Chapter 6 notes .docx

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Department
Retail Merchandising
Course
RM 2215
Professor
Hyunjoo Im
Semester
Spring

Description
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 following year  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 merchandise sold. - 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 of sales.  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 current assets) -Accounts receivable: primarily the monies owed to the retailer by custo
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