Operations Management: Financial Analysis in Retailing
Chapters 12 and 13
Logic of Ratio Analysis
Role of product-level Figures

Let’s Consider Large Discounters
Wal-Mart and K-Mart
Many others have gone into bankruptcy
POS recording of all transactions
Scanner data - in-store behavior
Sales, Profit, and Productivity

Let’s Consider some Key Components of  a Profit and Loss Statement
Net sales - revenues during a particular period
COGS - Cost of Goods sold - what does the retailer pay to acquire the goods they sell
Gross profit (margin):  Net Sales-COGS
Operating Expenses - what does it cost to run the business
Net Profit before Taxes - what have you earned?

What Can You Improve?
Are you buying most efficiently?
Can you train buyers to create better deals?  Can buying
                 be centralized? Should buying be localized?
What can you trim from the costs of doing business?  Eg.  Employee
                costs, benefits; Energy costs; Shrinkage; Costs to store inventory,
                 costs to ship goods

How does this picture change with E-Commerce?
Can products be bought more efficiently?
What costs have you eliminated?
Rent of retail space
Displays
In-store employees
In-store energy costs
Product level of analysis

Begin with Strategic Profit Model
Identify problem areas through comparisons over several years
Isolate parts of the model
Work through all aspects of retail mix

What is the Model?

Return on Net Worth =

     Net profit      X    Net sales     X  Total assets
      Net sales          Total assets         Net worth

      Net profit      X      Asset        X    Financial
         margin             turnover            leverage

Typically Compare Stores Across Categories
See the comparison chart in the text and compare to handout
Compare clothing stores
Compare supermarkets
Compare discounters
Make changes in order to improve each part of the model

What are the changeable parts of the retail mix?
In order to increase turnover of specific goods?
E.g. soft drinks
Display strategy
Location in store
Special promos
Pairing with other products

Improving the Picture
An analysis of these figures can help the firm to identify
               its weak points and its strong points
How can gross margin be improved? Handling costs
Warehousing, transportation, storage, labor, occupancy, store costs

Here are some Examples:
Suppose you are a retail consultant, and you have been hired to
           work with a retail chain which is concerned that they are carrying
            too much inventory.
What would you do?

You are hired to work with a firm which is concerned that their employees
          are costing them too much money, and they want to streamline their
          system in order to raise net profits
You could recommend that they consider certain parts of their income
                statements, certain ratios, or certain productivity indicators.

An Example
Suppose, for instance, that you were consulting both with BJs,
             a self-service warehouse firm, and also consulting for
             Nordstrom, a total service upscale department store.
Both might be concerned with cutting their operating expenses,
           but given the natures of their businesses, you might approach
           each in a different way.
 

Let’s Look at Each
Nordstrom sells it's business largely on a high level of
           employee interaction, so it would be difficult to make
            cuts in this area, although it could generally be scrutinized for effficiency.
BJs on the other hand, conveys a discount image on the "work"
         which is done by the customer. So employees are not considered nearly
              as much by the sales per employee, but instead may be considered
               by their speed in stocking and restocking the sales floor.

Employee Productivity
 Nordstrom's employees may instead be evaluated by their
            sales per person. Bj's groups inventory and merchandise
            in the same square footage by stacking merchandise vertically, a
            nd thus really looking at cubic feet of selling floor and inventory space.
           Nordstrom would instead separate inventory with selling floor,
           with more space for browsing.

Key Business Ratios
Comparisons with other retailers in your industry
 A standard comparative reference in the Retail Industry is
              Dun and Bradstreet’s Industry Norms and Key Business Ratios
Specific Lines of Businesses can be compared and contrasted

What are the Meanings of the Business Ratios in a Retail Context?
The Role of inventories in the ratios
Quick ratio = cash plus accounts receivable divided by
        total current liabilities, usually 1 to 1, eliminates inventory from consideration
Current ratio = total current assets divided by total current
         liabilities, 2 to 1, does include inventories

Budgeting
Allocation of resources to appropriate depts
setting of costs standards
reallocation of supermarket goods
planning for new store openings
Definition of performance standards

Measures of Productivity
Sales per square foot:  how well are you using the selling space?
overhead expenses as a percent of sales
sales per employee
How can these measures be improved?
eg elimination of certain depts: Buddies
Sears, Penneys, appliance, hardware depts

Operations Management
Optimal format and size of store: eg prototype stores
variations of shelf space, shelf locations, sales
match personnel to customer flows
energy costs, maintenance costs
inventory management

Category Management
Customizing the retail mix in each store or region
performance for categories of products
eg shelf space allocation

Measures:
Sales per linear foot of shelf space
Gross profit per linear foot of shelf space
Inventory turn

Use of Personnel
employee standards
build into hiring process
build into training process
build into evaluation process
built into reward process

Inventory Management
Coordination of suppliers
Passing along costs to suppliers
QR - quick response - keep less inventory on hand
why? less costs of inventory
also - less chance of stale good, out of fashion

EDI - electronic data interchange
paperless, computer based inventory
data on replenishment
tracking
reduction of inventory

Employee Shrinkage
Design of stores
Surveillance
Loss prevention by employees
Theft by employees, vendors