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Retailing Management 8e The McGraw-Hill Companies, All rights reserved.

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Financial Strategy
CHAPTER 06
McGraw-Hill/I rwin
Copyright 2012 by The McGraw-Hill Companies, I nc. All rights reserved.
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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

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Components of the
Strategic Profit Model
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The Strategic Profit Model:
An Overview
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


Net Profit Margin: reflects the profits generated from each dollar of sales
Asset Turnover: assesses the productivity of a firms investment in its assets
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Fiscal Annual Income Statement for
Family Dollar and Nordstrom
** ($ millions)
**
**
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Profit Management Path for Family
Dollar Stores and Nordstrom
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Profit Margin Management Path
Net Sales = Gross Sales + Promotional
Allowances - Return
Cost of Good Sold (COGs)
Gross Margin (GM) = Net Sales - COGs
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Profit Margin Management Path
Operating Expense
Variable (e.g.. sales commissions)
Fixed (rent, depreciation, staff salaries)
Selling, general, and administrative (SG&A) expenses
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Profit Margin Management Path
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
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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 %
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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 %
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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 %
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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
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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
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Asset Information from Family Dollar Stores
and Nordstroms Balance Sheets
* ($ millions)
* *
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Asset Management Path for Family
Dollar and Nordstrom
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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)
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Strategic Profit Model Ratios for
Selected Retailers
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Income Statement Information for Gifts To Go Stores
and Proposed Gifts-To-www.Go.com Internet
Channel
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Balance Sheet Information for Gifts To Go Stores and
Proposed Gifts-To-www.Go.com Internet Channel
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Analysis of Financial Strength
Cash-Flow Analysis
Retailers need cash to meet their obligations i.e.,
salary, rent, vendors, etc.
Cash flow is calculated by making adjustments to net
profit involving adding or subtracting differences in
revenue and expenses that occur from one period to
the next.
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Analysis of Financial Strength
Debt-Equity Ratio
The retailers short- and long-term debt divided by the
value of the owners or stockholders equity.

Current Ratio
The is short-term assets divided by short-term
liabilities, it evaluates the retailers ability to pay its
short-term debt obligations.
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Analysis of Financial Strength
Quick Ratio
acid-test ratio
More stringent test because it removes inventory
from the short-term assets.
If a retailer needs cash to pay its short-term liabilities,
it cannot rely on inventory to provide an immediate
source for cash.
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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
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Setting Objectives
in Large Retail Organizations
Top-Down Planning
Corporate Developmental Strategy
Category, Departments
and sales associates
implement strategy
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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
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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 retailers
investment decisions

Productivity measure determines how effectively
retailers use their resource what return (e.g., profits)
they get on their investments (e.g., expenses)
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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
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Examples of Performance
Measures Used by Retailers
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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