The Body Shop International PLC 2001 : An Introduction to Financial Modelling

Executive Summary
Around 1990s, The Body Shop International PLC is one of the fastest growing manufacturers of skin and hair care retailers in the world. Found by Anita Roddick that stepped down as CEO in 1998 and being replaced by Patrick Gournay that came with new strategy: focused product and increased investment in stores, increase the efficiencies of supply chain by reducing product and inventory costs; and to support the stakeholder. According to the new strategy adopted by Gournay and combining with projection forecast income statement and balance sheet resulted on the conclusion that the company needs additional financing. Projections forecast income statement and balance sheet done by using the assumption that the sales increase of 13% per year and additional assumptions that taken from the historical data on average. By taking this strategy, it is expected that the company can go as planned that the improvements can be done especially in positions of brand image of the product, the efficiency of its operational cost, also for the financial decision of The Body Shop International PLC.

Case Overview
By the end of 1990s, The Body Shop International PLC revenue is run aground. Although the firm revenue has increase by 20 percent in the early to middle 1990s, by late 1990s the revenue growth slowed to around 8 percent due to new competitor. Entering the year 2000, The Body Shop International PLC experience obstacles which results on the decision to forecast the financial prospect of the company. Forecasting is done by projecting the financial statements of The Body Shop PLC by the next three years. Therefore, Anita Roddick asked for a help to estimate the companys financial future.

Analysis
y Forecasting Method

There are two methods that being used: T-account forecasting and percent-of-sales forecasting.

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The Body Shop International PLC 2001 : An Introduction to Financial Modelling

Assumptions Parameter Sales growth Growth 13% Assumptions Same as sales growth of most recent year, increase annually COGS/Sales Operating Expense/ Sales Net Interest Rate 41% 51% 6% Average of the three historical years Average of the three historical years About the current interest rate (from overdraft+current portion of long term debt+long term liabilities) Tax Rate 30% Assume that tax rate is increasing 30% from Earning Before Tax Dividends 10,90 Same with amount of the three historical years Cash/Sales Account Receivable/ Sales Inventories/Sales Other Current Asset/ Sales Fixed Asset Accounts Payable/Sales 3% 4% Average of the three historical years Same with amount of the three historical years Accruals/Turnover 4% Same with amount of the three historical 13% 5% Average of the three historical years Same with most recent data 6% 8% Weighted Average of three historical years Same with most recent data

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The Body Shop International PLC 2001 : An Introduction to Financial Modelling

years Other Current Liabilities /Sales Long Term Liabilities/ Sales Starting Equity 121.60 4% Assume that other current liabilities/sales is increasing 4% and constant for 3 years GBP 10 million becomes current liabilities annually 0.25% Assume that starting equity on 2002 is $121.6 Million

According to the method and the assumption given above, we are able to answer the questions for the case. 1. Why would a company like Body Shop want to forecast its financial statements? An organization is expected in knowing on how much the external debt financing that the company needs. 2. Do the three year forecast: How did you prepare your forecast and what numbers did you get?

Fiscal Year Ended February 28 1999 2000 2001 (GBP) (%sales) (GBP) (%sales) (GBP) (%sales) Income Statement Turnover Cost of Sales Gross Profit Operating Expenses Excluding exceptional cost Exceptional cost Restructuring cost 422.73 173.32 249.41 100.00 41.00 59.00 0.00 215.59 51.00 0.00 0.00 477.69 100.00 195.85 41.00 281.84 59.00 0.00 243.62 51.00 0.00 0.00 275.29 539.79 221.31 318.47 100.00 41.00 59.00 0.00 51.00 0.00 0.00
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The Body Shop International PLC 2001 : An Introduction to Financial Modelling

Net interest expense Profit before tax Tax expense Profit (loss) after tax Ordinary dividends Profit (loss) retained

4.49 29.33 8.80 20.53 10.90 9.63

1.06 6.94 2.08 4.86 2.58 2.28

13.59 24.62 7.39 17.24 10.90 6.34

2.85 5.15 1.55 3.61 2.28 1.33

15.27 27.91 8.37 19.54 10.90 8.64 5.17 1.55 3.62 2.02 1.60

2.83

Fiscal Year Ended February 28 2002 2003 2004 (GBP) (% sales) (GBP) (% sales) (GBP) (% sales) Balance Sheet Assets Excess Cash Cash Accounts Receivable Inventories Other Current Assets Net Fixed Assets Other Assets Total Assets Liabilities and Equity Accounts Payable Taxes Payable Accruals Overdrafts Other Current 16.91 12.68 16.91 13.65 4.00 3.00 4.00 3.23 4.00 19.11 14.33 4.00 3.00 21.59 16.19 21.59 213.31 4.00 3.00 4.00 39.52 4.00
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25.36 33.82 54.96 21.14 126.82 8.45 270.55

0.00 6.00 8.00 13.00 5.00 30.00 2.00 64.00

28.66 38.22 62.10 23.88

0.00 6.00 8.00 13.00 5.00

32.39 43.18 70.17 26.99 161.94 10.80 345.46

0.00 6.00 8.00 13.00 5.00 30.00 2.00 64.00

143.31 30.00 9.55 2.00

305.72 64.00

19.11 4.00 175.34 36.71 4.00

The Body Shop International PLC 2001 : An Introduction to Financial Modelling

Liabilities Current Portion of Long Term Liabilities Long-term Liabilities Other Liabilities Shareholders Equity Total Liabilities and Equity

16.91

19.11

21.59

10.00 51.20 1.06 131.23 270.55

2.37 12.11 0.25 31.04 64.00

10.00 41.20 1.19 6.34

2.09 8.62 0.25 1.33

10.00 31.20 1.35 8.64 345.46

1.85 5.78 0.25 1.60 64.00

305.72 64.00

TRIAL ASSETS TRIAL LIABILITIES AND EQUITY PLUG : DEBT (EXCESS CASH)

270.55

305.72

345.46

256.90 13.65

130.38 175.34

132.16 213.31

Sensitivity Analysis (Overdraft and Excess Cash to COGS/SALES) 2002 2003 2004
COGS/ SALES Overdrafts Excess Cash COGS/ SALES Overdrafts Excess Cash COGS/SALES Overdrafts Excess Cash

13.65 0.1 0.2 0.3 0.35 0.38 0.41 0.45 0.5 4.39 13.65 26.01 41.45

82.10 51.21 20.32 4.88 0.1 0.2 0.3 0.35 0.38 0.41 0.45 0.5

175.34 67.13 102.04 136.94 154.39 164.87 175.34 189.30 206.75

0.1 0.2 0.3 0.35 0.38 0.41 0.45 0.5

213.31 91.04 130.48 169.92 189.64 201.47 213.31 229.08 248.81

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The Body Shop International PLC 2001 : An Introduction to Financial Modelling

0.6

72.34

0.6

241.65

0.6

288.25

Sensitivity Analysis (Overdraft and Excess Cash to COGS/SALES) 2002 2003 2004 COGS/ Excess COGS/ Excess COGS/ SALES Overdrafts Cash SALES Overdrafts Cash SALES 13.65 0.01 0.03 0.05 0.06 0.07 0.08 1 0.41 4.83 9.24 13.65 419.62 17.24 8.41 0.01 0.03 0.05 0.06 0.07 0.08 1 175.34 140.43 150.40 160.38 165.36 170.35 175.34 634.08 0.01 0.03 0.05 0.06 0.07 0.08 1

Overdrafts

Excess Cash

213.31 173.87 185.13 196.40 202.04 207.67 213.31 731.68

Sensitivity Analysis (Overdraft and Excess Cash to COGS/SALES) 2002 2003 2004
INVENTORIES /SALES Overdrafts Excess Cash INVENTORIES/ SALES Overdrafts Excess Cash INVENTORIES/ SALES Overdrafts Excess Cash

13.65 0.1 0.13 0.15 0.2 0.25 0.27 0.42 13.65 22.48 44.54 66.60 75.43

0.1 0.2 0.3 0.4 0.5 0.6

175.34 160.38 210.24 260.10 309.97 359.83 409.69

0.1 0.2 0.3 0.4 0.5 0.6

213.31 196.40 252.75 309.09 365.44 421.79 478.13

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The Body Shop International PLC 2001 : An Introduction to Financial Modelling

0.3

88.67

0.7

459.56

0.7

534.48

3. How much debt financing needed? What are the key drivers of this need and how much debt needs vary as the assumptions vary? EFN (External Financing Needed) =
Assets/Sales x Sales Spontaneous liabilities/Sales x Sales PM x Projected Sales x (1-d)

2001 Assets Sales Sales Spontaneous Liabilities Net Income Profit Margin (PM) Projected Sales Dividen d y 609.96 10.9 0.034 EFN (2001-2002) = 318.47 0.59 230.1 539.79 10.7

2002 270.55 609.96 70.17 16.91

2003 305.72 689.26 79.3 19.11

2004 345.46 778.86 89.6 21.59

359.87 0.59

406.65 0.59

459.52 0.59

689.26 10.9 0.03

778.86 10.9 0.027

10.9 0.024

230.1/539.79 x 70.17 10.7/539.79 x 70.17 0.59 x 609.96 x ( 1- 0.034 ) = - 318.86 y EFN (2002-2003) = 270.55/609.96 x 79.3 16.91/609.96 x 79.3 0.59 x 689.26 x ( 1-0.03) = - 361.49 y EFN (2003-2004) = 305.72/689.26 x 89.6 19.11/689.26 x 89.6 0.59 x 778.86 x ( 1 0.027) =- 409.87 4. What issues does this analysis raise for Roddick? According to the numbers showed in the financial projections,

Conclusion

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The Body Shop International PLC 2001 : An Introduction to Financial Modelling

Forecast is done by using the assumption that steady sales growth by 13%. Basics of the assumptions used are that the latest company sales growth from 2000 to 2001 is 13% and we believe after that the company will always in their stable position.

The most important assumptions used are sales growth, COGS, and Accounts Receivable. These assumptions are very important because it is a component of working capital.

Recommendation
To meet the numbers contained in the projections, and then The Body Shop must perform the following actions: y Efficiencies in overhead costs, because based on historical data that reaches 50% of sales.

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