ch06 financial strategy
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financial strategyTRANSCRIPT
PPT 6-1
5th Edition5th Edition
PPT 6-2
Chapter 6
Financial StrategyFinancial Strategy
PPT 6-3
Retailing Strategy
Retail Market Strategy Chapter 5
Financial Strategy Chapter 6
Retail Locations Chapters 7,8
Human Resource Management
Chapter 9
Information and Distribution Systems Chapter 10
Customer Relationship Management Chapter 11
PPT 6-4
Financial Tradeoff Made by Retailers to Increase ROI
Net Profit Margin
Asset Turnover
PPT 6-5
The Strategic Profit Model: An Overview
Profit Margin x Asset turnover = Return on assets
Net profit x Net sales (crossed out) = Net profitNet sales (crossed out) Total assets Total assets
PPT 6-6
The Strategic Profit Model: Margin Management
Net Profit Margin
Sales
Net Profit
Gross Margin
Total Expenses
Sales
Cost of Goods Sold
15%
15
40
100
60
100 25
-
-
PPT 6-7
The Strategic Profit Model: Asset Management
Asset Turnover
Total Assets
Sales
Current Assets
Fixed Assets
Inventory
Accounts Receivable
2.5
100
10
5
4
40
30
+ +
+
Other Current Assets
1
PPT 6-8
The Strategic Profit Model: Return on Assets
Net Profit Margin
Sales
Net Profit Gross Mar
Total Exp.
Sales
Cost Goods Sold
15%
15 40
100
60100 25
--
Asset Turnover
Total Assets
Sales
Current Assets
Fixed Assets
Inventory
A/R
2.5
100
10
5
440
30
+ +
+
Other Cur Assets
1
Return onAssets
37.5%Times
Net Profit Net Profit Net Sales
Total Assets = Net Sales
x Total Assets
Net Sales
Total Assets( )
Net Profit
Net Sales( )
Net Profit
Total Assets( )
÷
÷
PPT 6-9
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%
PPT 6-10
Income Statements for Wal-Mart Stores, Inc. and Tiffany & Co. 2002($in millions)
PPT 6-11
Components of Gross Margin
Gross Sales
Less ReturnsLess customer allowances Net
Sales
COGS
Gross Margin
PPT 6-12
Profit Margin Models for Wal-Mart Stores, Inc., and Tiffany & Co. ($ in millions)
Net Sales$139,208$ 1,173
Cost of goods sold$108,725$ 515
Operating expenses$ 22,363$ 493
Interest expenses$ 950$ 9
Gross margin$ 30,483$ 658
Total expenses$ 23,313$ 502
Net profit before tax$ 7,170$ 156
Taxes$ 2,740$ 66
Net profit after taxes$ 4,430$ 90
Net sales$139,208$ 1,173
Net profit margin 3.18% 7.68%
-
-
-
+
Top number = Wal-MartBottom Number = Tiffany
PPT 6-13
Gross Margin for Wal-Mart and Tiffany
Gross Margin = Gross Margin %Net Sales
Wal-Mart: $ 48,250 = 21.95%$219,812
Tiffany: $ 944 = 58.75%$1,607
Gross Margin = Gross Margin %Net Sales
Wal-Mart: $ 48,250 = 21.95%$219,812
Tiffany: $ 944 = 58.75%$1,607
Why does Tiffany’s have higher margins than Wal-Mart?
Does the higher margins mean the Tiffany’s is more profitable?
PPT 6-14
Total Expenditures / Net Sales Ratios for Wal-Mart and Tiffany
Total Expenses = Total Expenses/Net sales ratioNet Sales
Wal-Mart: $ 37,499 = 17.06%$219,812
Tiffany: $ 653 = 40.65%$1,607
Total Expenses = Total Expenses/Net sales ratioNet Sales
Wal-Mart: $ 37,499 = 17.06%$219,812
Tiffany: $ 653 = 40.65%$1,607
Why does Tiffany’s have higher expenses than Wal-Mart?
PPT 6-15
Types of Retail Operating Expenses
Selling expenses = Sales staff salaries + Commissions + Benefits
General expenses = Rent + Utilities + Miscellaneous expenses
Administrative expenses = Salaries of all employees other than salespeople + Operations of buying
offices + Other administrative expenses
PPT 6-16
Balance Sheets for Wal-Mart Stores, Inc. and Tiffany & Co. 2002 ($ in millions)
PPT 6-17
Balance Sheets for Wal-Mart Stores, Inc. and Tiffany & Co. 2002 ($ in millions)
PPT 6-18
Balance Sheets for Wal-Mart Stores, Inc. and Tiffany & Co. 2002 ($ in millions)
PPT 6-19
Asset Turnover Model for Wal-Mart Stores, Inc. and Tiffany & Co. and Subsidiaries ($ in millions)
Accounts receivable$ 1,118$ 108
Merchandise inventory$ 17,076$ 481
Cash $ 1,878$ 189
Other current assets$ 1,059$ 37
Total current assets$21,123$ 816
Fixed assets$28,864$ 241
Net sales$139,208$ 1,173
Total assets$ 49,996 $ 1,057
Assets turnover 2.78 1.11
-
+
+
Top number = Wal-MartBottom Number = Tiffany
+
+
PPT 6-20
Inventory Analysis
Inventory Total assets
Wal-Mart: $22,614 = 27.10%$83,451
Tiffany: $ 612 = 37.53%$1,630
Net sales = Inventory turnoverAvg. inventory
Wal-Mart: $219,812 = 7.59$28,974
Tiffany: $1,607 = 1.08 $1,484
PPT 6-21
Inventory Turnover
PPT 6-22
Asset Turnover for Different Fixtures
Net Sales = Asset turnoverTotal assets
Antique cabinet: $50,000 = 10$ 5,000
Plywood cabinet $40,000 = 80$ 500
PPT 6-23
Asset Turnover for Wal-Mart and Tiffany
Net Sales = Asset turnoverTotal assets
Wal-Mart: $219,812 = 2.63$ 83,451
Tiffany: $1,607 = 0.99$1,630
PPT 6-24
The Strategic Profit Model
Net Sales
Cost of goods sold
Variable expenses
Fixed expenses
Gross margin
Total expenses
Net profit
Net Sales
Net profit margin
Asset turnover
Return on assets
-
-
+
Inventory
Accounts receivable
Other current assets
Total current assets
Fixed assets
Net sales
Total assets
+
+ +
x
Margin Management
Asset Management
PPT 6-25
Return on Assets
Return on assets = Net profit margin X Asset turnover
= Net profit X Net sales Net sales Total assets
= Net profit Total assets
Wal-Mart: $ 6,854 = 8.21%$83,451
Tiffany: $ 175 = 10.74%$1,630
PPT 6-26
Strategic Profit Models for Selected Retailers (2001)
DISCOUNT STORES
(1) (2) (3) Net Profit Margin Asset Turnover Return on Assets (Net Profit (Net Sales (Net Profit Margin x
Net Sales)(%) Total Assets) Asset Turnover)(%)
Costco Companies, Inc. 1.73% 3.45 5.94%
Wal-Mart 3.03 2.64 8.00
Target 3.43 1.65 5.66
PPT 6-27
Strategic Profit Models for Selected Retailers (2001)
Supermarket Chains
(1) (2) (3) Net Profit Margin Asset Turnover Return on Assets (Net Profit (Net Sales (Net Profit Margin x
Net Sales)(%) Total Assets) Asset Turnover)(%)
Safeway 3.66 1.92 7.18
The Kroger Co. 2.08 2.62 5.44
Albertson’s. 1.32 2.38 3.14
PPT 6-28
Strategic Profit Models for Selected Retailers (2001)
DEPARTMENT STORES
(1) (2) (3) Net Profit Margin Asset Turnover Return on Assets (Net Profit (Net Sales (Net Profit Margin x
Net Sales)(%) Total Assets) Asset Turnover)(%)
May Department 4.92 1.19 5.90%Stores
Nordstrom 2.23 1.39 3.08
JCPenney 0.36 1.77 0.63
Kohl’s 6.62 1.52 10.06 .
PPT 6-29
Strategic Profit Models for Selected Retailers (2001)
Category Killers (1) (2) (3) Net Profit Margin Asset Turnover Return on Assets (Net Profit (Net Sales (Net Profit Margin x
Net Sales)(%) Total Assets) Asset Turnover)(%)
Circuit City 1.76 2.82 4.87Stores, Inc.
Best Buy 2.96 2.66 7.73
Staples. 2.43 2.63 6.47
Home Depot 5.68 3.03 11.53
Lowe’s 4.63 1.61 7.45
PPT 6-30
Strategic Profit Models for Selected Retailers (2001)
Drug Stores
(1) (2) (3) Net Profit Margin Asset Turnover Return on Assets (Net Profit (Net Sales (Net Profit Margin x
Net Sales)(%) Total Assets) Asset Turnover)(%)
Walgreen. 3.60% 2.79% 10.03%
CVS. 1.86 2.58 4.79
PPT 6-31
Income Statements for Gifts To Go and Giftstogo.com
Gifts To Go Giftstogo.com
(Projected)
Net Sales $ 200,000 $ 200,000
Less: Cost of goods sold 110,000 110,000
Gross margin 90,000 90,000
Less: Total expenses 30,000 50,000
Net profit, pretax 60,000 40,000
Less: Taxes 27,000 18,000
Tax rate 45% 45%
Net profit after tax 33,000 22,000
PPT 6-32
Gross Margin for Gifts To Go and Giftstogo.com
Gross margin % = Gross margin
Net sales
Gifts To Go: $ 90,000 = 45%
$200,000
Giftstogo.com: $ 90,000 = 45%
$200,000
PPT 6-33
Balance Sheets for Gifts To Go and Giftstogo.com
ASSETS Gifts To Go Giftstogo.com
Current assets
Merchandise inventory $ 44,000 $ 22,000
Cash 2,000 0
Other current assets 3,000 2,500
Total current assets 49,000 24,500
Fixed assets 125,000 70,000
Total assets $ 174,000 $ 94,500
PPT 6-34
Balance Sheets for Gifts To Go and Giftstogo.com
LIABILITIES Gifts To Go Giftstogo.com
Current liabilities
Accounts payable $ 35,000 $ 30,000
Notes payable 7,000 5,000
Total current liabilities 42,000 35,000
Long-term liabilities 10,000 12,000
Total liabilities $ 52,000 $ 47,000
PPT 6-35
Balance Sheets for Gifts To Go and Giftstogo.com
OWNERS’ EQUITY Gifts To Go Giftstogo.com
Owners’ equity $ 122,000 $ 47,500
Total liabilities and $ 174,000 $ 94,500
owners’ equity
PPT 6-36
Total Expenses/Net Sales Ratio for Gifts To Go and Giftstogo.com
Total expenses/ = Total Expenses
net sales ratio Net sales
Gifts To Go: $ 30,000
$200,000 = 15%
Giftstogo.com: $ 50,000
$200,000 = 25%
PPT 6-37
Net Profit Margins for Gifts To Go and Giftstogo.com
Net profit margin = Net profit
Net sales
Gifts To Go: $ 33,000 = 16.5%
$200,000
Giftstogo.com: $ 22,000 = 11%
$200,000
PPT 6-38
Inventory Turnover for Gifts To Go and Giftstogo.com
Inventory turnover = Net sales
Average inventory
Gifts To Go: $ 200,000
$ 80,000 = 2.5
Giftstogo.com: $ 200,000
$ 40,000 = 5
PPT 6-39
Asset Turnover For Gifts To Go and Giftstogo.com
Asset turnover = Net sales
Total assets
Gifts To Go: $ 200,000
$ 174,000 = 1.15
Giftstogo.com: $ 200,000
$ 94,500 = 2.12
PPT 6-40
Return on Assets for Gifts To Go and Giftstogo.com
Return on assets = Net profit
Total assets
Gifts To Go: $ 33,000
$174,000 = 19%
Giftstogo.com: $ 22,000
$94,500 = 23%
PPT 6-41
Productivity Measures
Returns on Investments
vs.
Absolute Profits
PPT 6-42
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 spaceentire corporation)
Net profits Number of Asset turnoveremployees
Growth in sales, Inventory Sales per employeeprofits
Advertising Sales per squareexpenditures foot
PPT 6-43
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)
merchandisecategory) Gross margin Markdowns Inventory turnover
Growth in sales Advertising Advertising as aexpenses percentage of
sales *
Cost of Markdown as amerchandise percentage of
sales** These productivity measures are commonly expressed as an
input/output.
PPT 6-44
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 footstore or department Gross margin Expenses for Net sales perwithin a store) utilities sales associate
or per selling hour
Growth in sales Number of sales Utility expenses asassociates a percentage of
sales *
* These productivity measures are commonly expressed as an input/output.
PPT 6-45
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 GMROIbuyer)
Store operations Net sales Square foot Net sales /(director of stores, square footstore manager)
*Inventory = Average inventory at cost
PPT 6-46
Activity-Based Costing Profitability Statement for Pepperidge Farm and
Private-Label Cookies at Safeway
Pepperidge Private-Label cookies
Retail price per case $ 31.20 $ 27.00
Cost per case 24.00 18.00
Gross margin 7.20 9.00
Other “relevant” costs 1.50 5.00
Contribution margin 5.70 4.00
PPT 6-47
A Simplified Cash Flow Diagram
Cash Inventory
Accounts Receivable Sales