1. Financial Strategy CHAPTER 06 6 - CHAPTER 6 CHAPTER 1 CHAPTER 1
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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Retailing Management 8e © The McGraw-Hill Companies, All rights reserved.

2. Retailing Strategy
CHAPTER 6
CHAPTER 1
CHAPTER 1
CHAPTER 2
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3. Objectives and Goals
CHAPTER 6
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CHAPTER 2
CHAPTER 1
Financial – not necessarily profits, but return on investment (ROI) – primary focus
Societal – helping to improve the world around us
Personal – self-gratification, status, respect
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4. Components of the Strategic Profit Model
CHAPTER 6
CHAPTER 1
CHAPTER 1
CHAPTER 2
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5. The Strategic Profit Model: An Overview
CHAPTER 6
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CHAPTER 2
Profit Margin x Asset turnover = Return on assets
Net profit x Net sales (crossed out) = Net profit
Net sales (crossed out) Total assets Total assets
Net Profit Margin: reflects the profits generated from each dollar of sales
Asset Turnover: assesses the productivity of a firm’s investment in its assets
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6. Fiscal Annual Income Statement for Family Dollar and Nordstrom
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** ($ millions) **
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7. Profit Management Path for Family Dollar Stores and Nordstrom
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CHAPTER 2
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8. Profit Margin Management Path
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Net Sales = Gross Sales + Promotional Allowances - Return
Cost of Good Sold (COGs)
Gross Margin (GM) = Net Sales - COGs
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9. Profit Margin Management Path
CHAPTER 6
CHAPTER 1
CHAPTER 2
CHAPTER 1
Operating Expense
Variable (e.g.. sales commissions)
Fixed (rent, depreciation, staff salaries)
Selling, general, and administrative (SG&A) expenses
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10. Profit Margin Management Path
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CHAPTER 2
CHAPTER 1
Operating profit margin
Operating profit margin = Gross margin - Operating expenses - Extraordinary (recurring) operating expenses
Net profit margin = Operating profit margin - Taxes - Interest - Extraordinary nonrecurring expenses
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11. Profit Margin Management Path
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Gross margin percentage is gross margin divided by net sales.
Retailers use to compare
the performance of various types of merchandise
their own performance with that of other retailers with higher or lower levels of sales.
Gross margin
Net sales
= Gross margin %
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12. Profit Margin Management Path
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SG & A or operating expenses can be expressed as a percentage of net sales to facilitate comparisons across items, stores, and merchandise categories within and between firms.
Operating expenses
Net sales
= Operating expenses %
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13. Profit Margin Management Path
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Net operating profit percentage is gross margin minus operating expenses divided by net sales
Gross margin - Operating expenses
Net sales
= Net operating profit %
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14. Asset Management Path Assets:
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Assets:
Economic Resources (e.g., inventory, buildings, computers, store fixtures) owned or controlled by a firm
Current Asset and Fixed Asset
Current Assets = Cash + Account Receivable + Inventory + Other current assets
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15. Average inventory at cost
Asset Management Path
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CHAPTER 6
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Accounts receivable are primarily the monies owed to the retailer by customers that have bought merchandise on credit.
Fixed Assets = Fixture, Stores (owned)
Asset Turnover = Sales/Total Assets
Inventory Turnover = COGS/Avg. Inventory (cost)
Net sales
Total assets
= Asset turnover
Cost of goods sold
Average inventory at cost
= Inventory turnover
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16. Asset Information from Family Dollar Stores’ and Nordstrom’s Balance Sheets
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* ($ millions) *
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17. Asset Management Path for Family Dollar and Nordstrom
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18. Inventory Turnover A Measure of the Productivity of Inventory:
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A Measure of the Productivity of Inventory:
It is used to evaluate how effectively retailers utilize their investment in inventory
Shows how many times, on average, inventory cycles through the store during a specific period of time (usually a year)
Inventory Turnover = COGS/avg inventory (cost)
Inventory Turnover = Sales/ avg inventory (retail)
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19. Strategic Profit Model Ratios for Selected Retailers
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CHAPTER 2
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20. Income Statement Information for Gifts To Go Stores and Proposed Gifts-To- Internet Channel
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CHAPTER 2
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21. Balance Sheet Information for Gifts To Go Stores and Proposed Gifts-To-www.Go.com Internet Channel
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22. Analysis of Financial Strength
CHAPTER 6
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CHAPTER 2
CHAPTER 1
Cash-Flow Analysis
Retailers need cash to meet their obligations — i.e., salary, rent, vendors, etc.
Cash flow is calculated by making adjustments to net profit involving adding or subtracting differences in revenue and expenses that occur from one period to the next.
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23. Analysis of Financial Strength
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CHAPTER 2
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Debt-Equity Ratio
The retailer’s short- and long-term debt divided by the value of the owners’ or stockholders’ equity.
Current Ratio
The is short-term assets divided by short-term liabilities, it evaluates the retailer’s ability to pay its short-term debt obligations.
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24. Analysis of Financial Strength
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Quick Ratio
“acid-test ratio”
More stringent test because it removes inventory from the short-term assets.
If a retailer needs cash to pay its short-term liabilities, it cannot rely on inventory to provide an immediate source for cash.
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25. Setting and Measuring Performance Objectives
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Retailers will be better able to gauge performance if it has specific objectives in mind to compare performance.
Should include:
numerical index of performance desired
time frame for performance
necessary resources to achieve objectives
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26. Setting Objectives in Large Retail Organizations
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Top-Down Planning
Corporate Developmental Strategy
Category, Departments and sales associates implement strategy
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27. Setting Objectives in Large Retail Organizations
CHAPTER 1
CHAPTER 6
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CHAPTER 2
Corporate
Bottom-Up Planning
Buyers and Store managers estimate what they can achieve
Operation managers must be involved in objective setting process
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28. Productivity Measures
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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 retailer’s investment decisions
Productivity measure – determines how effectively retailers use their resource – what return (e.g., profits) they get on their investments (e.g., expenses)
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29. Financial Performance of Retailers
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Outputs – Performance
Sales
Profits
Cash flow
Growth in sales, profits
Same store sales growth
Inputs Used by Retailers
Inventory ($)
Real Estate (sq. ft.)
Employees (#)
Overhead (Corporate Staff and Expenses)
Advertising
Energy Costs
MIS expenses
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30. Examples of Performance Measures Used by Retailers
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31. Assessing Performance
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Growth in Stockholder Value – Stock Price
Accounting Measures – ROA (Risk adjusted)
Benchmark
Performance Over Time
Compare performance indicator for three years
Performance Compared to Competitors
Compare performance indicators with major competitors for one year, most recent
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