Marketing Chapter 6 Homework Fixed Assets Buildings If Store Property Owned

Chapter 06 – Financial Strategy

6-1

CHAPTER 6

FINANCIAL STRATEGY

ANNOTATED OUTLINE

INSTRUCTOR NOTES

• Financial objectives and goals are an

integral component in every aspect of a

retailer’s strategy. Retailers can use

financial tools to measure and evaluate

their performance.

I. Objectives and Goals

• The first step in the strategic planning

process involves articulating the

retailer’s objectives and the scope of

activities it plans to undertake.

See PPT 6-3

A. Financial Objectives

• The appropriate financial performance

measure is not profits but rather return

on investment (ROI).

B. Societal Objectives

• Societal issues are related to broader

issues about providing benefits to

society – making the world a better

place to live, such as providing

Ask students to provide specific examples of

retailers meetings societal objectives

(merchandise, services, events, etc.) they have

seen in the current marketplace.

Chapter 06 – Financial Strategy

6-2

employment opportunities for people in

a particular area, offering people unique

merchandise, providing an innovative

service or sponsoring events.

C. Personal Objectives

• Many retailers, particularly owners of

small, independent businesses, have

important personal objectives such as

self-gratification, status and respect.

II. The Strategic Profit Model

• The strategic profit model, illustrated

in Exhibit 6-1, is a method for

summarizing the factors that affect a

firm’s financial performance as

measured by ROA.

See PPT 6-4

Chapter 06 – Financial Strategy

6-3

investment in its assets and indicates

how many sales dollars are generated by

each dollar of assets.

• In fact, two different retailers with wide

discrepancies in net profit margin and

asset turnover could have exactly the

same return on assets. See Exhibit 6.2

See PPT 6-6

A. Profit Margin Management Path

• The information used to analyze a firm’s

profit margin management path comes

from the income statement.

1. Net Sales

• The term net sales refers to the total

revenue received by a retailer after

refunds have been paid to customers for

returned merchandise and payments

have been collected from vendors for

promotions:

Chapter 06 – Financial Strategy

6-4

• Promotional allowances are payments

made by vendors to retailers in exchange

for the retailer promoting the vendor’s

merchandise.

function.

2. Gross Margin

Gross margin = Net sales – Cost of

goods sold.

• Gross margin, also called gross profit,

gives a retailer a measure of how much

profit it’s making on merchandise sales

without considering the expenses

associated with operating the store and

corporate overhead expenses.

See PPT 6-7, 6-8. and 6-9

Discuss the difference in gross margin

percentage between Costco and Macy’s. Why

is the difference to be expected?

3. Operating Expenses

• Operating expenses are the selling,

general and administrative expenses

(SG &A), plus the depreciation and

amortization of assets. The SG&A

includes costs, other than the cost of

merchandise, incurred in the normal

course of doing business such as

salaries, advertising and rent.

• The operating expense category includes

See PPT 6-10

Discuss the difference in expense to sales

ratio between Costco and Macy’s. Why is the

difference to be expected?

Chapter 06 – Financial Strategy

6-5

4. Interest and Taxes

• Two other major expenses are interest

(which includes the cost of borrowing

money to finance everything from

inventory to the purchase of a new store

location) and taxes.

5. Net Operating Income

• Due to the lack of control over taxes,

interest and extraordinary expenses, a

commonly used overall profit measure is

the net profit percentage before interest

expenses/income, taxes, and

extraordinary expenses.

See PPT 6-14

6. Net Profit

See PPT 6-11

Chapter 06 – Financial Strategy

6-6

• Net profit (after taxes) is the gross

margin minus operating expenses and

taxes:

• Like gross margin, net profit margin is

often expressed as a percentage of sales:

• Net profit / Net sales = Net profit %

after taxes

Discuss the difference in net profit margin

percentage between Costco and Macy’s. Why

is the difference to be expected?

III. Asset Management Path

• The information used to analyze a firm’s

asset management path primarily comes

from the balance sheet.

• The income statement summarizes the

financial performance over a period of

time, while the balance sheet

See PPT 6-15

Chapter 06 – Financial Strategy

6-7

controlled by an enterprise as a result of

past transactions or events.

A. Current Assets

• By accounting definition, current assets

are those that can normally be converted

to cash within one year. In retailing:

• From a marketing perspective, the

accounts receivable generated from

credit sales may be the result of an

important service provided to customers.

• The retailer’s ability to provide credit,

particularly at low interest rates, could

make the difference between making

and losing a sale.

• Merchandise inventory is a retailer’s

lifeblood. Exceptions to this

generalization are service retailers, who

carry little or no inventory.

credit cards like Visa. ( Because they don’t

want to tie up their assets in accounts

receivable. They would rather get most of

their money quickly to invest in more

inventory. Also, they must offer credit since

customers expect it.)

Chapter 06 – Financial Strategy

6-8

sales dollars can be generated from $1

B. Fixed Assets

• Fixed assets are assets that require more

than a year to convert to cash. In

retailing,

Fixed assets = Buildings (if store property

is owned rather than leased)

C. Asset Turnover

• Asset turnover is an overall

performance measure from the asset side

of the balance sheet.

See PPT 6-16

Ask students which firm has the highest asset

turnover and why they would expect this to be

D. Return On Assets

Chapter 06 – Financial Strategy

6-9

• Overall performance, as measured by

ROA, is determined by considering the

effects of both paths by multiplying the

net profit margin by asset turnover:

• The strategic profit model assumes two

important issues:

• First, retailers and investors need to

consider both net profit margin and asset

turnover when evaluating the retailer’s

financial performance.

IV. Evaluating Growth Opportunities

• To illustrate the use of strategic profit model

for evaluating a growth opportunity,

consider Gifts To Go, a two-store chain in

• Review Exhibit 6-8 and Exhibit 6-9. The

Gross Margin percentage will be the same in

both channels (50%), but the Net Profit %

will be higher in the Internet channel

(15.9% vs 14.3% in stores).

See PPT 6-21, PPT 6-22

Chapter 06 – Financial Strategy

6-10

V. Analysis of Financial Risk and Strength

• Since 2000, some large retailers have gone

out of business. See Exhibit 6-10. This

section discusses some of the measures of

financial strength and risk of retailers.

A. Cash Flow Analysis

• Retailers can be forced into bankruptcy even

when they show a profit. Profits are now

the same as cash flow.

See PPT 6-23

B. Debt-to-Equity

• The debt-to–equity ratio is the retailer’s

short and long-term debt divided by the

value of the owners’ or stockholders’ equity

in the firm.

See PPT 6-24

C. Current Ratio

• The current ratio short-term assets divided

by short-term liabilities.

See PPT 6-24

D. Quick Ratio

Chapter 06 – Financial Strategy

6-11

VI. Setting Performance Objectives

• Performance objectives should include:

(1) the performance sought, including a

numerical index against which progress

Performance objectives are illustrated in PPT

6-26

A. Top-Down versus Bottom-Up Process

• Top-down planning means that goals

are set at the top of the organization and

filter down through the operating levels.

• This top-down planning is

complemented by a bottom-up

planning approach. Buyers and store

managers are also estimating what they

can achieve. Their estimates are

transmitted up the organization to the

corporate planners.

Describe a situation where management has

set a higher sales goal for a particular period

but has also cut employee hours and

eliminated over-time for that same period.

B. Performance Objectives and Measures

• The measures used to evaluate retail

operations vary depending on: (1) the

level of the organization where the

decision is made and, (2) the resources

the manager controls.

Chapter 06 – Financial Strategy

6-12

C. Types of Measures

• Retailers’ performance measures are

broken into three types: input measures,

output measures, and productivity

measures.

• A productivity measure (the ratio of an

output to an input) determines how

effectively a retailer uses a resource.

• In general, since productivity measures

are a ratio of outputs to inputs, they can

be used to compare different business

units.

See PPT 6-29

Productivity measures are a ratio of outputs

to inputs. Ask students to demonstrate how

productivity measures can be used to compare

E. Assessing Performance: The Role of

Benchmarks

• The financial measures used to assess

See PPT 6-30

Chapter 06 – Financial Strategy

6-13

because they are affected by the

retailer’s strategy.

• A second approach for assessing a

retailer’s performance is to compare it

with its competitors.

V. Summary

• Basic elements of the retailing financial

strategy and how retailing strategy

affects the financial performance of a

firm are explained in the chapter.

Chapter 06 – Financial Strategy

ANSWERS TO GET OUT AND DO IT!

2. Internet Exercise- Go to the latest annual reports, and use the financial information to

update the numbers in the net profit margin management model and the assert turnover

management model for Costco and Macy’s. Have there been any significant changes in

their financial performance? Why are the key financial ratios for these two retailers so

different?

Depending on the time of year, this information might not be different from what is already in

3. Go Shopping-Go to your favorite store, and interview the manager. Determine how the

retailer sets its performance objectives. Evaluate its procedures relative to the procedures

presented in the text.

After the interview, students should be able to articulate whether or not the store uses a top-down

or bottom-up approach in setting objectives. A top-down approach involves planning at the

ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS

1. What are the key productivity ratios for measuring the retailer as a whole, its

merchandise management activities, and its store operation activities? Why are these

ratios appropriate for one area of the retailer’s operation and inappropriate for others?

One key measure for assessing the productivity of the retailer as a whole is the return on