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  • 1. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 1 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6 Financial Strategy CHAPTER 6
  • 2. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 2 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6Retailing Strategy Retail Market Strategy Financial Strategy Retail Locations Retail Site Location Human Resource Management Information Systems and Supply Chain Management Customer Relationship Management
  • 3. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 3 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6Questions • How is a retail strategy reflected in retailers’ financial objectives? • How do retailers need to evaluate their performance? • What is the strategic profit model, and how is it used? • What measures do retailers use to assess their performance?
  • 4. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 4 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6Objectives and Goals • Financial – not necessarily profits, but return on investment (ROI) – primary focus • Societal – helping to improve the world around us • Personal – self-gratification, status, respect
  • 5. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 5 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6 Components of the Strategic Profit Model
  • 6. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 6 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6 The Strategic Profit Model: An Overview Profit Margin x Asset turnover = Return on assets Net profit x Net sales (crossed out) = Net profit Net sales (crossed out) Total assets Total assets Net Profit Margin: reflects the profits generated from each dollar of sales Asset Turnover: assesses the productivity of a firm’s investment in its assets
  • 7. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 7 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6Profit Margin Management Path • Net Sales = Gross Sales + Promotional Allowances - Return • Cost of Good Sold (COGs) • Gross Margin (GM) = Net Sales - COGs
  • 8. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 8 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6Profit Margin Management Path • Operating Expense • Variable (e.g.. sales commissions) • Fixed (rent, depreciation, staff salaries) • Selling, general, and administrative (SG&A) expenses • Operating profit margin • Operating profit margin = Gross margin - Operating expenses – Extraordinary (recurring) operating expenses • Net profit margin = Operating profit margin - Taxes - Interest - Extraordinary nonrecurring expenses
  • 9. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 9 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6Profit Margin Management Path • Gross margin percentage is gross margin divided by net sales. • Retailers use to compare • the performance of various types of merchandise • their own performance with that of other retailers with higher or lower levels of sales. Gross margin Net sales = Gross margin %
  • 10. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 10 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6Profit Margin Management Path • SG & A or operating expenses can be expressed as a percentage of net sales to facilitate comparisons across items, stores, and merchandise categories within and between firms. Operating expenses Net sales = Operating expenses %
  • 11. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 11 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6Profit Margin Management Path • Net operating profit percentage is gross margin minus operating expenses divided by net sales Gross margin - Operating expenses Net sales = Net operating profit %
  • 12. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 12 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6Asset Management Path • Assets: • Economic Resources (e.g., inventory, buildings, computers, store fixtures) owned or controlled by a firm • Current Asset and Fixed Asset • Current Assets = Cash + Account Receivable + Inventory + Other current assets
  • 13. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 13 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6Asset Management Path • Accounts receivable are primarily the monies owed to the retailer by customers that have bought merchandise on credit. • Fixed Assets = Fixture, Stores (owned) • Asset Turnover = Sales/Total Assets • Inventory Turnover = COGS/Avg. Inventory (cost) Net sales Total assets = Asset turnover Cost of goods sold Average inventory at cost = Inventory turnover
  • 14. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 14 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6Inventory Turnover • A Measure of the Productivity of Inventory: • It is used to evaluate how effectively retailers utilize their investment in inventory • Shows how many times, on average, inventory cycles through the store during a specific period of time (usually a year) Inventory Turnover = COGS/avg inventory (cost) Inventory Turnover = Sales/ avg inventory (retail)
  • 15. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 15 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6Analysis of Financial Strength • Cash-Flow Analysis • Debt-Equity Ratio • Current Ratio • Quick Ratio
  • 16. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 16 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6 Setting and Measuring Performance Objectives • Retailers will be better able to gauge performance if it has specific objectives in mind to compare performance. • Should include: • numerical index of performance desired • time frame for performance • necessary resources to achieve objectives
  • 17. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 17 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6 Setting Objectives in Large Retail Organizations Top-Down Planning Corporate Developmental Strategy Category, Departments and sales associates implement strategy
  • 18. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 18 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6 Setting Objectives in Large Retail Organizations Bottom-Up Planning Buyers and Store managers estimate what they can achieve Corporate Operation managers must be involved in objective setting process
  • 19. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 19 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6Productivity 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 (e.g., profits) they get on their investments (e.g., expenses)
  • 20. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 20 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6 Outputs – Performance • Sales • Profits • Cash flow • Growth in sales, profits • Same store sales growth Inputs Used by Retailers • Inventory ($) • Real Estate (sq. ft.) • Employees (#) • Overhead (Corporate Staff and Expenses) • Advertising • Energy Costs • MIS expenses Financial Performance of Retailers
  • 21. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 21 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6 Examples of Performance Measures Used by Retailers
  • 22. Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 6 - 22 CHAPTER 2CHAPTER 1CHAPTER 1CHAPTER 6Assessing Performance • Growth in Stockholder Value – Stock Price • Accounting Measures – ROA (Risk adjusted) • Benchmark • Performance Over Time • Compare performance indicator for three years • Performance Compared to Competitors • Compare performance indicators with major competitors for one year, most recent