financial strategy in retail

7/31/2019 Financial Strategy in Retail

1/22

Financial Strategy


2/22

Retailer Objectives

Financial not necessarily profits, but returnon investment (ROI) primary focus

Societal helping to improve the worldaround us

Personal self-gratification, status, respect


3/22

Financial Tradeoff Made by Retailers to

Increase ROI

Asset Turnover

Net Profit Margin


4/22

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


5/22

Components of the Strategic Profit Model


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The Strategic Profit Model:Profit Management

Net ProfitMargin

Sales

Net Profit

GrossMargin

Total

Expenses

Sales

Cost ofGoods Sold

15%

15

40

100

60

100 25

-

-


7/22

The Strategic Profit Model:Asset Management

AssetTurnover

Total Assets

Sales

CurrentAssets

Fixed Assets

Inventory

AccountsReceivable

2.5

100

10

5

4

40

30

+ +

+

Other CurrentAssets

1


8/22

The Strategic Profit Model:

Return on Assets

Net Profit Margin

Sales

Net ProfitGross Mar

Total Exp.

Sales

Cost Goods Sold

15%

1540

100

60

100 25

-

-

Asset Turnover

Total Assets

Sales

Current Assets

Fixed Assets

Inventory

A/R

2.5

100

10

5

4

40

30

+ +

+

Other Cur Assets

1

Return on

Assets

37.5%

Times

Net Profit Net Profit Net Sales

Total Assets= Net Sales

xTotal Assets

Net Sales

Total Assets( )

Net Profit

Net Sales( )

Net Profit

Total Assets( )


9/22

Net

Sales

Gross MarginGross Margin

Gross SalesLess Returns

Less customer

allowances

COGS

Components of Gross Margin


10/22

Types of RetailOperating Expenses

Selling expenses = Sales staff salaries + Commissions +

Benefits

General expenses = Rent + Utilities + Miscellaneous

expenses

Administrative expenses = Salaries of all employees other than

salespeople + Other administrative expenses


11/22

Profit Management

Asset Management

The Strategic Profit Model

Net Sales

Cost of goods

sold

Variable

expenses

Fixed expenses

Gross margin

Total expenses

Net profit

Net Sales

Net profitmargin

Asset turnover

Return on

assets

-

-

+

Inventory

Accounts

receivable

Other current

assets

Total current

assets

Fixed assets

Net sales

Total assets

+

+ +

x


12/22

Productivity Measures

Input Measures assess the amount of resources or money used by the retailer to

achieve outputs such as sales

Output measuresasses the results of a retailers investment decisions

Productivity measure determines how effectively retailers use their resource

what return they get on their investments


13/22

Setting and Measuring Performance Objectives

Retailers will be better able to gauge performance if it has specific objectives in mind to

compare performance. These Should include:

numerical index of performance desired

time frame for performance

necessary resources to achieve objectives


14/22

Setting Objectives in Large Retail Organizations

Top Down PlanningCorporate Developmental Strategy

Category, Departments and sales

associates implement strategy


15/22

Setting Objectives in Large Retail Organizations

Bottom Up PlanningBuyers and Store managers

estimate what they can

achieve

Corporate

Operation managers must be

involved in objective setting

process


16/22

Financial Performance of Retailers

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


17/22

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


18/22

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 space

entire corporation)Net profits Number of Asset turnover

employees

Growth in sales, Inventory Sales per employee

profits

Advertising Sales per square

expenditures foot

l f f


19/22





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.

E l f P f


20/22





Store operations Net sales Square feet of Net sales per

(measures for a selling areas square foot

store ordepartment 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.

Ill t ti P d ti it M


21/22

Illustrative Productivity Measures

Used by Retailing Organizations

Level of Output Input ProductivityOrganization (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


22/22

Benchmarks

Performance of retailer over time retailer cancompare its recent performance to its performance inthe preceding months, quarters or years.

Performance of a retailer compared to its competitors

financial strategy in retail

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