McGraw-Hill © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Core Concepts in Fashion Chapter Ten

10-2 Chapter Ten Profit and loss statements Profit and loss statements –Used to see the big picture in a retail environment –A profit and loss statement is generally good for a specific time period, such as one quarter (3 months) –In any kind of merchandising, the goal for all buyers and designers is to maximize profit

10-3 Chapter Ten Components of a profit and loss statement Components of a profit and loss statement –Sales –Cost of Merchandise (inventory) Sold –Operating Expenses –A Profit or Loss figure

10-4 Chapter Ten Please insert figure 10.2 Please insert figure 10.2

10-5 Chapter Ten Balance sheet Balance sheet –Allows the business to see the assets it owns – Assets can include the inventory, buildings and any thing of value the company may own –The balance sheet also shows the debt of the retailer (what the retailer owes)

10-6 Chapter Ten Please insert figure 10.3 Please insert figure 10.3

10-7 Chapter Ten Gross Sales Gross Sales –The total amount of sales without accounting for actual cost of the good or the overhead involved Customer Returns and Allowances Customer Returns and Allowances –Any rebates given to customers –Any defective merchandise

10-8 Chapter Ten Net Sales Net Sales –The total number of sales for the day, less customer returns and allowances Cost of Inventory Cost of Inventory –Sometimes called Cost of Goods Sold (COGS) –The amount the buyer paid for the merchandise that sold

10-9 Chapter Ten Gross Margin Gross Margin –The difference between sales and cost of inventory –Important because it is an indication of a retailers ability to turn sales into profit Direct Expenses Direct Expenses –Those expenses which can be attributed to the cost of selling –Salaries, Advertising Indirect Expenses Indirect Expenses –Those expenses which are fixed-they don’t change regardless of the number of sales –Rent, power

10-10 Chapter Ten Total Operating Expenses Total Operating Expenses –The cost of inventory sold, direct and indirect expenses added together Markup Markup –The amount above cost which will be charged for an item

10-11 Chapter Ten Why Markdowns occur Why Markdowns occur –Buying errors  Overbuying quantities  Buying of wrong sizes (poor form utility)  Poor timing in orders  Purchasing of wrong sizes, or too many of one size  Stock becomes obsolescent –Pricing errors  Setting the initial price too high  Not being competitive for same type of goods –Selling errors  Careless handling, that results in damaged goods  Failure to display merchandise properly  Un-informed salespeople –Broken assortments  Merchandise has sold, leaving only a few uncoordinated miscellaneous items

10-12 Chapter Ten Markdown money Markdown money – an agreement from a vendor to take back (buy back) or refund money if a particular item does not sell well Sell Through Sell Through –The percentage of merchandise which sells at full price Cash Flow Cash Flow –The amount of money on hand –Effected by the amount a buyer purchases and how much is sold

10-13 Chapter Ten Turnover Turnover –How quickly merchandise in a store sells –Usually calculated on a yearly basis

10-14 Chapter Ten Shrinkage Shrinkage –Goods which are missing when inventory is taken –Two types of shrinkage-customer and employee shrink – Shrinkage due to customers can be minimized in the following ways:  Good customer service  Awareness of what a customer has in the dressing room  Security systems –Shrinkage due to employees can be minimized by:  Offering a generous discount on merchandise  Checking person and bags/purses before leaving for lunch breaks and after a shift  Using skills in chapter eight to motivate employees  Insuring all cash wrap transactions are correct

10-15 Chapter Ten Open-To-buy Open-To-buy –The amount of money a buyer has to make purchases –Determined by sales forecasts and what has already been purchased Six-Month Plan Six-Month Plan –A plan for all purchases which will be made in two seasons

10-16 Chapter Ten Insert figure 10.5 Insert figure 10.5

10-17 Chapter Ten Merchandise classifications Merchandise classifications –A category assigned to all clothing  Can include junior knits, junior denim, petite career

10-18 Chapter Ten The Buying Trip The Buying Trip –Review of Profit and Loss statement –Know pricing and markup –Have knowledge on desired turnover rate –Have an updated open to buy figure –Review Six month merchandising plan –Use merchandise classifications to insure she has right merchandise mix

10-19 Chapter Ten Negotiation Tips for Buying Trips Negotiation Tips for Buying Trips –Build trust  Vendors will be more likely to negotiate with a buyer if they know an ongoing relationship will occur. –Listen  Understand and evaluate the needs of the other party. –Know the settlement range  A settlement range is neither at the lower end or the high end of an acceptable range. It is simply a range that would make the negotiation successful.

10-20 Chapter Ten Negotiation tips for Buying Trips Negotiation tips for Buying Trips –Win-win  Every negotiation should be a win-win situation for both parties. –“You can catch more flies with honey than with vinegar.”  Be kind to the vendor. Most people do not get far by taking a hard position up front. –Understand the power dynamics  Know the position of power each person comes from. If a buyer really wants to obtain a trendy item from a vendor, he might have less negotiation power than with a less popular item.