Chapter 6 notes: Financial Strategy
Three types of objectives a retailer might have:
1) Financial Objectives:
-Most people focus on profits
-Return on assets (ROA): the profit generated by the assets possessed
by the firm.
2) Societal Objectives:
- Related to broader issues that provide benefits to society- making the world
a better place to live in.
-offering people unique merchandise, environmentally products, weight
reduction programs, sponsoring community events.
-Compared to financial objectives more difficult to measure
+ explicit social goals can be set
3) Personal Objectives:
-include self-gratification, status, and respect
Strategic Profit Model: is a method for summarizing the factors that affect a
firm’s financial performance, as measured by return on assets.
-it measure the profits that a firm makes relative to asset it possesses
-Operating profit margin (Earnings before interest and taxes (EBIT)):
is a measure of the profitability from continuing operations of a retailer and
is a useful predictor of the retailer’s profitability in the future.
-Asset turnover: the retailer’s net sales divided by its assets
-indicates how many dollars are generated for each dollar of assets
ex: if asset turnover is 3.0 it generates $3 in sales.
ROA is determined by:
Net profit margin X Asset turnover = Return on assets (ROA)
Net profit X Net sales = Net profit
Net sales Total assets Total assets
Profit Margin Management Path
-comes from income statement also known as statement of operations :
summarizes a firm’s financial performance over a period of time, typically a
quarter or year.
-fiscal year beginning on February 1 and ending on January 31 of the
Components in the Profit Management Path
- four components: net sales, cost of goods sold (COGS), gross margin, and
operating profit margin
- Net Sales: the total revenues received by a retailer that are related to
selling merchandise during a given time period. - Revenue not part of net sales are special charges to customers and credit
card interest because they reflect business activities unrelated to the
- Cost of goods sold (COGS): the amount a retailer pays to vendors for the
merchandise the retailer sells.
- Gross Margin/ gross profit: the net sales minus the cost of the goods
sold. (it indicates how much profit retailer is making on merchandise
sold, w/out considering expenses associated with operating the store and
corporate overhead expenses)
Gross margin = Net sales – Cost of goods sold
-Operating expenses: include selling, general, and administrative
(SG&A) expenses plus depreciation of the retailer’s assets.
-SG&A includes overhead costs-salaries for sales associates and managers,
advertising, utilities, office supplies, transportation, and rent.
-Extraordinary nonrecurring expenses: arise only during the year in
which they are incurred
- Operating profit margin/earning before interest and taxes (EBIT): the
gross margin minus operating and extraordinary recurring expenses.
-Net profit margin: operating profit minus interest and taxes
Analyzing Performance on the Profit Margin Management Path
- difficult to compare the performance of retailers when they differ in size
- useful to consider ratios with net sales in denominator when evaluating
retailer’s performance and comparing it to other retailers.
- Useful ratios: gross margin percentage, operating profit margin
percentage, and SG&A as a percentage of sales.
- Gross margin percentage: gross margin divided by net sales - use this
to compare the performance of various types of merchandise and their
own performance with that of other retailers with higher or lower levels
Asset management path
- primarily comes from retailer’s balance sheet
- balance sheet summarizes a retailer’s financial position at a given point in
time usually at end of fiscal year
Components in the Asset Management Path
-Assets: economic resources (inventory, buildings, computers, store fixtures)
owned or controlled by a firm. Two types current and fixed
-Current assets: assets that can normally be converted to cash
within one year (cash+ accounts receivable + merchandise inventory + other
-Accounts receivable: primarily the monies owed to the
retailer by custo