CTD 481 Lecture 1: CTD 481 Basic Profit Factors Notes

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Clothing, Textiles and Interior Design
CTD 481

CTD 481 Basic Profit Factors Notes Cost, retail, markup, gross margin Defining the Basic Profit Factors • The primary responsibility of a merchandiser in retailing is to attain a profit for the business Question: Why Do We Analyze Profit Calculations? • Make comparisons between departments and/or stores to determine relative strengths and weaknesses: ➢ Which stores are most profitable for the company? ➢ Which departments or vendors are the most profitable in the store or the overall company?? • Direct trends: ➢ Which stores, departments, or vendors are improving their profits consistently? Which have declined? • Make changes in merchandising strategy to achieve an increase in profits: ➢ Drop certain vendors and give the budge/floor space to more profitable brands ➢ Decrease the size of unprofitable departments to maximize floor space for more profitable areas • Indicate the direction of the business and whether it is prosperous, struggling for survival, or bankrupt: ➢ Prosperous: open new store locations, renovate stores, brand extensions, etc. – H&M, Zara, Free People ➢ Struggling: close least profitable store locations, merge corporate locations into one (Macy’s), replace upper management, etc. – Dillard’s, Kohl’s, Sears, Aeropostle, GAP, Abercrombie & Fitch ➢ Bankrupt: merge or sell to another company, close the business – Betsy Johnson, Cache, Mervin’s, Kmart, • Improve the profit margin by using this analysis Steps to Profitability • To make a profit, the merchandiser must set the proper price on the merchandise • 3 basic elements of any retail price: ➢ Cost of the merchandise – the amount the retailer pays for the merchandise o Known as the “cost”, “wholesale”, or “wholesale cost” ➢ Retail price: the price the retailer charges customers for the merchandise o Known as the “retail” ➢ Markup (MU) – the amount added to the cost price to arrive at the retail price • Pricing strategy: (cost of goods sold + markup) = retail • Q: why is this formula important to keep in mind when a buyer is negotiating the price of goods with a vendor? ➢ Setting the retail price is a balancing act: o Amount the customer is willing to pay o Markup percentage required by management The Bigger Picture • Cost of Goods Sold (COGS): the total cost to the retailer of the merchandise sold in their stores ➢ Including any discounts taken, shipping charges, workroom costs, etc. • Net Sales: the total amount the retailer sells to the end consumers ➢ After any returns, discounts, damages, etc. • Markdown Percent (MD%): the portion of net sales that represents dollars lost on merchandise not sold for its full original retail price ➢ I.e. How much of our net sales was merchandise sold at a discount? ➢ Markdowns decrease Markup, which lowers profit potential • How do COGS, Net Sales, and MD% all fit together? • These figures will determine Gross Margin ➢ Gross margin is how much of Net Sales remains after covering COGS and Markdowns and is usually represented as a percent ➢ Note: o Markdowns prevent Gross Margin from being as high as the original markup on the merchandise o Therefore the higher the initial Markup and the lower the Markdowns, the higher the Gross Margin Gross Margin • Gross Margin is the ultimate measure of a buyer’s performance • Why? • It is the figure that indicates the buyer’s ability to: ➢ Purchase the right product o At the right price o At the right time o In the right place o In the right quantities ➢ Negotiate with vendors o On price o On allowances o On services • Gross Margin is one of two important figures that will determine a company’s profit or loss: ➢ Gross Margin – Expenses = Profit or Loss ➢ Expenses include operating costs, salaries, advertising, etc. ➢ If Expenses exceed Gross Margin, the company has lost money How To Increase Profits • There are three primary ways to increase profits: 1. Increase Sales ➢ Responsibility of buyers and retail managers and associates 2. Decrease Cost of Goods Sold ➢ Responsibility of buyers 3. Decrease Expenses ➢ Responsibility of upper management Percentages in Profit Analysis • Percentages are a very important part of analyzing sales and profit • They facilitate the ability to compare: ➢ A dollar figure alone isn’t always sufficient in analyzing sales and profit • Store A: ➢ GM: $1.8 million ➢ GM%: 16% • Store B: ➢ GM: $850,000 ➢ GM%: 42% Important Percentage Figures • Markup Percent (MU%): tells how much the company will retain if merchandise is sold at the full retail price ➢ MU% = MU $ / Retail Price ➢ The MU Complement is often used in retail calculation. This is merely the inverse of the MU% or (100% - MU%) • COGS Rate: the percentage your COGS makes up of
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