1. Key Issues 3 ways to increase the value of money Asset turnover model
Financial objectives and the strategic profit model
ROI model
Gross margin return on investment
Monitoring retail performance
Direct product profitability

2. Value of An Investment How much will your own portfolio be worth if …
You start investing 10 years after graduation, & invest $2000 per 10%, every year ‘til you retire?
You start now, & invest $2000 per 10%, but only for 10 years, then stop?

3. A Simplified Cash Flow Diagram
Inventory
Accounts Receivable
Sales

4. Increasing the Value of Money
You have $ You’ve found a no-risk investment for which you will get a certain 20 percent ROI in 4 months. Your parents have offered to lend you $10,000 more, for 1 year. By how much can you grow your $1000 in a one-year period? And what’s your ROI?
Margin
Leveraging Our Investment
Adding Stock Turnover (“turns”)

5. Increasing the Value of Money
Strategic Element
ROI (/ Investment)
Result
Margin (no leverage or turnover)
Investment = $1000 ( = profit)
Leverage (no turnover)
Turnover (no leverage)
Margin, Leverage, Turnover
Strategic Profit Model
ROI = Margin x Leverage x Turnover = 20% x 11.0 x 3.64 = 800%

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

7. Retail Profit Accelerators: How Can Retailers Increase Profits?
Increase Volume
Increase Price
Decrease COGS
Decrease Expenses
Base
Period
Increase
Unit Volume 5%
Increase
Prices 5%
Sales $1,000,000 $1,050,000 $1,050,000
COGS , , ,000
Gross margin , , ,000
Expenses , , ,000
Profit , , ,000
Profit increase $ , ,000
Profit increase % % %
Decrease
COGS 5%
Decrease
Expenses 5%
Sales $1,000,000 $1,000,000
COGS , ,000
Gross margin , ,000
Expenses , ,000
Profit , ,000
Profit increase $ , ,000
Profit increase % % %

8. Developing Financial Objectives
The Objectives Themselves
The Plan to Meet the Objectives
Profits?
How should they be measured?

9. Who is Most Successful? Store Total Sales Growth % Comp Store Growth %
Gross
Margin %
Inventory
Turnover
Sales per
Sq Ft $
JCPenney
Dayton’s
Toys R Us
Home Depot
Circuit City
The Limited
Wal-Mart
Kmart
Costco -1 9 11 35 18 17 8 26 -2 2 11 1 3 10 4 14 33 26 30 28 29 21 25 9
3.4
4.6
3.1
5.6
4.7
6.0
4.5
3.0
11.8
137
198 na
348
1,083
302
279
670
1994 Data

10. 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

11. Examples of Performance Measures Used by Retailers
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

12. Income Statements: Wal-Mart vs Tiffany (2000, in millions)
Wal-Mart Tiffany
Net sales $ 139, $ 1,173
Less: Cost of goods sold $ 108, $
Gross margin $ 30, $
Less: Operating expense $ 22, $
Less: Interest expense $ $
Total expense $ 23, $
Net profit, pretax $ 7, $
Less: Taxes* $ 2, $
Tax rate % %
Net profit after tax $ 4, $
* Effective tax rates often differ among corporations due to different tax breaks and advantages.
Which has the higher net margin?
Source: Levy & Weitz

13. Profit Margin Model: Wal-Mart vs Tiffany (2000, in millions)
Net Sales
$139,208
$1,173
Gross
margin
$30,493
$658 -
Top Number = Wal-Mart
Bottom Number = Tiffany
Cost of goods sold
$108,725
$515
Net profit
before tax
$7,170
$156 -
Net profit
after taxes
$4,430
$90
Operating
expenses
$22,363
$493 -
Net profit margin
3.18%
7.68%
Total expenses
$23,313
$502
Taxes
$2,740
$66  +
Net sales
$139,208
$1,173
Interest expenses
$950 $9

14. Return on Assets Model
Net Profit X Asset = Return on Margin Turnover Assets
Provo Bakery % X 9 times = %
Zales Jewelry % X 1 time = %

15. ROA: Turnover vs Margin
High Turnover
Unattainable
Low
Margin
High
Margin
Failure
Low Turnover

16. Asset Turnover Model: Wal-Mart vs Tiffany (2000, in millions)
What does this represent?
Accounts receivable
$1,118
$108
Top Number = Wal-Mart
Bottom Number = Tiffany +
Merchandise inventory
$17,076
$481
From income statement
Net sales
$139,208
$1,173
Total current assets
$21,123
$816
Asset turnover
2.78
1.11 + 
Cash
$1,878
$189
The sales $ generated by each $ of assets
Total assets
$49,996
$1,057 +
From balance sheet +
Fixed assets
$28,864
$241
Other current assets
$1,059
$37

17. Financial Objectives: The Strategic Profit Model
Return on
Investment
Return on
Assets
Leverage
Ratio = x
Net Profit
Net Worth
Net Profit
Total Assets
Total Assets
Net Worth
Return on
Assets
Net Profit
Margin
Asset
Turnover x
Net Sales
Total Assets
The $ sales generated by each $ of assets
The net profit generated by each $ of sales =
Net Profit
Total Assets
and so ...

18. The Strategic Profit Model: The Financial Objective & Financial Program
Rate of Return on Assets
Return on
Investment
Asset
Turnover =
Net Profit
Margin
Leverage
Ratio x x
Net Profit
Net Worth
Net Profit
Net Sales
Net Sales
Total Assets
Total Assets
Net Worth
The Financial
Objective
The Financial Program
(The SPM)
Implications for Profitability?

19. The Cougar Boutique What is the ROI? Balance Sheet Assets
Current
Cash & other $ 50,000
Inventory 500,000
Accounts receivable 200,000
Total 750,000
Fixed 250,000
Total Assets $1,000,000
Liabilities
Current
Accounts payable $ 300,000
Notes payable 25,000
Other 25,000
Total 350,000
Long term 125,000
Total liabilities 475,000
Net worth 525,000
Total liab. & NW $1,000,000
Dollars Percent
Net sales $2,500,
Less: cost of sales 2,000,000 80
Gross margin 500,000 20
Less: expenses
Variable $250,000
Fixed 200,000
Total 450,000 18
Net profit $50,000 2
Income Statement
What is the ROI?

20. The Cougar Boutique: ROI
Simple Way:
Diagnostic Way, Using the SPM:

21. ROI Model, Including The Strategic Profit Model
Which is … the income statement? Balance sheet? SPM?
Net Sales
Net Sales
Cost of
goods sold
Variable
expenses
Fixed
Gross
margin
Total
Net profit
Asset
turnover
Return on
assets
Inventory
Accounts
receivable
Other current
Total current
Net sales
Income Statement
Balance Sheet
Strategic Profit Model
Financial
Leverage
Net Worth
Gross
margin -
Cost of
goods sold -
Net profit
Variable
expenses
Net profit
margin +
Total
expenses
Net Sales
Fixed
expenses
Return on
assets x
Inventory
Return on
Net Worth x =
Net sales +
Asset
turnover
Financial
Leverage
Accounts
receivable
Total current
assets
Total
assets + +
Other current
assets
Fixed
assets

22. Effect of Changes in the SPM on ROI
Return on
Investment
Asset
Turnover =
Net Profit
Margin
Leverage
Ratio x x
Basic Example:
9.5% = % x x
Leverage Increased:
15% = % x x
Profit Margin Increased:
23.75% = % x x
ROA Reduced:
3.8% = % x x

23. SPM Examples Return on = Investment x x Big Lots: 24.6% 13.1 1.5 1.2
Asset
Turnover =
Net Profit
Margin %
Leverage
Ratio x x
Big Lots: 24.6%
Albertson’s: 18.9%
The Dress Barn: 32.4%
Land’s End: 40.2%
The Limited: 32.3%
The Gap: 25.5%
1998 data

24. Breakeven Analysis Example (women’s top coats):
Shows number of units which must be produced & sold at a given price to cover all costs.
Formulation: BE = Fixed Cost .
Unit Contribution
Example (women’s top coats):
Avg. variable cost: $100
Tot. fixed cost: $200,000
Selling price: $166.67
Unit contribution: $66.67
BE =

25. Controlling (Monitoring) Performance
Customer
Feedback
Store
Level
Market Share
Analysis
Operating
Ratios
Sales Variance
(Actual vs Planned)
Department
Level
Sales-to-Expense
Ratios
Analysis of Alloca-
tion of Costs
Direct Product
Profitability

26. E.g., Computing DPP Dollars per Case Retail $ l8.70 Less: Cost 14.96
Gross margin
Plus: Discounts and allowances
Payment discount
Merchandising allowance
Backhaul allowance
Less: Direct handling costs
Warehouse direct labor
Warehouse inventory expense
Warehouse operating expense
Transportation to stores
Retail direct labor
Retail inventory expense
Retail operating expense
Direct product profit $ 0.95

27. Using DPP to Calculate Return on Shelf Space
Item A Item B
Gross margin per case $9.33 $8.02
Less direct costs per case
Plus discounts and allowances per case
DPP per case
Multiplied by cases per week
DPP per week
Divided by square feet of shelf facing
DPP per week per square foot of shelf space

28. Direct Product Profitability
The per-unit profit of products: unit price less all direct unit costs
High DPP
per unit
Low Unit
Volume
High Unit
Volume
Low DPP