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Chapter 6

Chapter 6. Financial Strategy. Retailing Strategy. Human Resource Management Chapter 9. Retail Locations Chapters 7,8. Retail Market Strategy Chapter 5 Financial Strategy Chapter 6. Information and Distribution Systems Chapter 10. Customer Relationship Management Chapter 11.

iris-jensen
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Chapter 6

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  1. Chapter 6 Financial Strategy

  2. Retailing Strategy Human Resource Management Chapter 9 Retail Locations Chapters 7,8 Retail Market Strategy Chapter 5 Financial Strategy Chapter 6 Information and Distribution Systems Chapter 10 Customer Relationship Management Chapter 11

  3. Retailer Objectives Financial – not necessarily profits, but return on investment (ROI) – primary focus Societal – helping to improve the world around us Personal – self-gratification, status, respect

  4. Financial Tradeoff Made by Retailers to Increase ROI Net Profit Margin Asset Turnover

  5. 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 The Strategic Profit Model: An Overview

  6. Components of the Strategic Profit Model

  7. Sales 100 Gross Margin - 40 Cost of Goods Sold Net Profit 60 15 Net Profit Margin - 15% Total Expenses Sales 100 25 The Strategic Profit Model: Profit Management

  8. Inventory 5 Sales + 100 Asset Turnover Current Assets Accounts Receivable 10 2.5 4 Total Assets + + 40 Other Current Assets Fixed Assets 30 1 The Strategic Profit Model: Asset Management

  9. Sales 100 Gross Mar Net Profit 40 - 15 Net Profit Margin Cost Goods Sold - 15% 60 Total Exp. Sales 100 25 ) ( Net Profit Net Sales Return on Assets Times Inventory 37.5% 5 Sales ) ( 100 + Net Profit Total Assets Asset Turnover Current Assets A/R 10 2.5 4 Total Assets ++ 40 ) ( Net Sales Total Assets Fixed Assets Other Cur Assets 30 1 Net Profit Net Profit Net Sales Total Assets = Net Sales x Total Assets The Strategic Profit Model: Return on Assets

  10. Financial Implications of Strategies Used By a Bakery and Jewelry Store Net Profit X Asset = Return on Assets Margin Turnover La Madeline Bakery 1% X 10 times = 10% Kalame Jewelry 10% X 1 time = 10%

  11. Income Statements for Federated Department Stores and Costco

  12. Profit Management Path for Federated and Costco

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

  14. Gross Margin for Federated and Costco Gross Margin = Gross Margin % Net Sales Federated: $ 6,333 = 40.5% $15,630 Costco: $ 6,014 = 12.5% $48,107 Why does Federated have higher margins than Costco? Does the higher margins mean the Federated’s is more profitable?

  15. Operating Expenses Operating Expenses = Operating Expenses % Net sales Federated: $4,933 = 31.6% $15,630 Costco: $4,629 = 9.6% $48,107

  16. Selling expenses=Sales staff salaries + Commissions +Benefits General expenses = Rent + Utilities + Miscellaneous expenses Administrative expenses = Salaries of all employees other than salespeople + Operations of buying offices + Other administrative expenses Types of Retail Operating Expenses

  17. Net Profit Net Profit = Net Profit % Net sales Federated: $689 = 4.4% $15,630 Costco: $882 = 1.8% $48,107

  18. Asset Information from Federated’s and Costco’s Balance Sheet

  19. Asset Management Path for Federated and Costco

  20. Inventory Turnover Cost of Goods = Inventory Turnover Average inventory Federated: $9,297 = 3.0 $3,120 Costco: $42,093 = 11.6 $ 3,644

  21. Inventory Turnover

  22. Asset Turnover Net Sales = Asset Turnover Total Assets Federated: $15,630 = 1.1 $14,885 Costco: $48,107 = 3.2 $15,093

  23. Return on Assets Net Profit Margin x Asset Turnover = Return on Assets Federated: 4.41 x 1.05 = 4.63% Costco: 1.83 x 3.29 = 5.84%

  24. Strategic Profit Model Ratios for Selected Retailers

  25. Income Statement for Gifts to Go

  26. Gross Margin Percent Gross Margin = Gross Margin Percent Net Sales Stores: $350,000 = 50% $700,000 GiftstoGo.com $220,000 = 50% $440,000

  27. Operating Expense Percent Operating Expenses = Operating Expenses % Net Sales Stores: $250,000 = 35.7% $700,000 GiftstoGo.com: $150,000 34.1% $440,000

  28. Net Profit Percentage Net Profit = Net Profit Percentage Net Sales Stores: $ 59,800 = 8.5% $700,000 GiftstoGo.com: $ 45,500 = 10.3% $440,000

  29. Balance Sheet Information for Gifts to Go and Proposed Internet Channel

  30. Inventory Turnover Cost of Goods = Inventory Turnover Average Inventory Stores: $350,000 = 2.0 $175,000 GiftstoGo.com: $220,000 = 3.1 $ 70,000

  31. Asset Turnover Net Sales = Asset Turnover Total Assets Stores: $700,000 = 1.84 $380,000 GiftstoGo.com: $440,000 = 2.09 $211,000

  32. Return on Assets Net Profit Margin x Asset Turnover = Return on Assets Stores: 8.54 x 1.84 = 15.7% Giststgo.com 10.3 x 2.09 = 21.3%

  33. Net Sales - Gross margin Cost of goods sold - Net profit Variable expenses Net profit margin + Total expenses Net Sales Fixed expenses Return on assets x Inventory Net sales + Asset turnover Total current assets Accounts receivable + Total assets + Other current assets Fixed assets The Strategic Profit Model Profit Management Asset Management

  34. 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 they get on their investments

  35. 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

  36. Setting Objectives in Large Retail Organizations Top Down Planning Corporate Developmental Strategy Category, Departments and sales associates implement strategy

  37. Setting Objectives in Large Retail Organizations Corporate Bottom Up Planning Buyers and Store managers estimate what they can achieve Operation managers must be involved in objective setting process

  38. Outputs - Performance Sales Profits Cash flow Growth in sales, profits – Same store sales growth Financial Performance of Retailers Inputs Used by Retailers • Inventory ($) • Real Estate (sq. ft.) • Employees (#) • Overhead (Corporate Staff and Expenses) • Advertising • Energy Costs • MIS expenses

  39. Productivity - Outputs/Input • Corporate Level • ROA = Profits/Assets (ROE = Profit/Equity) • Overhead/Sales • Buyers (Inventory, Pricing, Advertising) • Gross Margin % = Gross Margin/Sales • Inv Turnover = COGS/ Avg. Inventory (cost) • GMROI – Gross Margin/Average Inventory • Advertising/sales • Stores (Real Estate, Employees) • Sales/Square Feet inv. Shrinkage/sales • Sales/Employee

  40. Performance Objectives and Measures Used by Retailers

  41. 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 Examples of Performance Measures Used by Retailers

  42. Examples of Performance Measures Used by Retailers Level of Output Input Productivity Organization (Output/Input) Merchandise Net sales Inventory level Gross Margin management Return on (measures for a Investment (GMROI) merchandise category) Gross margin Markdowns Inventory turnover Growth in sales Advertising Advertising as a expenses percentage of sales * Cost of Markdown as a merchandise percentage of sales* * These productivity measures are commonly expressed as an input/output.

  43. Examples of Performance Measures Used by Retailers Level of Output Input Productivity Organization (Output/Input) Store operations Net sales Square feet of Net sales per (measures for a selling areas square foot store or department Gross margin Expenses for Net sales per within a store) utilities sales associate or per selling hour Growth in sales Number of sales Utility expenses as associates a percentage of sales * * These productivity measures are commonly expressed as an input/output.

  44. Illustrative Productivity Measures Used by Retailing Organizations 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

  45. Benchmarks Performance of retailer over time – retailer can compare its recent performance to its performance in the preceding months, quarters or years. Performance of a retailer compared to its competitors

  46. Sources of Information • Balance Sheet (Snap Shot at One Time) • Asset Management • Income Statement (Summary Over Time) • Margin Management • Annual Reports/ SEC Filings • http://www.sec.gov/edgar/searchedgar/companysearch.html

  47. Federated’s and Costco’s Financial Performance Over Three Years

  48. Financial Performance of Federated and Other National Department Store Chains

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