CHAPTER 6

2
1

Financial Strategy
CHAPTER 6

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 Retailing Strategy CHAPTER 6
2
1

Retail Market Strategy

Financial Strategy

Retail Locations

Retail Site Location

Human Resource Management

Information Systems and Supply Chain Management

Customer Relationship Management

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 Questions CHAPTER 6
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1

• 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?

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 Objectives and Goals CHAPTER 6
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• Financial – not necessarily profits, but return on

investment (ROI) – primary focus

• Societal – helping to improve the world around us

• Personal – self-gratification, status, respect

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 Components of the
Strategic Profit Model
CHAPTER 6
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1

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 The Strategic Profit Model:
An Overview
CHAPTER 6
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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

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 Profit Margin Management Path CHAPTER 6
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• Net Sales = Gross Sales + Promotional

Allowances - Return
• Cost of Good Sold (COGs)
• Gross Margin (GM) = Net Sales - COGs

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 Profit Margin Management Path CHAPTER 6
2
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• 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

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 Profit Margin Management Path CHAPTER 6
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• 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
= Gross margin %
Net sales

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 Profit Margin Management Path CHAPTER 6
2
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• 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
= Operating expenses %
Net sales

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 Profit Margin Management Path CHAPTER 6
2
1

• Net operating profit percentage is gross margin minus

operating expenses divided by net sales

Gross margin - Operating expenses

= Net operating profit %
Net sales

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 Asset Management Path CHAPTER 6
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• 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

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 Asset Management Path CHAPTER 6
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• 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
Net sales
= Asset turnover
Total assets
• Inventory Turnover = COGS/Avg. Inventory (cost)
Cost of goods sold
= Inventory turnover
Average inventory at cost

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 Inventory Turnover CHAPTER 6
2
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• 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)

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 Analysis of Financial Strength CHAPTER 6
2
1

• Cash-Flow Analysis
• Debt-Equity Ratio
• Current Ratio
• Quick Ratio

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 Setting and
Measuring Performance Objectives
CHAPTER 6
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• 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

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 Setting Objectives
in Large Retail Organizations
CHAPTER 6
2
1

Top-Down Planning
Corporate Developmental Strategy

Category, Departments
and sales associates
implement strategy

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 Setting Objectives
in Large Retail Organizations
CHAPTER 6
2
1

Corporate

Bottom-Up Planning
Buyers and Store Operation managers
managers estimate must be involved in
what they can objective setting
achieve process
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 Productivity Measures CHAPTER 6
2
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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)

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 Financial Performance of Retailers CHAPTER 6
2
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Outputs – Performance Inputs Used by Retailers

• Sales • Inventory ($)

• Profits • Real Estate (sq. ft.)
• Employees (#)
• Cash flow
• Overhead (Corporate Staff
• Growth in sales, profits and Expenses)
• Same store sales growth • Advertising
• Energy Costs
• MIS expenses

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 Examples of Performance
Measures Used by Retailers
CHAPTER 6
2
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 Assessing Performance CHAPTER 6
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• 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

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