Financial Strategy
McGraw-Hill/Irwin PPT 6-1 Levy/Weitz: Retailing Management, 5/e
Copyright 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Financial Tradeoff Made by Retailers to Increase ROI
Net Profit Margin
Asset Turnover
PPT 6-2
The Strategic Profit Model: An Overview
Profit Margin x
Asset turnover
= Return on assets
Net profit x Net sales (crossed out)
Net sales (crossed out) = Net profit Total assets Total assets
PPT 6-3
The Strategic Profit Model: Margin Management
Sales Gross Margin
100
Cost of Goods Sold
40
Net Profit Net Profit Margin
15
Sales
Total Expenses
60
15%
100
25
PPT 6-4
The Strategic Profit Model: Asset Management
Inventory
5
Sales
Asset Turnover
100
Total Assets
Current Assets
Accounts Receivable
2.5
10 +
Fixed Assets
4
Other Current Assets
40
30
PPT 6-5
The Strategic Profit Model: Return on Assets
Sales Net Profit Net Profit Margin Gross Mar
100
15
Sales
15%
Return on Assets
40 Total Exp.
Cost Goods Sold
60
Inventory
Net Profit Net Sales
100
Sales
25
Times
37.5%
Net Profit Total Assets
) Asset Turnover
2.5
100
Total Assets
Current Assets
5 + A/R
4 + Other Cur Assets 1
(
Net Profit Total Assets PPT 6-6
=
Net Sales Total Assets
)
x
40
Net Sales Total Assets
10 + Fixed Assets 30
Net Profit Net Sales
Financial Implications of Strategies Used By a Bakery and Jewelry Store
Net Profit Margin
Asset = Return on Assets Turnover
La Madeline Bakery Kalame Jewelry
1% 10%
X X
10 times 1 time
= =
10% 10%
PPT 6-7
Income Statements for Wal-Mart Stores, Inc. and Tiffany & Co. 2002($in millions)
PPT 6-8
Components of Gross Margin
Gross Sales Less Returns Less customer allowances
Net Sales COGS
Gross Margin
PPT 6-9
Profit Margin Models for Wal-Mart Stores, Inc., and Tiffany & Co. ($ in millions)
Net Sales $139,208 $ 1,173
Top number = Wal-Mart Bottom Number = Tiffany
Gross margin $ 30,483 $ 658
Cost of goods sold $108,725 $ 515
Operating expenses $ 22,363 $ 493
Total expenses $ 23,313 $ 502
Net profit before tax $ 7,170 $ 156
Taxes $ 2,740 $ 66
Net profit after taxes $ 4,430 $ 90
+
Interest expenses $ 950 $ 9
Net sales $139,208 $ 1,173
Net profit margin 3.18% 7.68%
PPT 6-10
Gross Margin for Wal-Mart and Tiffany
Gross Margin Net Sales Wal-Mart: $ 48,250 $219,812 $ 944 $1,607 = Gross Margin %
21.95%
Tiffany:
58.75%
Why does Tiffanys have higher margins than WalMart?
Does the higher margins mean the Tiffanys is more profitable?
PPT 6-11
Total Expenditures / Net Sales Ratios for Wal-Mart and Tiffany
Total Expenses Net Sales = Total Expenses/Net sales ratio
Wal-Mart:
$ 37,499 $219,812
$ 653 $1,607
17.06%
Tiffany:
40.65%
Why does Tiffanys have higher expenses than Wal-Mart?
PPT 6-12
Types of Retail Operating Expenses
Selling expenses
Sales staff salaries + Commissions + Benefits
General expenses
Administrative expenses
Rent + Utilities + Miscellaneous expenses
Salaries of all employees other than salespeople + Operations of buying offices + Other administrative expenses
PPT 6-13
Balance Sheets for Wal-Mart Stores, Inc. and Tiffany & Co. 2002 ($ in millions)
PPT 6-14
Balance Sheets for Wal-Mart Stores, Inc. and Tiffany & Co. 2002 ($ in millions)
PPT 6-15
Balance Sheets for Wal-Mart Stores, Inc. and Tiffany & Co. 2002 ($ in millions)
PPT 6-16
Asset Turnover Model for Wal-Mart Stores, Inc. and Tiffany & Co. and Subsidiaries ($ in millions)
Accounts receivable $ 1,118 $ 108
Top number = Wal-Mart Bottom Number = Tiffany
+
Merchandise inventory $ 17,076 $ 481 Net sales $139,208 $ 1,173
+
Cash $ 1,878 $ 189
Total current assets $21,123 $ 816
Total assets $ 49,996 $ 1,057
Assets turnover 2.78 1.11
+
Fixed assets $28,864 $ 241
+
Other current assets $ 1,059 $ 37
PPT 6-17
Inventory Analysis
Inventory Total assets
Wal-Mart: Tiffany: $22,614 = 27.10% $83,451 $ 612 $1,630 = 37.53%
Net sales = Inventory turnover Avg. inventory
Wal-Mart: $219,812 = 7.59 $28,974 $1,607 = $1,484 1.08
Tiffany:
PPT 6-18
Inventory Turnover
PPT 6-19
Asset Turnover for Different Fixtures
Net Sales = Total assets
Asset turnover
Antique cabinet:
$50,000 $ 5,000
$40,000 $ 500
10
Plywood cabinet
80
PPT 6-20
Asset Turnover for Wal-Mart and Tiffany
Net Sales = Asset turnover Total assets
Wal-Mart:
$219,812 $ 83,451 $1,607 $1,630
2.63
Tiffany:
0.99
PPT 6-21
The Strategic Profit Model
Net Sales
Cost of goods sold
Gross margin
Margin Management
Variable expenses
Net profit
+
Fixed expenses Inventory
Total expenses Net Sales
Net profit margin
x +
Accounts receivable
Total current assets
Return on assets
Net sales
Total assets
Asset turnover
+
Other current assets
+
Fixed assets
Asset Management
PPT 6-22
Return on Assets
Return on assets = = = Net profit margin X Asset turnover Net profit Net sales X Net sales Total assets
Net profit Total assets = 8.21%
Wal-Mart:
$ 6,854 $83,451 $ 175 $1,630
Tiffany:
PPT 6-23
10.74%
Strategic Profit Models for Selected Retailers (2001)
DISCOUNT STORES
(1) (2) (3) Net Profit Margin Asset Turnover Return on Assets (Net Sales (Net Profit Margin x (Net Profit Net Sales)(%) Total Assets) Asset Turnover)(%)
Costco Companies, Inc. Wal-Mart Target
1.73% 3.03 3.43
3.45 2.64 1.65
5.94% 8.00 5.66
PPT 6-24
Strategic Profit Models for Selected Retailers (2001)
Supermarket Chains
(1) Net Profit Margin (Net Profit Net Sales)(%) (2) Asset Turnover (Net Sales Total Assets) (3) Return on Assets (Net Profit Margin x Asset Turnover)(%)
Safeway
The Kroger Co. Albertsons.
3.66
2.08 1.32
1.92
2.62 2.38
7.18
5.44 3.14
PPT 6-25
Strategic Profit Models for Selected Retailers (2001)
DEPARTMENT STORES
(1) Net Profit Margin (Net Profit Net Sales)(%) May Department Stores Nordstrom JCPenney Kohls 4.92 (2) Asset Turnover (Net Sales Total Assets) 1.19 (3) Return on Assets (Net Profit Margin x Asset Turnover)(%) 5.90%
2.23 0.36 6.62
1.39 1.77 1.52
3.08 0.63 10.06
PPT 6-26
Strategic Profit Models for Selected Retailers (2001)
Category Killers
(1) Net Profit Margin (Net Profit Net Sales)(%) Circuit City Stores, Inc. Best Buy Staples. Home Depot Lowes 1.76 (2) Asset Turnover (Net Sales Total Assets) 2.82 (3) Return on Assets (Net Profit Margin x Asset Turnover)(%) 4.87
2.96 2.43 5.68 4.63
2.66 2.63 3.03 1.61
7.73 6.47 11.53 7.45
PPT 6-27
Strategic Profit Models for Selected Retailers (2001)
Drug Stores
(1) Net Profit Margin (Net Profit Net Sales)(%) (2) Asset Turnover (Net Sales Total Assets) (3) Return on Assets (Net Profit Margin x Asset Turnover)(%)
Walgreen. CVS.
3.60% 1.86
2.79% 2.58
10.03% 4.79
PPT 6-28
Income Statements for Gifts To Go and [Link]
Gifts To Go [Link]
(Projected)
Net Sales
Less: Cost of goods sold Gross margin Less: Total expenses
200,000
110,000 90,000 30,000
$ 200,000
110,000 90,000 50,000
Net profit, pretax
Less: Taxes Tax rate Net profit after tax
60,000
27,000 45% 33,000
40,000
18,000 45% 22,000
PPT 6-29
Gross Margin for Gifts To Go and [Link]
Gross margin %
Gross margin Net sales $ 90,000 $200,000 $ 90,000 $200,000 = 45%
Gifts To Go:
[Link]:
45%
PPT 6-30
Balance Sheets for Gifts To Go and [Link]
ASSETS
Gifts To Go [Link]
Current assets Merchandise inventory Cash Other current assets Total current assets Fixed assets Total assets $ $ 44,000 2,000 3,000 49,000 125,000 174,000 $ $ 22,000 0 2,500 24,500 70,000 94,500
PPT 6-31
Balance Sheets for Gifts To Go and [Link]
LIABILITIES
Gifts To Go [Link]
Current liabilities Accounts payable $ 35,000 $ 30,000
Notes payable
Total current liabilities Long-term liabilities Total liabilities $
7,000
42,000 10,000 52,000 $
5,000
35,000 12,000 47,000
PPT 6-32
Balance Sheets for Gifts To Go and [Link]
OWNERS EQUITY
Gifts To Go [Link]
Owners equity Total liabilities and owners equity
$ $
122,000 174,000
$ $
47,500 94,500
PPT 6-33
Total Expenses/Net Sales Ratio for Gifts To Go and [Link]
Total expenses/ net sales ratio Gifts To Go:
Total Expenses Net sales $ 30,000 $200,000 $ 50,000 $200,000
15%
[Link]:
25%
PPT 6-34
Net Profit Margins for Gifts To Go and [Link]
Net profit margin =
Net profit Net sales
$ 33,000 $200,000 $ 22,000 $200,000 = 16.5%
Gifts To Go:
[Link]:
11%
PPT 6-35
Inventory Turnover for Gifts To Go and [Link]
Inventory turnover =
Net sales Average inventory
$ 200,000 $ 80,000 = $ 200,000 $ 40,000 =
Gifts To Go:
2.5
[Link]:
PPT 6-36
Asset Turnover For Gifts To Go and [Link]
Asset turnover
Net sales Total assets
$ 200,000 $ 174,000 = $ 200,000 $ 94,500 =
Gifts To Go:
1.15
[Link]:
2.12
PPT 6-37
Return on Assets for Gifts To Go and [Link]
Return on assets =
Net profit Total assets $ 33,000 $174,000 $ 22,000 $94,500
Gifts To Go:
19%
[Link]:
23%
PPT 6-38
Productivity Measures
Returns on Investments
vs.
Absolute Profits
PPT 6-39
Examples of Performance Measures Used by Retailers
Level of Organization
Corporate Net sales (measures of entire corporation) Net profits Square feet of store space
Number of employees Inventory
Output
Input
Productivity (Output/Input)
Return on assets
Asset turnover
Growth in sales, profits
Sales per employee
Advertising expenditures
Sales per square foot
PPT 6-40
Examples of Performance Measures Used by Retailers
Level of Organization
Merchandise management (measures for a merchandise category) Net sales Inventory level
Output
Input
Productivity (Output/Input)
Gross Margin Return on Investment (GMROI) Inventory turnover Advertising as a percentage of sales *
Gross margin Growth in sales
Markdowns Advertising expenses
Cost of merchandise
Markdown as a percentage of sales*
* These productivity measures are commonly expressed as an input/output.
PPT 6-41
Examples of Performance Measures Used by Retailers
Level of Output Input Productivity
Organization
Store operations (measures for a store or department within a store) Net sales Square feet of selling areas
(Output/Input)
Net sales per square foot
Gross margin
Expenses for utilities
Net sales per sales associate or per selling hour
Utility expenses as a percentage of sales *
Growth in sales
Number of sales associates
* These productivity measures are commonly expressed as an input/output.
PPT 6-42
Illustrative Productivity Measures Used by Retailing Organizations
Level of Organization
Corporate (chief executive officer) Net profit Owners equity
Output
Input
Productivity (Output/Input)
Net profit / owners equity = return on owners equity
Merchandising
(merchandise manager and buyer)
Gross margin
Inventory
Gross margin /
inventory* = GMROI
Store operations Net sales (director of stores, store manager)
Square foot
Net sales / square foot
*Inventory = Average inventory at cost
PPT 6-43
Activity-Based Costing Profitability Statement for Pepperidge Farm and Private-Label Cookies at Safeway
Pepperidge
Private-Label cookies $ 27.00
Retail price per case
$ 31.20
Cost per case
Gross margin Other relevant costs Contribution margin
24.00
7.20 1.50 5.70
18.00
9.00 5.00 4.00
PPT 6-44
A Simplified Cash Flow Diagram
Cash
Inventory
Accounts Receivable
Sales
PPT 6-45
