Financial Strategy in Retail Management (RM)

Financial Startegy in Retail

1. Financial Strategy

2. Retailer’s Objectives MS precedes the FS of the firm Financial - most appropriate measure is ROA – primary focus Societal – providing employment opportunities, fair-price, unique merchandise, environment friendly products, innovative service et.al . (speak Verymeri – Meri Zeiff ) Personal – self gratification, status and respect. (Build a Bear workshop – Maxine Clark, FN - NYKAA)

3. Strategic profit model Followed from the illustrious DUPONT model. Divides ROA into 2 components 1. Net Profit Margin: (how much profit a firms makes (after tax) divided by its net sales) – reflects the profit generated from each rupee of sales. For eg : If a retailers NPM is 5 %, it makes 5 paise for every rupee of merchandise or service it sells 2. Asset Turnover: Retailer’s net sales divided by its assets – asses the productivity of a firm’s investment in its assets and indicate how many sales rupees are generated by each dollar if assets. For Eg : If a retailer’s AT is 3, then it generates Rs. 3 in sales for each rupee invested in the firm’s assets.

4. Net Profit Margin. * Asset Turnover =. Return on Assets (ROA)   ROA hence is determined by two sets of activities – profit margin management and asset management. For eg : Net Profit Margin (%) * Asset Turnover (times) = Return on Assets (%) Asset Turnover Return on Assets Adyar Bakery 1 10 10 GRT Jewelers 10 1 10

5. Profit Management Path (-Income statement - in AR provides a summary of the retailer’s performance during the previous fiscal year ) Net sales = Gross amount of Sales + Promotional allowances – Customer returns Customer returns represent the value of merchandise that customers return and for which they receive a refund of cash or a credit. Promotional allowances are payments made by vendors to retailers in exchange for the retailer’s promoting the vendor’s merchandise. (slotting fees /membership fees – for a warehouse club)

6. Income Statement (million rupees) Macys Costco Net sales 15,630 48,107 Less: Cost of Goods Sold 9,297 42,093 Gross Margin 6,333 6,014 Less: Operating Expenses 4,933 4,629 Less: Interest expenses/income 284 -15 Total Expenses 5,217 4,614 Net Profit, pre-tax 1,116 1,400 Less: taxes 427 518 Net Profit , after tax 689 882 Gross margin % 40.5 12.5 Operating Expenses as % of sales 31.5 % 9.6 % Net profit % after taxes 4.4 1.8 Net profit before interest and taxes % 9.0 2.9

7. Gross margin indicates an important measure in retailing as it indicates how much profit the retailer is making on merchandise sales without considering the expenses associated with operating the store. (GM/NS=GM Percentage) Gross margin like other performance measure is also expressed as a percentage of net sales so that retailers can compare a) the performance of various type of merchandise b) their own performance with other retailers with higher or lower level of sales Firm Gross margin percentage Macys 40.5 % Costco 12.5 %

8. Operating Expenses. (OE/NS = OE %) OE are costs, other than the cost of merchandise, incurred in the normal course of doing business – salaries, adv., utilities, office supplies, rent and interest (cost of borrowing money to finance inventory). Like GM, OE are expressed as percentage of net sales to facilitate comparison across items and departments within firms Firm Operating Expenses percentage Macys 31.6 % Costco 9.6 %

9. Net Profit. (NP/NS = NP %) It is measure of overall performance with respect to profit margin management path and is often expressed as a percentage of net sales Firm Net Profit percentage Macys 4.4 % Costco 1.8 % A commonly used overall profit measurement is the profit percentage before interest and taxes. This is because OM usually doesn’t have any control over the interest rates and taxes

10. Both firms as per this pathway of the model seems to be generating almost same level of absolute profits and Macy’s has a much higher profit percentage . Thus , this model suggest that Macy’s is out performing Costco. BUT we also need to see the Asset Management Pathway to conclusively ascertain the ROA of both the firms

11. Asset Turnover management Path Comes from the balance sheet Asset Information Macys Costco Accounts receivables 3,418 335 Merchandise Inventory 3,120 3,644 Cash 868 2,823 Other current assets 104 467 Total current assets 7,510 7,269 Fixed assets 7,375 7,824 Total assets 14,885 15,093 Inventory Turnover 3.0 11.6 Asset Turnover 1.1 3.2 ROA 4.6 % 5.8 %

12. Components in AMP Assets are economic resources – fixed assets and current assets These are long-term assets that a retail business uses for operations and are not intended for sale. They typically have a useful life of more than a year. Examples in Retail: Store buildings (if owned) Leasehold improvements (e.g., interior modifications to rented space) Retail fixtures and fittings (shelves, counters, display racks) Point-of-sale (POS) systems Office equipment (computers, printers, furniture) Delivery vehicles (if applicable) Warehouse equipment (forklifts, storage racks)

13. Current Assets These are short-term assets that can be converted into cash within a year, crucial for day-to-day operations. Examples in Retail: Cash and cash equivalents (money in the register, bank accounts) Inventory (products available for sale) Accounts receivable (if the store offers credit sales) Prepaid expenses (rent, insurance paid in advance) Short-term investments (if applicable) Both asset types are critical in retail. Fixed assets help in long-term growth and efficiency, while current assets ensure smooth daily operations and cash flow.

14. Current Assets = Cash + Accounts Receivables + Merchandise Inventory + Other current Assets Accounts receivables are primarily the monies owned to the retailer by customers that bought merchandise on credit – typically comes from a retailer’s proprietary store credit cards or in-house credit cards Asset Turnover = This is a measure assessing the performance of the asset management in the strategic profit model.   Firm Asset Turnover Macys 1.1 % Costco 3.2 %

15. Inventory turnover = IT measures how effectively retailers utilize their investment in inventory/ measure of productivity of the inventory   Firm Inventory Turnover Macys 3.0 % Costco 11.6 %

16. Return on Assets In terms of profit management path, Macy’s performed better than Costco, but Costco had higher Asset turnover Overall performance Net profit margin * Asset turnover. = Return on Assets Asset turnover Return on Assets Macy’s 4.41 1.05 4.63 % Costco 1.83 3.29 5.84 %

17. Financial Leverage Financial Leverage = → Measures the degree of debt financing. FL indicates how much of a company's assets are funded by equity versus debt. Impact on ROE : If financial leverage increases , ROE can increase because the company is using more debt financing relative to equity. However, higher leverage also increases financial risk , as more debt means higher interest payments and potential insolvency issues.  

18. Why ROA is Used in Retail Instead of ROE In the retail industry , Return on Assets (ROA) is often preferred over Return on Equity (ROE) for evaluating financial performance. This is due to several key reasons: 1 . Asset-Intensive Nature of Retail Retail businesses (like Walmart, Target, or Costco) invest heavily in assets such as stores, warehouses, and inventory. ROA measures how efficiently a retailer generates profit from these assets , making it a better indicator of operational efficiency. Example: A retailer with a higher ROA is better at converting its store investments into profits compared to a competitor with a lower ROA.

19. 2. High Use of Debt (Leverage) in Retail Retailers often finance operations with debt , such as loans for store expansions, inventory purchases, and supply chain management. ROE is highly influenced by leverage , meaning a highly indebted retailer might show strong ROE despite weak business fundamentals. ROA eliminates this distortion by focusing on how efficiently a company utilizes all its assets, regardless of financing. Example: Two retailers might have the same ROE , but one might have higher debt , artificially inflating its ROE. ROA reveals which retailer is actually more efficient in using assets to generate profit.

20. 🔹 Retailers focus on ROA because it measures how well they turn assets (stores, inventory) into profits, regardless of financing. 🔹 ROE is more relevant in industries where equity financing plays a bigger role, like technology or financial services.