Chapter 6\Retailing

Profit Margin Management Path continued

Analyzing Performance in the Profit Margin Management Path •Gross margin (in %) - gross margin divided by net sales •Operating expenses (in %) - operating expenses divided by net sales •Operating profit margin (in %) - gross margin - operating expenses divided by net sales

gross margin (in %)

Gross margin divided by net sales expressed as a percentage.

net profit margin (in %)

How much profit a firm makes divided by net sales.

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.

Determining ROA

La Chatelaine Bakery is a low-profit-margin/high-turnover operation, whereas Lehring Jewelry is a high-profit-margin/low-turnover operation. But both stores have the same return on assets (ROA).

output measure

Measure that assesses the results of retailers' investment decisions.

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.

return on assets (ROA)

Net profit after taxes divided by total assets.

Profit Margin Management Path

Net profit margin/Net Sales = Net Profit Margin in percent Net Sales/Total Assets = Asset Turnover Net Profit Margin x Asset Turnover = Return on Assets

inventory turnover

Net sales divided by average retail inventory; used to evaluate how effectively managers utilize their investment in inventory.

asset turnover

Net sales divided by total assets.

intangible assets

Nonphysical assets such as patents and goodwill.

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.

same-store sales growth

The sales growth in stores that have been open for over one year. Also called comparable-store sales growth.

comparable-store sales growth

The sales growth in stores that have been open for over one year. Also called same-store sales growth.

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.

net sales

The total number of dollars received by a retailer after all refunds have been paid to customers for returned merchandise.

Setting and Measuring Performance Objectives Assessing Performance: The Role of Benchmarks

Two common benchmarks •Performance of retailer over time •Performance of retailer compared to competition

bottom-up planning

When goals are set at the bottom of the organization and filter up through the operating levels.

Strategic Profit Model

a method for summarizing the factors that affect a firm's financial performance, as measured by return on assets.

ROA determined by

multiplying these two things together

Financial objectives

•Appropriate measure is return on assets (ROA) •ROA - profits generated by the assets possessed by the firm

Profit Margin Management Path

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

Setting and Measuring Performance Objectives 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

Setting and Measuring Performance Objectives 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

Personal objectives

•Especially for small, independent businesses •Self-gratification, status, respect

Asset Turnover Management Path

•Estimates Gifts-To-Go.com will have higher inventory turnover than stores •Vendors will "drop ship" orders so reduces inventory

Net profit margin (in percent)

•How much profit a firm makes (after taxes, interest income, and extraordinary gains and losses) divided by net sales

Profit Margin Management Path

•Income statement (statement of operations or profit and loss (P&L) statement) •Summarizes a firm's financial performance over a period of time, typically a quarter or a year.

Using the Strategic Profit Model to Analyze Other Decisions •Gifts-To-Go 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 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 •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

Societal objectives

•Make the world a better place to live •More difficult to measure

Evaluating Growth Opportunities Gifts To Go owner considering opening Internet channel called www.Gifts-To-Go.com

•Market size is large but very competitive •Decides to conduct a financial analysis

productivity measure

The ratio of an output to an input determining how effectively a firm uses a resource.

input measure

A performance measure used to assess the amount of resources or money used by the retailer to achieve outputs.

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.

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.

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.

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.

Social Responsibility

Achieving societal objectives is important to Blake Mycoskie, founder, CEO, and chief giving officer of TOMS shoes.

Asset Management Path

Assets are economic resources (inventory, buildings, computers, fixtures) owned or controlled by a firm •Current Assets - assets that can be converted to cash within one year •Cash and cash equivalents •Merchandise inventory •Inventory turnover - how many times, on average, inventory cycles through the store during a specific period of time •Noncurrent assets are assets not likely to be converted to cash within one year •Fixed assets - buildings, distribution centers, fixtures, equipment, etc. •Intangible assets - nonphysical assets (patents, etc.) •Analyzing the Performance of the Asset Management Path - Asset turnover (net sales divided by total assets) used to assess

fixed assets

Assets that require more than a year to convert to cash.

net profit margin

Calculated as: operating profit margin - other income or expenses - interest - taxes. Also called net income.

net income

Calculated as: operating profit margin - other income or expenses - interest - taxes. Also called net profit margin.

current assets

Cash or any assets that can normally be converted into cash within one year.

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.

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.

cash and cash equivalents

Currency, checks, short-term bank accounts, and investments that mature within three months or less.

assets

Economic resources, such as inventory or store fixtures, owned or controlled by an enterprise as a result of past transactions or events.

slotting fee

Fee paid by a vendor for space in a retail store. Also called slotting allowance.

slotting allowance

Fee paid by a vendor for space in a retail store. Also called slotting fee.

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.

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 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.

chargeback fee

The fee that retailers require vendors to pay when the provided merchandise does not meet the terms of the purchase agreement.

cost of goods sold (COGS)

The fee the retailer pays a vendor for merchandise that the retailer sells.

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.

operating profit margin (in %)

The gross margin minus the operating expenses divided by net sales expressed as a percentage.

operating profit margin

The gross margin minus the operating expenses.

Components in the Profit Margin Management Path

•Net sales - total revenues received by a retailer that are related to selling merchandise given time period minus returns, discounts, and credits. •Cost of goods sold (COGS) - the amount a retailer pays to vendors for merchandise + transportation •Gross margin or Gross profit - net sales - COGS •Slotting fee or allowance - fee paid by a vendor for space in a retail store •Chargeback fee - payment for not meeting terms of purchasing agreement •Operating expenses also called Selling, general, and administrative expenses (SG&A) - overhead costs for normal business operations (salaries, etc.) •Operating profit margin - gross margin - operating expenses. •Net profit margin or Net income - operating profit margin - other income or expenses - interest - taxes

Combining the Profit Margin and Asset Management Paths

•Nordstrom 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

Setting and Measuring Performance Objectives Performance objectives should include

•Numerical index of performance desired •Time frame to achieve objective •Resources needed to achieve objective

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

Asset turnover

•Retailer's net sales divided by its assets

Setting and Measuring Performance Objectives 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