Financial Strategy

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

Financial Tradeoff Made by Retailers to Increase ROI

Net Profit Margin

Asset Turnover

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

Components of the Strategic Profit Model

The Strategic Profit Model: Profit Management

Sales

Gross Margin

100 -

40
Net Profit Net Profit Margin

Cost of Goods Sold

15

Total Expenses

60

15%

Sales

100

25

The Strategic Profit Model: Asset Management

Inventory

5
Sales
Asset Turnover

100

+
Current Assets Accounts Receivable

2.5

Total Assets

10 +
Fixed Assets

4
+
Other Current Assets

40

30

The Strategic Profit Model: Return on Assets

Sales Net Profit Net Profit Margin Gross Mar

100 Cost Goods Sold

15
Sales

40 Total Exp.

15%
Return on Assets

60

Net Profit Net Sales

100

25
Inventory

Times Sales Asset Turnover

37.5%

5
Current Assets A/R

Net Profit Total Assets

100
Total Assets

2.5

10
Fixed Assets

4
Other Cur Assets

(
Net Profit Total Assets
=

Net Sales Total Assets

)
Net Sales
x

40

Net Profit Net Sales

30

Total Assets

Components of Gross Margin

Gross Sales Less Returns Less customer allowances Net Sales COGS

Gross Margin

Types of Retail Operating Expenses

Selling expenses Benefits General expenses Administrative expenses

= Sales staff salaries + Commissions +

Rent + Utilities + Miscellaneous expenses Salaries of all employees other than salespeople + Other administrative expenses

The Strategic Profit Model

Net Sales

Cost of goods sold

Gross margin

Profit Management

Variable expenses

Net profit Net profit margin

+
Fixed expenses

Total expenses

Net Sales

x
Inventory

Return on assets

+
Accounts receivable
Total current assets

Net sales Asset turnover

+
Other current assets

+
Fixed assets

Total assets

Asset Management

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 retailers investment decisions Productivity measure determines how effectively retailers use their resource what return they get on their investments

Setting and Measuring Performance Objectives

Retailers will be better able to gauge performance if it has specific objectives in mind to compare performance. These Should include: numerical index of performance desired time frame for performance necessary resources to achieve objectives

Setting Objectives in Large Retail Organizations

Top Down Planning Corporate Developmental Strategy

Category, Departments and sales associates implement strategy

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

Financial Performance of Retailers

Outputs - Performance Inputs Used by Retailers Sales Inventory ($) Profits Real Estate (sq. ft.) Cash flow Employees (#) Growth in sales, profits Overhead (Corporate Staff Same store sales growth and Expenses) Advertising Energy Costs MIS expenses

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

Examples of Performance Measures Used by Retailers

Level of Organization
Corporate Net sales (measures of entire corporation)

Output

Input

Productivity (Output/Input)

Square feet of Return on assets store space

Net profits Number of Asset turnover employees Growth in sales, profits Inventory Sales per employee

Advertising expenditures

Sales per square foot

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)

Gross margin
Growth in sales

Markdowns
Advertising expenses

Inventory turnover
Advertising as a percentage of sales *

Cost of merchandise

Markdown as a percentage of sales*

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

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

Growth in sales

Number of sales Utility expenses as associates a percentage of sales *

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

Illustrative Productivity Measures Used by Retailing Organizations

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

Output

Input

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

Merchandising (merchandise manager and buyer)

Store operations (director of stores, store manager)

Gross margin

Inventory *

Gross margin / inventory* = GMROI

Net sales

Square foot

Net sales / square foot

*Inventory = Average inventory at cost

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