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

Profit Margin x

Asset turnover

Net profit

Net sales (crossed out) = Net profit

Net sales (crossed out)

Total assets

= Return on assets

Total assets

The Strategic Profit Model:

Margin Management
Sales
Gross
Margin

Net Profit
Net Profit
Margin

15%

15

40
-

Sales

Total
Expenses

100

25

100
-

Cost of
Goods
Sold

60

The Strategic Profit Model:

Asset Management
Inventory

Sales
Asset
Turnover

2.5

100
Total Assets

40

Current
Assets

Accounts
Receivabl
e

10

Fixed
Assets

Other
Current
Assets

30

The Strategic Profit Model:

Return on Assets
Sales
Net Profit

40
-

Net Profit Margin

15

15%

Sales

Total Exp.

100

25

Return on
Assets

Gross Mar

Net Profit
Net Sales

Times
Sales

100

Total Assets

Total Assets
Assets

Net Profit
=

Net Sales

Cost Goods Sold

60

Current Assets

5
+
A/R

40

10
+
Fixed Assets

4
+
Other Cur Assets

Net

30

Total Assets

Net Sales
Total Assets

Net Profit
Sales

Inventory

37.5
Net Profit
% ) Asset Turnover
2.5

100

Total

Financial Implications of Strategies

Used By
a Bakery and Jewelry Store
Net Profit
Assets

Margin

La Madeline Bakery
10%
Kalame Jewelry
=
10%

1%

Asset = Return on
Turnover

X
10%

10 times
X

1 time

Income Statements for Wal-Mart Stores, Inc.

and Tiffany & Co.
2002($in millions)

Components of Gross
Margin
Gross Sales
Less
Less
Returns
customer
allowances

Gross Margin

Net
Sales
COGS

Profit Margin Models for Wal-Mart Stores, Inc.,

and Tiffany & Co. ($ in millions)

Net Sales
$139,208
$ 1,173

Top number
= Wal-Mart
Bottom Number = Tiffany
Gross margin
$ 30,483
$
658

Cost of goods
sold
$108,725
$
515
Operating
expenses
$ 22,363
$
493

+
Interest
expenses
$ 950
$
9

Net profit
before tax
$ 7,170
$ 156

Total
expenses
$ 23,313
$
502

Taxes
$ 2,740
$
66

Net profit
after taxes
$ 4,430
$
90

Net sales
$139,208
$ 1,173

Net profit
margin
3.18%
7.68%

Gross Margin for

Wal-Mart and Tiffany
Gross
Gross Margin
Margin
Net
Net Sales
Sales

=
=

Gross
Gross Margin
Margin %
%

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

21.95%
21.95%

Tiffany:
Tiffany:

58.75%
58.75%

$$ 944
944
$1,607
$1,607

=
=

Why 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
Total Expenses
Expenses
Net
Net Sales
Sales

=
= Total
Total Expenses/Net
Expenses/Net sales
sales

Wal-Mart:
Wal-Mart: $$ 37,499
37,499
$219,812
$219,812
Tiffany:
Tiffany:

$$ 653
653
$1,607
$1,607

=
= 17.06%
17.06%
=
=

40.65%
40.65%

Why does Tiffanys have higher expenses than

Wal-Mart?

Types of Retail
Operating Expenses

Selling expenses
Commissions +
General expenses
Miscellaneous

Sales staff salaries +

Benefits
=

Rent + Utilities +
expenses

Administrative expenses
other than

Salaries of all employees

salespeople + Operations of
buying
offices + Other
administrative expenses

Balance Sheets for Wal-Mart Stores, Inc. and

Tiffany & Co. 2002 ($ in millions)

Balance Sheets for Wal-Mart Stores, Inc. and

Tiffany & Co. 2002 ($ in millions)

Balance Sheets for Wal-Mart Stores, Inc. and

Tiffany & Co. 2002 ($ in millions)

Asset Turnover Model for Wal-Mart Stores, Inc.

and Tiffany & Co. and Subsidiaries ($ in millions)

Top number
= WalMart
Bottom Number = Tiffany

Accounts
receivable
$ 1,118
$ 108

Merchandi
se
inventory
$ 17,076
$
481

Cash
$ 1,878
$ 189

Other
current
assets
$ 1,059
$
37

Total
current
assets
$21,123
$
816

+
Fixed
assets
$28,864
$
241

Net sales
$139,208
$ 1,173

Total
assets
$ 49,996
$ 1,057

Assets
turnover
2.78
1.11

Inventory Analysis
Inventory
Total
Wal-Mart:
assets

$22,614 = 27.10%
$83,451

Tiffany:

$ 612 = 37.53%
$1,630

Net sales
turnover
Avg. inventory

= Inventory

Tiffany:

$1,607 =

Wal-Mart:

$219,812 = 7.59
$28,974
$1,484

1.08

Inventory Turnover

Asset Turnover for Different Fixtures

Net Sales
Total assets

Asset turnover

Antique cabinet:
$50,000
10
$ 5,000

Plywood cabinet
80
$

$40,000
500

Asset Turnover for

Wal-Mart and Tiffany
Net Sales = Asset turnover
Total assets

Wal-Mart: $219,812 =
$ 83,451

2.63

Tiffany:

0.99

$1,607
$1,630

The Strategic Profit Model

Net Sales

Cost of
goods sold

Gross
margin

Variable
expenses

+
Fixed
expenses

Total
expenses

Margin
Management
Net profit

Net profit
margin

Net Sales

x
Inventory
Net sales

+
Accounts
receivable

+
Other current
assets

Total
current
assets

Fixed assets

Return on
assets

Asset
turnover

Total assets

Asset
Management

Return on Assets
Return on assets
Asset

Net profit margin

turnover
=

Net profit

Net

sales
Net sales
assets
Wal-Mart: $ 6,854 =
8.21%
=
Net profit
$83,451 Total assets
Tiffany:
10.74%

175

Total

Strategic Profit Models

for Selected Retailers (2001)
DISCOUNT STORES

Assets
Margin x

(1)
(2)
(3)
Net Profit Margin
Asset Turnover
(Net Profit
Sales
(Net
Net Sales)(%)

Total Assets)

Return on
(Net Profit
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

Assets
Margin x
Asset Turnover)(%)

(1)
(2)
(3)
Net Profit Margin
Asset Turnover Return on
(Net
(Net
(Net Profit
Profit
Sales
Net Sales)(%)
Total Assets)

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

Assets
Margin x
Asset Turnover)(%)

(1)
(2)
(3)
Net Profit Margin
Asset Turnover Return on
(Net
(Net
(Net Profit
Profit
Sales
Net Sales)(%)
Total Assets)

May Department
Stores

4.92

1.19

5.90%

Nordstrom

2.23

1.39

3.08

JCPenney

0.36

Kohls

6.62
.

1.77
1.52

0.63
10.06

Strategic Profit Models

for Selected Retailers (2001)
Category Killers
Assets
Margin x
Asset Turnover)(%)

(1)
(2)
(3)
Net Profit Margin
Asset Turnover Return on
(Net
(Net
(Net Profit
Profit
Sales
Net Sales)(%)
Total Assets)

Circuit City
Stores, Inc.

1.76

2.82

4.87

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

Assets
Margin x
Asset Turnover)(%)

Walgreen.
CVS.

(1)
(2)
(3)
Net Profit Margin
Asset Turnover Return on
(Net
(Net
(Net Profit
Profit
Sales
Net Sales)(%)
Total Assets)

3.60%
1.86

2.79%
2.58

10.03%
4.79

Income Statements for Gifts

To Go and Giftstogo.com
Gifts To Go
Giftstogo.com
(Projected)

Net Sales
200,000
Less: Cost of goods sold
110,000
Gross margin
90,000

200,000
110,000
90,000

Less: Total expenses

50,000

30,000

Net profit, pretax

40,000

60,000

Less: Taxes

27,000

Gross Margin for Gifts

To Go and Giftstogo.com

Gross margin % = Gross margin

Net sales
Gifts To Go:

$ 90,000

= 45%

$200,000
Giftstogo.com:
45%

$ 90,000
$200,000

Balance Sheets for Gifts

To Go and Giftstogo.com
ASSETS

Gifts To Go

Giftstogo.com

Current assets
Merchandise inventory
22,000

Cash

44,000

2,000

0
Other current assets
2,500

3,000

Total current assets

24,500

49,000

Fixed assets
70,000
Total assets

125,000
$

174,000

Balance Sheets for Gifts

To Go and Giftstogo.com
LIABILITIES

Gifts To Go

Giftstogo.com

Current liabilities
Accounts payable
30,000

Notes payable
5,000

7,000

Total current liabilities

35,000

42,000

Long-term liabilities
12,000
Total liabilities

35,000

10,000
$

52,000

47,000

Balance Sheets for Gifts

To Go and Giftstogo.com
OWNERS EQUITY

Gifts To Go

Giftstogo.com

Owners equity
47,500

122,000

Total liabilities and

94,500

174,000

owners equity

Total Expenses/Net Sales Ratio

for Gifts To Go and Giftstogo.com
Total expenses/ = Total Expenses
net sales ratio
Gifts To Go:

Net sales
$ 30,000
$200,000 = 15%

Giftstogo.com:

$ 50,000
$200,000 = 25%

Net Profit Margins for Gifts

To Go and Giftstogo.com

Net profit margin

= Net profit
Net sales

Gifts To Go:

$ 33,000 = 16.5%
$200,000

Giftstogo.com:

$ 22,000 = 11%
$200,000

Inventory Turnover for Gifts

To Go and Giftstogo.com

Inventory turnover= Net sales

Average inventory
Gifts To Go:

$ 200,000
$

Giftstogo.com:

80,000

= 2.5

$ 200,000
$

40,000

= 5

Asset Turnover For Gifts

To Go and Giftstogo.com

Asset turnover

= Net sales
Total assets

Gifts To Go:

$ 200,000
$ 174,000

Giftstogo.com:

= 1.15

$ 200,000
$ 94,500 = 2.12

Return on Assets for Gifts

To Go and Giftstogo.com

Return on assets

= Net profit
Total assets

Gifts To Go:

$ 33,000
$174,000 = 19%

Giftstogo.com:

$ 22,000
$94,500 = 23%

Productivity Measures
Returns on Investments
vs.
Absolute Profits

Examples of Performance
Measures Used by Retailers
Level of
Productivity

Output

Input

Organization
(Output/Input)
Corporate
Net sales
on assets
(measures of
entire corporation)
Net profits

Growth in sales,

Square feet of

Return

store space
Number of
employees
Inventory

Asset turnover

Sales per

employee
profits
Advertising
expenditures

Sales per square

foot

Examples of Performance
Measures Used by Retailers
Level of
Productivity

Output

Input

Organization
(Output/Input)
Merchandise
Margin
management
(measures for a

Net sales

Inventory level

Gross

Return on
Investment

(GMROI)

merchandise
category)
Inventory turnover

Gross margin

Growth in sales

Markdowns

Advertising
expenses

Advertising as a

percentage of
sales
*
* These productivity measures are commonly
expressed
as an input/output.
Cost of

Markdown as a

Examples of Performance
Measures Used by Retailers
Level of
Productivity

Output

Input

Organization
(Output/Input)
Store operations
Net sales
Net sales per
(measures for a
selling areas
store or
department
Gross margin
Expenses for
within a store)
utilities

Square feet of
square foot
Net sales per
sales associate
or per selling

hour

* These
as

Growth in sales

Number of sales Utility expenses

productivity measures are commonly expressed

as an input/output.
associates
a percentage of
sales *

Illustrative Productivity Measures

Used by Retailing Organizations
Level of
Productivity

Output

Input

Organization
(Output/Input)
Corporate
profit /
(chief executive
officer)

Net profit

Merchandising Gross margin

margin /

Owners equity

Net

owners equity =
return on owners
equity
Inventory

Gross

inventory* =
GMROI

(merchandise
manager and
buyer)
Store operations
sales
*Inventory = AverageNet
inventory
Net sales /

at cost

Square foot

Activity-Based Costing Profitability Statement

for Pepperidge Farm and
Private-Label Cookies at Safeway

Label

Pepperidge

Privatecookies

Retail price per case

27.00

$ 31.20

Cost per case

24.00

Gross margin

7.20

Other relevant costs

5.00
Contribution margin
4.00

$
18.00
9.00

1.50
5.70

A Simplified Cash Flow Diagram

Cash

Accounts
Receivable

Inventor
y
Sales