Nykaa Financial Objectives - Simulation.pptx

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Financial Strategy

©McGraw-Hill Education.
Learning Objectives
Learning Objective 6-1 Review the strategic objectives of
a retail firm.
Learning Objective 6-2 Contrast the two paths to financial
performance using the strategic profit model.
Learning Objective 6-3 Illustrate the use of the strategic
profit model for analyzing growth opportunities.
Learning Objective 6-4 Review the measures retailers use
to access their performance.

Objectives and Goals
Learning Objective 6-1 Review the strategic objectives of a retail firm.
Financial objectives
• Appropriate measure is return on assets (ROA)
Societal objectives
• Make the world a better place to live
• More difficult to measure
Personal objectives
• Especially for small, independent businesses
• Self-gratification, status, respect

Social Responsibility
Achieving
societal
objectives is
important to
Blake Mycoskie,
founder, CEO,
and chief giving
officer of TOMS
shoes.
© Tiffany Rose/WireImage/Getty Images

Strategic Profit Model 1 of 11
Learning Objective 6-2 Contrast the two paths to financial performance using
the strategic profit model.
Strategic Profit Model - a method for
summarizing the factors that affect a firm’s
financial performance, as measured by return on
assets.

Exhibit 6-1 Profit Margin Management Path
Jump to long description in
appendix

Net profit margin (in percent)
• How much profit a firm makes divided by net sales
Asset turnover
• Retailer’s net sales divided by its assets
ROA determined by multiplying these two things
together

EXHIBIT 6-2 Different Approaches for Achieving
an Acceptable ROA
Net Profit Margin × Asset Turnover = Return on
Assets
Karachi Bakery 1% 10 times 10%
Tanishq Jewelry 10% 1 times 10%

Determining ROA
Karachi Bakery is a low-profit-margin/high-turnover
operation, whereas Tanishq Jewelry is a high-profit-
margin/low-turnover operation. But both stores have
the same return on assets (ROA).
(first): © Image Source; (second): © Claudia Dewald/Getty Images

Profit Margin Management Path
• Income statement (statement of operations)
• Profit and loss (P&L) statement

EXHIBIT 6-3 Income Statements for
Rolex and Walmart (in lakhs)
Rolex Income
Statement 1/30/2023
Walmart Income
Statement 1/31/2023
Net sales Rs. 14,437 Rs. 482,130
Less cost of goods sold (COGS) 9,168 360,984
Gross margin 5,269 121,146
Less operating expenses (SG&A) 4,168 97,041
Operating profit margin 1,101 24,105
Less other income (interest, taxes) 501 9,411
Net profit margin 600 14,694
Ratios
Gross margin as a percentage of sales 36.50% 25.13%
Operating expenses as a percentage of
sales
28.87% 20.13%
Operating profit margin as percentage of
sales
7.63% 5.00%
Net profit margin as a percentage of sales 4.16% 3.05%
Sources: Walmart 10K, filed March 30, 2016; Nordstrom, Inc. 10K, filed March 14, 2016.

EXHIBIT 6-3 Income Statements for
Rolex and Walmart
Rolex Income
Statement 1/30/2023
Walmart Income
Statement 1/31/2023
Net sales Rs. 14,437 Rs. 482,130
Less cost of goods sold (COGS) 9,168 360,984
Gross margin 5,269 121,146
Less operating expenses (SG&A) 4,168 97,041
Operating profit margin 1,101 24,105
Less other income (interest, taxes) 501 9,411
Net profit margin 600 14,694
Ratios
Gross margin as a percentage of sales 36.50% 25.13%
Operating expenses as a percentage of
sales
28.87% 20.13%
Operating profit margin as percentage of
sales
7.63% 5.00%
Net profit margin as a percentage of sales 4.16% 3.05%

EXHIBIT 6-4 Profit Management Path of
Strategic Profit Model
appendix

Profit Margin Management Path continued
• Components in the Profit Margin Management Path
• Net sales
• Cost of goods sold (COGS)
• Gross margin
• Gross profit

• Components in the Profit Margin Management Path
continued
• Operating expenses
• Selling, general, and administrative expenses
(SG&A)
• Operating profit margin
• Net profit margin
• Net income

Costs of Online Channels
The retailer’s cost
to sell a pair of
jeans online is
higher than in a
store because of
shipping, handling,
and returns.
© payphoto/iStock/Getty Images

• Analyzing Performance in the Profit Margin
Management Path
• Gross margin (in %)
• Operating expenses (in %)
• Operating profit margin (in %)

Asset Management Path
• Assets are economic resources (inventory, buildings,
computers, fixtures) owned or controlled by a firm
• Current Assets
• Cash and cash equivalents
• Merchandise inventory
• Accounts receivable
• Inventory turnover

Crowdfunding
If you want a good
deal on jeans and
you don’t mind
waiting a couple of
months to get them,
try Gustin. It uses a
crowdfunding model
to keep its costs low.
Source: Gustin

EXHIBIT 6-5 Balance Sheet for Rolex and Walmart
Rolex 1/30/2023 Walmart 1/31/2023
Cash and cash equivalents 509 8,705
Merchandise inventory 1,945 44,469
Other current assets 474 7,065
Total current assets 3,014 60,239
Property and equipment
(net)
3,375 110,171
Intangible assets 435 23,040
Other noncurrent assets 514 66,370
Total noncurrent assets 4,684 139,342
Total assets 7,698 199,581
Inventory turnover 4.71 8.12
Asset turnover 1.88 2.42
ROA 7.79 7.36

EXHIBIT 6-6 Asset Management Path in Strategic Profit
Model
appendix
Rolex

Asset Management Path continued
• Noncurrent assets are assets not likely to be
converted to cash within one year
• Fixed assets
• Intangible assets

Asset Management Path continued
• Analyzing the Performance of the Asset Management
Path
• Asset turnover (net sales divided by total assets) used to
assess

Combining the Profit Margin and Asset
Management Paths
• Rolex has higher operating profit margin and
performs better than Walmart on profits
• Working to develop supply chains that allow less
merchandise to be delivered more often
• Walmart has higher asset turnover
• Attempting to increase gross margins by carrying fresh and
organic produce, meat, prepared foods

Implications for Improving Financial Performance
• Profit management path: profit margin increased by
increasing sales or reducing COGS, operating
expenses
• Asset management path: increase asset turnover by
decreasing dollar amount of inventory in stores but
less inventory could lead to fewer sales
• Need to consider both operating and net profit margin
and asset turnover when evaluating financial
performance
• Need to consider implications of strategic decisions

Evaluating Growth Opportunities 1 of 4
Learning Objective 6-3 Illustrate the use of the strategic profit model for
analyzing growth opportunities.
Suppose Nykaa owner has just physical stores,
considering opening an exclusive internet
channel called www.Nykaa.com
• Market size is large but very competitive
• Decides to conduct a financial analysis

EXHIBIT 6-7 Income Statement Information of Analysis of Nykaa
Growth Opportunities
Income Statements
Nykaa
Stores
Nykaa.com Businesses
Combined
Net sales $700,000 $440,000 $1,140,000
Less: Cost of goods sold 350,000 220,000 570,000
Gross margin 350,000 220,000 570,000
Less: Operating expenses 250,000 150,000 400,000
Operating profit 100,000 70,000 170,000
Less: Interest Expenses &
Taxes
40,000 24,000 64,000
Ratios (as percent of net sales)
Gross margin 50% 50% 50%
Operating expense 35.7% 34.1% 35.1%
Operating profit 14.3% 15.9% 14.9%
Net profit margin 8.6% 10.5% 9.3%

Profit Margin Management Path
• Assumes store sales will remain the same after
introduction of Internet channel
• Gross margin
• Operating expenses
• Net operating profit margin

Asset Turnover Management Path
• Estimates Nykaa.com will have higher inventory
turnover than stores
• Vendors will “drop ship” orders so reduces inventory

EXHIBIT 6-8 Balance Sheet Information of Analysis of
Nykaa Growth Opportunities
Nykaa Stores Nykaa.com Businesses
Combined
Cash $175,000 $131,000 $306,000
Merchandise inventory 175,000 70,000 245,000
Total current assets 350,000 201,000 551,000
Fixed assets 30,000 10,000 40,000
Total assets 380,000 211,000 591,000
Ratios
Inventory turnover 2.00 3.14 2.33
Asset turnover 1.84 2.09 1.93
ROA 15.8% 21.8% 17.97%

Using the Strategic Profit Model to Analyze Other
Decisions
• Nykaa could install computerized inventory control
system
• Increase sales
• Gross margin percentage will increase
• Increase fixed assets
• Asset turnover will probably increase
• Total assets may actually decrease

Setting and Measuring Performance Objectives
1 of 7
Learning Objective 6-4 Review the measures retailers use to assess their
performance.
Performance objectives should include
• Numerical index of performance desired
• Time frame to achieve objective
• Resources needed to achieve objective

2 of 7
Top-Down versus Bottom-Up Process
• Top-down planning means goals are set at top of
organization and passed down to lower operating
levels
• Bottom-up planning involves lower levels in
company when developing performance objectives
that are then aggregated up

3 of 7
Who is Accountable for Performance?
• Business unit and managers accountable for
revenues, expenses, cash flow, and contribution to
ROA they can control
• Performance objectives and measures used to
pinpoint problem areas
• Actual performance may differ from prediction due to
unpredictable circumstances

4 of 7
Performance Objectives and Measures
• Difficult to find single measure to evaluate
performance
• Measures vary depending on
• Level of organization at which decision is made
• Resources the manager controls

5 of 7
Types of Measures
• Input measures
• Resources allocated to achieve outputs
• Output measures
• Assess results of investment decisions
• Productivity measure
• Determines how effectively retailers use resources

EXHIBIT 6-9 Measure for Assessing the
Performance of Retailers 1 of 2
Level of
Organization
Output Input Productivity
(Output/Input)
Corporate
(measures for
entire
corporation)
Net sales
Square feet of store
space
Return on assets
Net profits Number of employees Asset turnover
Growth in sales,
profits, comparable-
store sales
Inventory Sales per employee
Advertising expenditures Sales per square foot
Merchandise
management
(measures for
a merchandise
category)
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

EXHIBIT 6-9 Measure for Assessing the
Performance of Retailers 2 of 2
Level of
Organization
Output Input Productivity (Output/Input)
Store
operations
(measures for
a store or
department
within a store)
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
Inventory shrinkage*

6 of 7
Types of Measures continued
• Corporate performance
• Comparable-store sales growth
• Same-store sales growth
• Merchandise management measures
• Set and lower prices
• Negotiate with vendors over price of merchandise
• Store operations measures
• Sales per square foot of selling space
• Sales per employee

7 of 7
Assessing Performance: The Role of Benchmarks
• Two common benchmarks
• Performance of retailer over time
• Performance of retailer compared to competition

Key Terms 1 of 6
assets Economic resources, such as inventory or store fixtures, owned or
controlled by an enterprise as a result of past transactions or events.
asset turnover Net sales divided by total assets.
bottom-up planning When goals are set at the bottom of the organization and
filter up through the operating levels.
cash and cash equivalents Currency, checks, short-term bank accounts, and
investments that mature within three months or less.
chargeback fee The fee that retailers require vendors to pay when the
provided merchandise does not meet the terms of the purchase agreement.
comparable-store sales growth The sales growth in stores that have been
open for over one year. Also called same-store sales growth.

Key Terms 2 of 6
cost of goods sold (COGS) The fee the retailer pays a vendor for
merchandise that the retailer sells.
crowdfunding Method of raising money to support a particular project by
convincing a large group of people to donate money, often in relatively small
amounts.
current assets Cash or any assets that can normally be converted into cash
within one year.
fixed assets Assets that require more than a year to convert to cash.
gross margin The difference between the price the customer pays for
merchandise and the cost of the merchandise (the price the retailer paid the
supplier of the merchandise). More specifically, gross margin is net sales
minus cost of goods sold. Also called gross profit.
gross margin (in %) Gross margin divided by net sales expressed as a
percentage.

Key Terms 3 of 6
gross profit The difference between the price the customer pays for
merchandise and the cost of the merchandise (the price the retailer paid the
supplier of the merchandise). More specifically, gross profit is net sales
minus cost of goods sold. Also called gross margin.
income statement A summary of the financial performance of a firm for a
certain period of time. Also called a statement of operations or profit and
loss statement.
input measure A performance measure used to assess the amount of
resources or money used by the retailer to achieve outputs.
intangible assets Nonphysical assets such as patents and goodwill.
inventory turnover Net sales divided by average retail inventory; used to
evaluate how effectively managers utilize their investment in inventory.
merchandise inventory The goods the retailer invests in and holds in stock, to
enable customers to find what they want in the right place at the right time.

Key Terms 4 of 6
net income Calculated as: operating profit margin – other income or expenses
– interest - taxes. Also called net profit margin.
net profit margin Calculated as: operating profit margin – other income or
expenses – interest - taxes. Also called net income.
net profit margin (in %) How much profit a firm makes divided by net sales.
net sales The total number of dollars received by a retailer after all refunds
have been paid to customers for returned merchandise.
operating expenses Costs, other than the cost of merchandise, incurred in the
normal course of doing business, such as salaries for sales associates and
managers, advertising, utilities, office supplies, and rent. Also called selling,
general, and administrative (SG&A) expenses.
operating profit margin The gross margin minus the operating expenses.

Key Terms 5 of 6
operating profit margin (in %) The gross margin minus the operating
expenses divided by net sales expressed as a percentage.
output measure Measure that assesses the results of retailers’ investment
decisions.
productivity measure The ratio of an output to an input determining how
effectively a firm uses a resource.
profit and loss (P&L) statement A summary of the financial performance of a
firm for a certain period of time. Also called an income statement or
statement of operations.
return on assets (ROA) Net profit after taxes divided by total assets.
same-store sales growth The sales growth in stores that have been open for
over one year. Also called comparable-store sales growth.

Key Terms 6 of 6
selling, general, and administrative expenses (SG&A) Costs, other than the
cost of merchandise, incurred in the normal course of doing business, such
as salaries for sales associates and managers, advertising, utilities, office
supplies, and rent. Also called operating expenses.
slotting allowance Fee paid by a vendor for space in a retail store. Also called
slotting fee.
slotting fee Fee paid by a vendor for space in a retail store. Also called slotting
allowance.
statement of operations A summary of the financial performance of a firm for
a certain period of time. Also called an income statement or profit and loss
(P&L) statement.
strategic profit model A tool used for planning a retailer’s financial strategy
based on both margin management (net profit margin) and asset
management (asset turnover). Using the SPM, a retailer’s objective is to
achieve a target return on sales.

Appendix of Image Long
Descriptions

Appendix 1 EXHIBIT 6-1 Profit Margin
Management Path
The strategic profit model is used to measure a
retailer’s return on assets. The model shows this is
achieved by two components. The first component
is the profit management path. The net profit
margin is divided by net sales to derive the net
profit margin percent. The second component is
the asset turnover management path. Net sales
are divided by total assets to derive asset turnover.
The net profit margin percent is then multiplied by
asset turnover, which yields the return on assets.
Return to original slide

Appendix 2 EXHIBIT 6-4 Profit Management Path
of Strategic Profit Model
The chart begins by calculating the gross margin. This is determined by
dividing net sales by the cost of goods sold. For Walmart, this is
482,130 dollars divided by 360,984 dollars to reach a gross margin of
121,146 dollars. For Nordstrom, this is 14,437 dollars divided by 9,168
dollars to reach a gross margin of 5,269 dollars.
The operating expenses are then subtracted from the gross margin to
determine the net operating profit before tax. For Walmart, 121,146
dollars minus 97,041 dollars reaches a net operating profit before tax of
72124,105 dollars. For Nordstrom, 5,269 dollars minus 4,168 dollars
reaches a net operating profit before tax of 1,101 dollars.

Appendix 3 EXHIBIT 6-6 Asset Management Path in
Strategic Profit Model
The chart begins by calculating the total current assets. This is determined by
adding merchandise inventory, cash, and other current assets.
Walmart: 44,469 dollars plus 8,705 dollars plus 7,065 dollars equals total
current assets of 60,239 dollars.
Nordstrom: 1,945 dollars plus 595 dollars plus 474 dollars equals total current
assets of 3,014 dollars.
Total assets are then determined by adding the total current assets to fixed
assets. For Walmart, this is 60,239 dollars plus 139,342 dollars, reaching total
assets of 199,581 dollars. For Nordstrom, this is 3,014 dollars plus 4,684
dollars, reaching total assets of 7,698 dollars.
Finally, net sales are divided by total assets to reach asset turnover. For
Walmart, this is 482,130 dollars divided by 199,58, reaching an asset turnover
of 2.42X. For Nordstrom, this is 14,437 dollars divided by 7,698 dollars,
reaching an asset turnover of 1.88X.

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