Chapter 6
Financial Strategy
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Retailer Objectives
Financial – not necessarily profits, but return
on assets (ROA) – primary focus
Societal – helping to improve the world
around us
Personal – self-gratification, status, respect
6-2
Financial Tradeoff Made to Increase ROA
Net Profit Margin
Asset Turnover
(Net Profit Margin) X (Asset Turnover) = Return on assets (ROA)
6-3
The Strategic Profit Model:
An Overview
Net Profit Margin X Asset Turnover = Return on assets (ROA)
Net profit x Net sales = Net profit
Net sales Total assets Total assets
6-4
Strategic Profit Model: Components
6-5
The Strategic Profit Model: Profit Management
Sales
Gross 100
Margin
-
40 Cost of
Net Profit Goods Sold
Net Profit 15 60
Margin -
15% Total
Sales Expenses
100 25
6-6
The Strategic Profit Model: Asset Management
Inventory
5
Sales
+
Asset 100 Current Accounts
Turnover Assets Receivable
2.5 10 4
Total Assets
40 + +
Other Current
Fixed Assets Assets
30 1
6-7
The Strategic Profit Model: Return on Assets
Sales
Gross Mar 100
Net Profit
15 40 -
Net Profit Margin Cost Goods Sold
÷ -
15% Sales Total Exp. 60
( Net Profit
Net Sales ) 100 25
Return on
Assets Times
Inventory
37.5% Sales 5
( Net Profit
Total Assets ) Asset Turnover 100 Current Assets
+
A/R
2.5 ÷ 10 4
Total Assets
( Net Sales
Total Assets ) 40 +
Fixed Assets
+
Other Cur Assets
Net Profit Net Profit Net Sales 30 1
= x 6-8
Total Assets Net Sales Total Assets
Profit Management Path
for Federated and Costco
6-9
Components of Gross Margin
Gross Sales
Less Returns
Less customer
Gross Margin
allowances
Net
Sales COGS
6-10
Graphic Presentation of the Income Statement
LO 2
Gross Returns &
Sales Allowances
Cost of
Net Sales Goods Sold
Operating
Gross Expenses
Margin
Operating
(Net) Profit
11
Types of Retail Operating Expenses
Selling expenses = Sales staff salaries + Commissions +
Benefits
General expenses = Rent + Utilities + Miscellaneous
expenses
Administrative expenses = Salaries of all employees + Operations
of buying offices + Other administrative
expenses
6-12
Asset Management Path
for Federated and Costco
6-13
Asset Information from
Federated’s and Costco’s Balance Sheet
6-14
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%
6-15
The Strategic Profit Model
Net Sales
- Gross
Profit Management
margin
Cost of
goods sold
- Net profit
Variable
expenses Net profit
+ Total margin
expenses Net Sales
Fixed
expenses
Return on
x
assets
Inventory
+ Net sales
Asset
Accounts
receivable
Total current
assets turnover
+ + Total assets
Other current Fixed assets
assets Asset Management
6-16
Strategic Profit Model Ratios
for Selected Retailers
6-17
Balance Sheet Information for Gifts to Go
and Proposed Internet Channel
6-18
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
6-19
Financial Performance of Retailers
Outputs - Performance Inputs Used by Retailers
■ Sales ■ Inventory ($)
■ Profits ■ Real Estate (sq. ft.)
■ Cash flow ■ Employees (#)
■ Growth in sales, profits – ■ Overhead (Corporate Staff
Same store sales growth and Expenses)
■ Advertising
■ Energy Costs
■ MIS expenses
6-20
Performance Objectives and Measures
Used by Retailers
6-21
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)
Advertising/sales
■ Stores (Real Estate, Employees)
Sales/Square Feet
Sales/Employee
inv. Shrinkage/sales
6-22
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
6-23
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.
6-24
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.
6-25
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
6-26
Federated’s and Costco’s Financial
Performance Over Three Years
6-27
Financial Performance of Federated and
Other National Department Store Chains
6-28
Exercise
■ Read retailing view 6.2 (P.145)
■ Read retailing view 6.3 (P.149) to know how
Cosco cut the cost.
6-29
