Gross Margin

PPT 6-11

Profit Margin Models for Wal-Mart Stores, Inc., and Tiffany & Co. ($ in millions)
Net Sales $139,208 $ 1,173

Top number = Wal-Mart Bottom Number = Tiffany

Gross margin $ 30,483 $ 658

Cost of goods sold $108,725 $ 515

Operating expenses $ 22,363 $ 493

Total expenses $ 23,313 $ 502

Net profit before tax $ 7,170 $ 156

Taxes $ 2,740 $ 66

Net profit after taxes $ 4,430 $ 90

+
Interest expenses $ 950 $ 9

Net sales $139,208 $ 1,173

Net profit margin 3.18% 7.68%

PPT 6-12

Gross Margin for Wal-Mart and Tiffany

Gross Margin Net Sales Wal-Mart: $ 48,250 $219,812 $ 944 $1,607 = Gross Margin %

21.95%

Tiffany:

58.75%

Why does Tiffanys have higher margins than WalMart?

Does the higher margins mean the Tiffanys is more profitable?
PPT 6-13

Total Expenditures / Net Sales Ratios for Wal-Mart and Tiffany

Total Expenses Net Sales = Total Expenses/Net sales ratio

Wal-Mart:

$ 37,499 $219,812
$ 653 $1,607

17.06%

Tiffany:

40.65%

Why does Tiffanys have higher expenses than Wal-Mart?

PPT 6-14

Types of Retail Operating Expenses

Selling expenses

Sales staff salaries + Commissions + Benefits

General expenses
Administrative expenses

Rent + Utilities + Miscellaneous expenses

Salaries of all employees other than salespeople + Operations of buying offices + Other administrative expenses

PPT 6-15

Balance Sheets for Wal-Mart Stores, Inc. and Tiffany & Co. 2002 ($ in millions)

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

Asset Turnover Model for Wal-Mart Stores, Inc. and Tiffany & Co. and Subsidiaries ($ in millions)
Accounts receivable $ 1,118 $ 108

Top number = Wal-Mart Bottom Number = Tiffany

+
Merchandise inventory $ 17,076 $ 481 Net sales $139,208 $ 1,173

+
Cash $ 1,878 $ 189

Total current assets $21,123 $ 816

Total assets $ 49,996 $ 1,057

Assets turnover 2.78 1.11

+
Fixed assets $28,864 $ 241

+
Other current assets $ 1,059 $ 37

PPT 6-19

Inventory Analysis
Inventory Total assets
Wal-Mart: Tiffany: $22,614 = 27.10% $83,451 $ 612 $1,630 = 37.53%

Net sales = Inventory turnover Avg. inventory

Wal-Mart: $219,812 = 7.59 $28,974 $1,607 = $1,484 1.08

Tiffany:

PPT 6-20

Inventory Turnover

PPT 6-21

Asset Turnover for Different Fixtures

Net Sales = Total assets

Asset turnover

Antique cabinet:

$50,000 $ 5,000
$40,000 $ 500

10

Plywood cabinet

80

PPT 6-22

Asset Turnover for Wal-Mart and Tiffany

Net Sales = Asset turnover Total assets

Wal-Mart:

$219,812 $ 83,451 $1,607 $1,630

2.63

Tiffany:

0.99

PPT 6-23

The Strategic Profit Model

Net Sales

Cost of goods sold

Gross margin

Margin Management

Variable expenses

Net profit

+
Fixed expenses Inventory

Total expenses Net Sales

Net profit margin

x +
Accounts receivable
Total current assets

Return on assets

Net sales

Total assets

Asset turnover

+
Other current assets

+
Fixed assets

Asset Management

PPT 6-24

Return on Assets
Return on assets = = = Net profit margin X Asset turnover Net profit Net sales X Net sales Total assets

Net profit Total assets = 8.21%

Wal-Mart:

$ 6,854 $83,451 $ 175 $1,630

Tiffany:
PPT 6-25

10.74%

Strategic Profit Models for Selected Retailers (2001)

DISCOUNT STORES
(1) (2) (3) Net Profit Margin Asset Turnover Return on Assets (Net Sales (Net Profit Margin x (Net Profit Net Sales)(%) Total Assets) Asset Turnover)(%)

Costco Companies, Inc. Wal-Mart Target

1.73% 3.03 3.43

3.45 2.64 1.65

5.94% 8.00 5.66

PPT 6-26

Strategic Profit Models for Selected Retailers (2001)

Supermarket Chains
(1) Net Profit Margin (Net Profit Net Sales)(%) (2) Asset Turnover (Net Sales Total Assets) (3) Return on Assets (Net Profit Margin x Asset Turnover)(%)

Safeway
The Kroger Co. Albertsons.

3.66
2.08 1.32

1.92
2.62 2.38

7.18
5.44 3.14

PPT 6-27

Strategic Profit Models for Selected Retailers (2001)

DEPARTMENT STORES
(1) Net Profit Margin (Net Profit Net Sales)(%) May Department Stores Nordstrom JCPenney Kohls 4.92 (2) Asset Turnover (Net Sales Total Assets) 1.19 (3) Return on Assets (Net Profit Margin x Asset Turnover)(%) 5.90%

2.23 0.36 6.62

1.39 1.77 1.52

3.08 0.63 10.06

PPT 6-28

Strategic Profit Models for Selected Retailers (2001)

Category Killers
(1) Net Profit Margin (Net Profit Net Sales)(%) Circuit City Stores, Inc. Best Buy Staples. Home Depot Lowes 1.76 (2) Asset Turnover (Net Sales Total Assets) 2.82 (3) Return on Assets (Net Profit Margin x Asset Turnover)(%) 4.87

2.96 2.43 5.68 4.63

2.66 2.63 3.03 1.61

7.73 6.47 11.53 7.45

PPT 6-29

Strategic Profit Models for Selected Retailers (2001)

Drug Stores
(1) Net Profit Margin (Net Profit Net Sales)(%) (2) Asset Turnover (Net Sales Total Assets) (3) Return on Assets (Net Profit Margin x Asset Turnover)(%)

Walgreen. CVS.

3.60% 1.86

2.79% 2.58

10.03% 4.79

PPT 6-30

Income Statements for Gifts To Go and Giftstogo.com

Gifts To Go Giftstogo.com
(Projected)

Net Sales
Less: Cost of goods sold Gross margin Less: Total expenses

200,000
110,000 90,000 30,000

$ 200,000
110,000 90,000 50,000

Net profit, pretax

Less: Taxes Tax rate Net profit after tax

60,000
27,000 45% 33,000

40,000
18,000 45% 22,000

PPT 6-31

Gross Margin for Gifts To Go and Giftstogo.com

Gross margin %

Gross margin Net sales $ 90,000 $200,000 $ 90,000 $200,000 = 45%

Gifts To Go:

Giftstogo.com:

45%

PPT 6-32

Balance Sheets for Gifts To Go and Giftstogo.com

ASSETS
Gifts To Go Giftstogo.com

Current assets Merchandise inventory Cash Other current assets Total current assets Fixed assets Total assets $ $ 44,000 2,000 3,000 49,000 125,000 174,000 $ $ 22,000 0 2,500 24,500 70,000 94,500

PPT 6-33

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
Total current liabilities Long-term liabilities Total liabilities $

7,000
42,000 10,000 52,000 $

5,000
35,000 12,000 47,000

PPT 6-34

Balance Sheets for Gifts To Go and Giftstogo.com

OWNERS EQUITY
Gifts To Go Giftstogo.com

Owners equity Total liabilities and owners equity

$ $

122,000 174,000

$ $

47,500 94,500

PPT 6-35

Total Expenses/Net Sales Ratio for Gifts To Go and Giftstogo.com

Total expenses/ net sales ratio Gifts To Go:

Total Expenses Net sales $ 30,000 $200,000 $ 50,000 $200,000

15%

Giftstogo.com:

25%

PPT 6-36

Net Profit Margins for Gifts To Go and Giftstogo.com

Net profit margin =

Net profit Net sales

$ 33,000 $200,000 $ 22,000 $200,000 = 16.5%

Gifts To Go:

Giftstogo.com:

11%

PPT 6-37

Inventory Turnover for Gifts To Go and Giftstogo.com

Inventory turnover =

Net sales Average inventory

$ 200,000 $ 80,000 = $ 200,000 $ 40,000 =

Gifts To Go:

2.5

Giftstogo.com:

PPT 6-38

Asset Turnover For Gifts To Go and Giftstogo.com

Asset turnover

Net sales Total assets

$ 200,000 $ 174,000 = $ 200,000 $ 94,500 =

Gifts To Go:

1.15

Giftstogo.com:

2.12

PPT 6-39

Return on Assets for Gifts To Go and Giftstogo.com

Return on assets =

Net profit Total assets $ 33,000 $174,000 $ 22,000 $94,500

Gifts To Go:

19%

Giftstogo.com:

23%

PPT 6-40

Productivity Measures

Returns on Investments

vs.

Absolute Profits
PPT 6-41

Examples of Performance Measures Used by Retailers

Level of Organization
Corporate Net sales (measures of entire corporation) Net profits Square feet of store space
Number of employees Inventory

Output

Input

Productivity (Output/Input)
Return on assets

Asset turnover

Growth in sales, profits

Sales per employee

Advertising expenditures

Sales per square foot

PPT 6-42

Examples of Performance Measures Used by Retailers

Level of Organization
Merchandise management (measures for a merchandise category) Net sales Inventory level

Output

Input

Productivity (Output/Input)
Gross Margin Return on Investment (GMROI) Inventory turnover Advertising as a percentage of sales *

Gross margin Growth in sales

Markdowns Advertising expenses

Cost of merchandise

Markdown as a percentage of sales*

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

PPT 6-43

Examples of Performance Measures Used by Retailers

Level of Output Input Productivity

Organization
Store operations (measures for a store or department within a store) Net sales Square feet of selling areas

(Output/Input)
Net sales per square foot

Gross margin

Expenses for utilities

Net sales per sales associate or per selling hour

Utility expenses as a percentage of sales *

Growth in sales

Number of sales associates

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

PPT 6-44

Illustrative Productivity Measures Used by Retailing Organizations

Level of Organization
Corporate (chief executive officer) Net profit Owners equity

Output

Input

Productivity (Output/Input)
Net profit / owners equity = return on owners equity

Merchandising
(merchandise manager and buyer)

Gross margin

Inventory

Gross margin /
inventory* = GMROI

Store operations Net sales (director of stores, store manager)

Square foot

Net sales / square foot

*Inventory = Average inventory at cost

PPT 6-45

Activity-Based Costing Profitability Statement for Pepperidge Farm and Private-Label Cookies at Safeway
Pepperidge
Private-Label cookies $ 27.00

Retail price per case

$ 31.20

Cost per case

Gross margin Other relevant costs Contribution margin

24.00
7.20 1.50 5.70

18.00
9.00 5.00 4.00

PPT 6-46

A Simplified Cash Flow Diagram

Cash

Inventory

Accounts Receivable

Sales

PPT 6-47