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Getting Started as a Retail Analyst

Getting Started as a Retail Analyst. Using SEC Filings, Chain Store Age, and Internet Sites. Growth in Sales for Chain Retailers. Increasing the number of stores Adding a new store format Increased sales promotion Changing the merchandise mix. Exam Data III.

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Getting Started as a Retail Analyst

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  1. Getting Started as a Retail Analyst Using SEC Filings, Chain Store Age, and Internet Sites

  2. Growth in Sales for Chain Retailers • Increasing the number of stores • Adding a new store format • Increased sales promotion • Changing the merchandise mix

  3. Exam Data III • Select three publicly traded retailers, which compete within an overlapping merchandise line. • Prepare an exhibit (table) tracking their performance on 5 components of the Strategic Profit Model and • Gross Margin (or gross profit if shown), turnover, and GMROI. • Optional: Accounts payable and selling space (GMROS) • Select a consecutive span of years including the most recent (2005) and 2002.

  4. EDGAR • “Search the EDGAR Database” • “Companies and other filers”

  5. Gross Margin • Sales revenue minus cost of goods sold • Selling price*quantity - cost*quantity • Percent gross margin=gross margin/revenue

  6. Turnover • “True” measures of turnover

  7. GMROI • “Gross margin return on inventory”

  8. Days Payable • Indication of how long a firms taking (on average) to pay bills, or comparison of how it’s using suppliers to finance inventory.

  9. Gross margin • Three components: • Reflects the service outputs provided by an institution to its buyers • Risk • Perishability • Pre-sold, bespoke • Brand strength • Competition • Different from initial markup, closer to maintained markup

  10. Factors Affecting Gross Margin • Competition: Higher the competition—the lower gross margins, more intensely distributed brands have low margins. • Differentiated merchandise • Risk of the merchandise: Higher risk, higher markups… (and greater markdowns)

  11. In-store allocation of resources among lines • Ratio analysis: • GMROI = gross margin/inventory • GMROS = gross margin/selling space • GMROL = gross margin/employee unit • These decisions are set with regard to the design of the format, and modifications to the format must address these criteria

  12. Inventory Performance • Assets turnover = Net sales / total assets • Inventory turnover = Units sold / units in inventory Cost of goods sold / average inventory Sales / inventory @ retail • Return on assets = Net profit / total assets Net profit margin x assets turnover

  13. Gross Margin=10.7% (47,145M-42,092M) 47,145 Profit Margin 1.8% COSTCO 2004 Turnover=11.5 (42,092M) 3,644M Return on Assets =5.616% Asset Turnover=3.12 47,145/15,092 Return on Net Worth = 11.11% Financial Leverage 15,092/7,625

  14. Gross Margin=33.0% (10,282M-6,887M) 10,282M KOHLS 04 Profit Margin 5.7% Turnover=4.28 (6,887M) 1,607M Return on Assets =8.75% Asset Turnover=1.54 10,282/6,698 Return on Net Worth = 13.98% Financial Leverage=1.60 6,698/4,191

  15. KOHL’S CORP '99 Profit margin 5.66% 258,142 4,557,112 Return on assets 8.86% 258,142 2,914,662 Asset turnover Return on 1.56X net worth 4,557,112 15.32% 2,914,662 258,142 1,685,503 Leverage 1.73X 2,914,662 1,685,503

  16. Leverage: Total Assets/Net Worth • Ratio illustrating the use of debt by the retailer. • Provides a measure of market assessment of the risk of the operation, the higher the proportion of apparel in inventory, the lower ratio of financial leverage. • ROA x Leverage = Return on Net Worth

  17. Hastings 2005 Profit margin 1.07% 5,809 542,016 Return on assets 2.28% 5,809 254,116 Asset turnover 2.13X Return on net worth 542,016 6.45% 254,116 5,809 89,774 Leverage 2.83x 254,116 89,774

  18. KOHL’S CORP '99 Profit margin 5.66% 258,142 4,557,112 Return on assets 8.86% 258,142 2,914,662 Asset turnover Return on 1.56X net worth 4,557,112 15.32% 2,914,662 258,142 1,685,503 Leverage 1.73X 2,914,662 1,685,503

  19. Routes to higher financial performance:Increasing the Profit Margin • Increasing the Gross Margin • Smarter purchasing: fewer discounts and reductions • Differentiating the merchandise reduces price competition • Vendor discounts/concessions • Reducing Expenses • "Flexible" employee scheduling • Incorporating a commission portion into compensation • Reducing store hours during slack periods • Shifting functions to suppliers

  20. Routes to higher financial performance:Increasing the Asset Turnover • Increasing Sales: • "High velocity retailing," lower margins • Reducing Investments in Assets • Lower investments in inventory, supplier retains title to some goods. • Lease rather than own, such as build the store, sell it, and lease it back from owners. • Minimize investments in practices not core to operations, such as distribution. • Distribute retained earnings ("cash") to owners in form of dividends. • In short, reduce investment in assets that come at the expense of investments in inventory.

  21. Routes to higher financial performance: Increasing Financial Leverage • Expand assets through the use of debt rather than equity instruments for inventory: • Increase accounts payable • Increase use of notes payable • Use debt financing for investment in real estate. • Utilize debt financing to the point where increased interest expenses hurt return on net worth.

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