Financial Strategy

Retailers develop their strategy and build sustainable competitive advantage to generate continuing stream of profits. Financial analysis is used by retailers to access the retailers market strategy .Financial analysis is used to :Monitor the retailers performance Access the reasons its performance is above or below expectations Provide insights into appropriate actions that can be taken if performance falls short of those expectations .

Objectives and Goals Three types of objectives a retailer might have :Financial objectives Return on investment ( ROI ) Return on assets ( ROA) Societal Objectives are related to broader issues about providing benefits to the society . For example: providing employment opportunities for people , offering people unique merchandise . Personal Objectives Many retailers , particularly owners of small , independent business , have important personal objectives , including self gratification , status and respect.

Financial Tradeoff Made by Retailers to Increase ROI

Net Profit Margin

Asset Turnover

The Strategic Profit Model: An Overview

The Strategic Profit Model: Margin Management

The Strategic Profit Model: Asset Management

The Strategic Profit Model: Return on Assets

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%

Income Statements for Wal-Mart Stores, Inc. and Tiffany & Co. 2002($in millions)

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Components of Gross Margin

Gross SalesLess ReturnsLess customer allowancesNet Sales

COGSGross Margin

Profit Margin Models for Wal-Mart Stores, Inc., and Tiffany & Co. ($ in millions)

Gross Margin for Wal-Mart and TiffanyGross Margin = Gross Margin %Net Sales

Wal-Mart:$ 48,250= 21.95%$219,812

Tiffany:$ 944= 58.75%$1,607Why does Tiffanys have higher margins than Wal-Mart?Does the higher margins mean the Tiffanys is more profitable?

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%$1,607Why does Tiffanys have higher expenses than Wal-Mart?

Types of Retail Operating Expenses

Balance Sheets for Wal-Mart Stores, Inc. and Tiffany & Co. 2002 ($ in millions)

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Balance Sheets for Wal-Mart Stores, Inc. and Tiffany & Co. 2002 ($ in millions)

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Balance Sheets for Wal-Mart Stores, Inc. and Tiffany & Co. 2002 ($ in millions)

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Asset Turnover Model for Wal-Mart Stores, Inc. and Tiffany & Co. and Subsidiaries ($ in millions)

Inventory Analysis

Inventory Turnover

Asset Turnover for Different Fixtures

Net Sales = Asset turnoverTotal assetsAntique cabinet:$50,000=10$ 5,000

Plywood cabinet$40,000=80$ 500

Asset Turnover for Wal-Mart and Tiffany

Net Sales= Asset turnoverTotal assetsWal-Mart:$219,812=2.63$ 83,451

Tiffany:$1,607=0.99$1,630

The Strategic Profit Model

Return on Assets

Return on assets = Net profit margin X Asset turnover

= Net profit X Net sales Net sales Total assets

= Net profit Total assetsWal-Mart:$ 6,854=8.21%$83,451

Tiffany:$ 175=10.74%$1,630

Strategic Profit Models for Selected Retailers (2001)

DISCOUNT STORES

(1) (2) (3) Net Profit MarginAsset 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

( (

Strategic Profit Models for Selected Retailers (2001)

Supermarket Chains

(1) (2)(3) Net Profit Margin Asset TurnoverReturn 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

Albertsons. 1.32 2.38 3.14

( (

Strategic Profit Models for Selected Retailers (2001)

DEPARTMENT STORES

(1) (2)(3) Net Profit Margin Asset TurnoverReturn 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 3.08JCPenney 0.36 1.77 0.63

Kohls 6.62 1.52 10.06 .

( (

Strategic Profit Models for Selected Retailers (2001)

Category Killers (1) (2)(3) Net Profit Margin Asset TurnoverReturn 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

Lowes 4.63 1.61 7.45

( (

Strategic Profit Models for Selected Retailers (2001)

Drug Stores

(1) (2)(3) Net Profit Margin Asset TurnoverReturn 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

( (

Income Statements for Gifts To Go and Giftstogo.com

Gross Margin for Gifts To Go and Giftstogo.com

Balance Sheets for Gifts To Go and Giftstogo.com

Balance Sheets for Gifts To Go and Giftstogo.com

Balance Sheets for Gifts To Go and Giftstogo.com

Total Expenses/Net Sales Ratio for Gifts To Go and Giftstogo.com

Net Profit Margins for Gifts To Go and Giftstogo.com

Inventory Turnover for Gifts To Go and Giftstogo.com

Asset Turnover For Gifts To Go and Giftstogo.com

Return on Assets for Gifts To Go and Giftstogo.com

Productivity MeasuresReturns on Investments

vs.

Absolute Profits

Examples of Performance Measures Used by Retailers

Examples of Performance Measures Used by RetailersLevel ofOutputInputProductivityOrganization(Output/Input)

MerchandiseNet salesInventory levelGross Margin managementReturn on(measures for aInvestment (GMROI)merchandisecategory)Gross marginMarkdownsInventory turnoverGrowth in salesAdvertisingAdvertising as aexpensespercentage ofsales *

Cost of Markdown as amerchandisepercentage ofsales** These productivity measures are commonly expressed as an input/output.

Examples of Performance Measures Used by RetailersLevel ofOutputInputProductivityOrganization(Output/Input)

Store operationsNet salesSquare feet ofNet sales per(measures for aselling areassquare footstore or departmentGross marginExpenses forNet sales perwithin a store)utilitiessales associateor per selling hour

Growth in salesNumber of salesUtility expenses asassociatesa percentage ofsales *

* These productivity measures are commonly expressed as an input/output.

Illustrative Productivity Measures Used by Retailing OrganizationsLevel ofOutputInputProductivityOrganization(Output/Input)

CorporateNet profitOwners equityNet profit /(chief executiveowners equity =officer) return on ownersequity

MerchandisingGross marginInventory*Gross margin /(merchandiseinventory* = manager andGMROIbuyer)

Store operationsNet salesSquare footNet sales /(director of stores,square footstore manager)

*Inventory = Average inventory at cost

Activity-Based Costing Profitability Statement for Pepperidge Farm and Private-Label Cookies at Safeway

A Simplified Cash Flow Diagram