Chapter 6

Chapter 6
Financial Strategy
McGraw-Hill/Irwin
PPT
6-1
Levy/Weitz: Retailing Management, 5/e
Copyright 2004 by The McGraw-Hill Companies, Inc. All rights
Financial Tradeoff Made by Retailers to

Increase ROA
PPT 6-2
Financial Implications of Strategies Used By

a Bakery and Jewelry Store
La Madeline Bakery
Kalame Jewelry
PPT 6-3
Net Profit
Margin
Asset = Return on Assets

Turnover
1%
10 times
10%
10%
1 time
10%
The Strategic Profit Model:

An Overview
PPT 6-4
Profit Margin x
Asset turnover
= Return on assets
Net profit
x
Net sales (crossed out)
Net sales (crossed out) = Net profit

Total assets
Total assets

Margin Management
Sales
Gross
Margin
100
-
Cost of
Goods Sold
Net Profit
Net Profit
Margin
15%
Total
Expenses
Sales
25
PPT 6-5
60

Asset Management
Inventory
Sales
Asset
Turnover
100
Current
Assets
Total Assets
PPT 6-6
Accounts
Receivable
Fixed Assets
Other Current
Assets
30

Return on Assets
Sales
Net Profit
Gross Mar
40
-
Net Profit Margin
15
15%
Sales
Total Exp.
100
25
Return on
Assets
Net Profit
Net Sales
Times
Net Profit
Total Assets
) Asset Turnover
100
2.5
Total Assets
(
Net Profit
Total Assets
PPT 6-7
Net Sales
Total Assets
40
Net Profit
=
Net Sales
Cost Goods Sold
60
Inventory
Sales
100
Net Sales
x
Total Assets
Current Assets
5
+
A/R
10
+
Fixed Assets
4
+
Other Cur Assets
30
Profit Margin Models for Wal-Mart Stores, Inc.,

and Tiffany & Co. ($ in millions)
Net Sales
$219,812
$ 1,607
Top number
= Wal-Mart
Bottom Number = Tiffany
Gross margin
$ 48,250
$
944
Cost of goods
sold
$171,562
$
663
Operating
expenses
$ 36,173
$
634
+
Interest
expenses
$ 1,326
$ 20
PPT 6-8
Net profit before

tax
$ 10,751
$ 291
Total expenses
$ 37,499
$
653
Taxes
$ 3,897
$
116
Net profit after

taxes
$ 6,854
$ 175
Net sales
$219,812
$ 1,607
Net profit
margin
Gross Margin for

Wal-Mart and Tiffany
PPT 6-9
Gross
GrossMargin
Margin
Net
NetSales
Sales
==
Gross
GrossMargin
Margin%
%
Wal-Mart:
Wal-Mart:
$$ 48,250
48,250
$219,812
$219,812
==
%
%
Tiffany:
Tiffany:
$$ 944
944
$1,607
$1,607
==
%
%
Total Expenditures / Net Sales

Ratios for Wal-Mart and Tiffany
Total
TotalExpenses
Expenses
Net
NetSales
Sales
== Total
Total Expenses/Net
Expenses/Netsales
salesratio
ratio
Wal-Mart:
Wal-Mart:
$$ 37,499
37,499
$219,812
$219,812
==
%
%
Tiffany:
Tiffany:
$$ 653
653
$1,607
$1,607
==
%
%
PPT 6-10
Asset Turnover Model for Wal-Mart Stores, Inc.

and Tiffany & Co. and Subsidiaries ($ in millions)
Top number
= Wal-Mart
Bottom Number = Tiffany
Accounts
receivable
$ 2,000
$ 99
Merchandise
inventory
$ 22,614
$
612
+
Cash
$ 2,161
$ 174
Other current
assets
$ 1,471
$
71
PPT 6-11
Total current
assets
$28,246
$ 955
+
Fixed
assets
$55,205
$ 675
Net sales
$219,812
$ 1,607
Total assets
$ 83,451
$ 1,630
Assets
turnover
2.63
0.99
Inventory Analysis
Inventory
Total assets
Wal-Mart:
$22,614 =
$83,451
Tiffany:
$ 612
$1,630
Net sales
= Inventory turnover
Avg. inventory
PPT 6-12
Wal-Mart:
$219,812 =
$28,974
Tiffany:
$1,607 =
$1,484
Asset Turnover for

Wal-Mart and Tiffany
Net Sales = Asset turnover
Total assets
PPT 6-13
Wal-Mart:
$219,812
$ 83,451
Tiffany:
$1,607
$1,630
Return on Assets
Return on assets
Net profit margin X Asset
Net profit
Net sales
Net profit
Total assets
turnover
PPT 6-14
Net sales
Total assets
Wal-Mart:
$ 6,854
$83,451
Tiffany:
$ 175
$1,630
Examples of Performance
Measures Used by Retailers
Level of
Output
Input
Organization
(Output/Input)
Corporate
Net sales
(measures of
entire corporation)
Net profits
Growth in sales,
profits
PPT 6-15
Productivity
Square feet of
store space
Return on assets
Number of
employees
Asset turnover
Inventory
Sales per employee
Advertising
expenditures
Sales per square

foot
Level of
Output
Input
Organization
Merchandise
management
(measures for a
merchandise
category)
Productivity
(Output/Input)
Net sales
Inventory level
Gross Margin
Return on
Investment (GMROI)
Gross margin
Markdowns
Inventory turnover
Growth in sales
Advertising
expenses
Advertising as a
percentage of
sales *
Cost of
merchandise
Markdown as a
percentage of
sales*
* These productivity measures are commonly expressed as an

input/output.
PPT 6-16
Level of
Output
Input
Organization
Store operations
(measures for a
store or
department
within a store)
Productivity
(Output/Input)
Net sales
Square feet of
selling areas
Net sales per

square foot
Gross margin
Expenses for
utilities
Net sales per

sales associate
or per selling hour
Growth in sales
Number of sales
associates
Utility expenses as
a percentage of
sales *
* These productivity measures are commonly expressed as an

input/output.
PPT 6-17
Illustrative Productivity Measures

Used by Retailing Organizations
Level of
Output
Input
Productivity
Organization
(Output/Input)
Corporate
(chief executive
officer)
Net profit
Owners equity
Merchandising
Gross margin
Inventory
PPT 6-18
Gross margin /
inventory* =
GMROI
(merchandise
manager and
buyer)
Store operations Net sales
(director of stores,
store manager)
Net profit /
owners equity =
return on owners
equity
Square foot
*Inventory = Average inventory at cost
Net sales /
square foot

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Chapter 6

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Chapter 6

Copyright 2004 by The McGraw-Hill Companies, Inc. All rights

Financial Tradeoff Made by Retailers to

Financial Implications of Strategies Used By

Asset = Return on Assets

The Strategic Profit Model:

Net sales (crossed out) = Net profit

The Strategic Profit Model:

The Strategic Profit Model:

The Strategic Profit Model:

Net Profit Margin

Cost Goods Sold

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

Net profit before

Net profit after

Gross Margin for

Total Expenditures / Net Sales

Asset Turnover Model for Wal-Mart Stores, Inc.

Asset Turnover for

Net profit margin X Asset

Sales per employee

Sales per square

* These productivity measures are commonly expressed as an

Net sales per

Net sales per

* These productivity measures are commonly expressed as an

Illustrative Productivity Measures

*Inventory = Average inventory at cost

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