1. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 1 CHAPTER 2CHAPTER 1 CHAPTER 6 Financial Strategy CHAPTER 6

2. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 2 CHAPTER 2CHAPTER 1 CHAPTER 6 Retailing Strategy Retail Market StrategyFinancial StrategyRetail LocationsRetail Site LocationHuman Resource ManagementInformation Systems and Supply Chain ManagementCustomer Relationship Management

3. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 3 CHAPTER 2CHAPTER 1 CHAPTER 6 Questions How is a retail strategy reflected in retailers’ financial objectives? How do retailers need to evaluate their performance? What is the strategic profit model, and how is it used? What measures do retailers use to assess their performance?

4. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 4 CHAPTER 2CHAPTER 1 CHAPTER 6 Objectives and Goals Financial – not necessarily profits, but return on investment (ROI) – primary focus Societal – helping to improve the world around us Personal – self-gratification, status, respect

5. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 5 CHAPTER 2CHAPTER 1 CHAPTER 6 Components of the Strategic Profit Model

6. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 6 CHAPTER 2CHAPTER 1 CHAPTER 6 The Strategic Profit Model: An Overview Profit Margin xAsset turnover = Return on assets Net profitxNet 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

7. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 7 CHAPTER 2CHAPTER 1 CHAPTER 6 Profit Margin Management Path Net Sales = Gross Sales + Promotional Allowances - Return Cost of Good Sold (COGs) Gross Margin (GM) = Net Sales - COGs

8. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 8 CHAPTER 2CHAPTER 1 CHAPTER 6 Profit Margin Management Path Operating Expense Variable (e.g.. sales commissions) Fixed (rent, depreciation, staff salaries) Selling, general, and administrative (SG&A) expenses 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

9. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 9 CHAPTER 2CHAPTER 1 CHAPTER 6 Profit Margin Management Path 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 %

10. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 10 CHAPTER 2CHAPTER 1 CHAPTER 6 Profit Margin Management Path 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 %

11. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 11 CHAPTER 2CHAPTER 1 CHAPTER 6 Profit Margin Management Path Net operating profit percentage is gross margin minus operating expenses divided by net sales Gross margin - Operating expenses Net sales = Net operating profit %

12. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 12 CHAPTER 2CHAPTER 1 CHAPTER 6 Asset Management Path 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

13. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 13 CHAPTER 2CHAPTER 1 CHAPTER 6 Asset Management Path 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

14. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 14 CHAPTER 2CHAPTER 1 CHAPTER 6 Inventory Turnover 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)

15. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 15 CHAPTER 2CHAPTER 1 CHAPTER 6 Analysis of Financial Strength Cash-Flow Analysis Debt-Equity Ratio Current Ratio Quick Ratio

16. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 16 CHAPTER 2CHAPTER 1 CHAPTER 6 Setting and Measuring Performance Objectives 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

17. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 17 CHAPTER 2CHAPTER 1 CHAPTER 6 Setting Objectives in Large Retail Organizations Top-Down Planning Corporate Developmental Strategy Category, Departments and sales associates implement strategy

18. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 18 CHAPTER 2CHAPTER 1 CHAPTER 6 Setting Objectives in Large Retail Organizations Bottom-Up Planning Buyers and Store managers estimate what they can achieve Corporate Operation managers must be involved in objective setting process

19. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 19 CHAPTER 2CHAPTER 1 CHAPTER 6 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 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)

20. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 20 CHAPTER 2CHAPTER 1 CHAPTER 6 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 Financial Performance of Retailers

21. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 21 CHAPTER 2CHAPTER 1 CHAPTER 6 Examples of Performance Measures Used by Retailers

22. Retailing Management 8e© The McGraw-Hill Companies, All rights reserved. 6 - 22 CHAPTER 2CHAPTER 1 CHAPTER 6 Assessing Performance 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