Managing A Retailer's Finances

Merchandise Budget

Merchandising: Planning and control of the buying and selling of goods and services to help the retailer realize its objectives.

Merchandise budget:

Sales can be impacted by economy, taxes, weather, timing of Thanksgiving, Easter, Valentine's Day, Mother's Day, and so forth.

Early Easter Hurt Retailers in April

The early Easter produced a powerful showing in March that largely didn't extend into April. April also was colder, and gasoline prices ratcheted higher, two factors that kept shoppers home and hurt consumer sentiment.

"We knew Easter would produce a strong March, and that was built into analysts' expectations for April," said Barbara Kahn, professor of marketing at the University of Pennsylvania's Wharton School. "The fact that April's numbers have softness shows this is a rocky economic recovery and people are still a bit cautious."

Still, one month doesn't make a trend, and it will take later into the year to see just how cautious consumers are.

April same-store sales rose 2.2% for the 18 retailers that report figures, according to analysts polled by Thomson Reuters. This represented the weakest monthly showing in a year and a half. The 2.2% increase compares with an 11.1% gain a year ago when Easter fell on April 24, and is beneath the range of 3% to 5% that retailers have been reporting so far this year. For March and April combined, to show the shift of the Easter holiday to early April this year, retailers reported a 4.5% gain. The growth is down from a 6.4% rise over the same two months last year.

Five major merchandising questions:

  1. anticipated sales ?

  2. stock on hand requirements, given the stock turnover expected ?

  3. what reductions may be required ?

  4. what additional purchases may be necessary ?

  5. what gross margin is likely to occur ? (try to determine the gross margin of the retailer from your project)

Four rules to prepare a merchandise budget: Importance of forecasting for services, based on the perishability of the service.

Consider the airline industry, not only day to day travel, but how they manage slow seasons versus peak seasons.

Restaurant, time of day, time of year

Important to use recent trends for forecasting, consider inflation, as well as changes in competitive structure of the marketplace.

For each entry:

  1. Planned BOM Stock
  2. Planned Sales
  3. Planned Retail Reductions
  4. Planned EOM Stock
  5. Planned Purchases at Retail
  6. Planned Purchases at Cost
  7. Planned Initial Markup
  8. Planned Gross Margin
  9. Planned BOM Stock to Sales Ratio
  10. Planned Sales Percentage
  11. Planned Retail Reduction Percentage

BOM (Beginning of Month Inventory): Stock to sales ratio; amount of stock on hand at the beginning of the month, to support the sales for that month. Can use industry averages, (National Retail Federation), or retailer's planned turnover goals.

BOM is equal to EOM stock for previous month.

Planned Retail Reductions, based on:

Retail Accounting Statements

Deconstruct the business, by the numbers, to understand the real picture. Three:

Income statement: financial statement that provides sales and expenses over a set period of time

Not everything is straightforward, ex: Treatment of Rebates

Accounting Standards Body: Financial Accounting Standards Board

Develops: Generally Accepted Accounting Principles

Balance Sheet: financial condition of a retailer, at a particular point in time. Assets versus liabilities. Assets = liabilities + net worth

Treatment of Goodwill

Cash flow: assesses the short term viability of the retailer, focusing on the incoming and outgoing cash.

Best Buy Like Titantic, Says Retail Analyst (VIDEO)
Real Cash flow number, importance of cash flow, price matching reducing prices with increased spending.

Sears tops estimates; some skeptical about turnaround
Sears Holdings' sales have fallen every year since 2005, when Lampert merged the Kmart and Sears Roebuck and Co chains in an $11 billion deal.

However, the company has boosted results in recent quarters by closing stores and managing inventory. It has also sold real estate and other assets to pay down debt.

"They live kind of hand-to-mouth," said analyst Evan Mann of independent corporate bond research firm Gimme Credit. "But I don't really see a long-term plan to make them a relevant retailer."

As of February 2, the company had cash balances of $618 million, down from $754 million on January 28, 2012.

On Thursday, Sears reiterated its expectation to generate at least $500 million of liquidity by selling assets over the next 12 months, without specifying what those might be.

J.C. Penney sales plunge, much worse than expected
Gross margin was 23.8 percent of sales, down 6.4 percentage points from a year earlier. The company blamed lower-than-expected sales and a higher level of sales on clearance.

Retailers ranging from Kohl's Corp (KSS.N) to Target Corp (TGT.N) said the holiday was heavily discount-driven, putting additional pressure on Penney's no sales, no coupon philosophy.

The department store chain had $930 million in cash and cash equivalents at the end of the quarter. Analysts had been closely watching the cash figure to see if it dropped much below the $1 billion mark.

"Looks like they really did not burn that much cash," Morningstar analyst Paul Swinand said, pointing to the fact that operating cash flow for the year was roughly neutral. "That's surprisingly good for such bad results."

(Managing merchandising, core business versus managing other assets / liabilities, to sustain cash flow etc)

Lululemon's Secret Sauce

A year later, and a product recall: As Lululemon recalls too-sheer black yoga pants, its stock sinks

Inventory systems

Accounting systems

Cost method: book value, based solely on the cost of inventory. Has certain limitations: difficult to measure inventory, cost out each sale, and appropriate the freight charge (required for cost of goods sold)

Retail method:

  1. Calculate the cost complement: cost of inventory available to retail value of inventory.
  2. calculate reductions from retail value:
    • Sales
    • Markdowns
    • Discounts
    • Stock shortages (estimates)

  3. conversion of the adjusted retail book inventory to cost

Inventory Pricing Systems:

LIFO versus FIFO

LIFO: Last in First out: used in times of inflation, as replacement cost is better reflected by the cost of most recent purchases. It is used by most US firms. It is disallowed under International Accounting Standards.

FIFO: First in First out: Complies with International Financial Reporting Standards and used internationally.

The implications of choice of method can impact cost of goods sold (potentially increased under LIFO in times of inflation), which in turn impacts tax liabilities (reduces them).