The Body Shop.doc

De La Salle University Graduate School of BusinessTHE BODY SHOPACC511MProf. Raymond Queddeng1st Term, S.Y. 2010-2011GROUP IIChungtuyo, Myrna VictoriaEslabon, RonaldoGonzales, RosvieMacapinlac, RonaldI. STATEMENT OF THE PROBLEMIn the early to middle of 1990s, The Body Shop surged, posting at least 20% of revenue growth each. However, because of the rapid expansion which tarnished the image of The Body Shop, coupled by the entry of several competitors, growth slowed down to around 8% in 2000s. Anita Roddick, the founder of The Body Shop, stepped down as CEO in 1998 and was replaced by Patrick Gournay who made several organizational changes and re-alignments. While the revenues grew by 13%, the pre-tax profit declined 21%, which is below managements expectations. Roddick and Gournay requested forecast for the next three years, to be presented sans the technical terms and should be easily graspable. Based on the 3-point strategy that will be implemented by CEO Patrick Gournay, we can see that Body Shop will focus on three major avenues, namely: Marketing, Finance, and Social Responsibility.1. Enhance brand through a focused product strategy and increased investment in stores; - MARKETING2. Operational efficiencies in our supply chain by reducing product and inventory costs - FINANCIAL3. Reinforce our stakeholder culture CSRAs a hypothetical consultant to the Body Shop, the group will endeavour to propose a multi-faceted solution that the company can apply to improve their mid- to long- term growth and profitability. It is a strategy that involves the different areas of operations, with emphasis on the financial concerns, and that will satisfy the social and environmental goals of Anita Roddick.II. OBJECTIVESa. To make financial projections given limited information and specified market condition b. To use reiteration to solve the circularity of debt and interest expensec. To make meaningful recommendation with regard to future earnings and financial requirements based on the financial projectionsd. To simplify the financial terms to make them accessible to non-financial people. III. AREAS OF CONSIDERATION/ASSUMPTIONSThe primary concern will be to improve the after-tax profitability of the company using financial modelling through the optimal mix of cost and sales components. The information stated in the case will be the basis for projections that will be made.a. Reiteration was used to compute for the debt requirements or excess in cashb. Sensitivity analysis should be conducted to determine the acceptable interplay of various cost components and asset requirements.c. Several meaningful assumptions should be incorporated to support the projections. Likewise, The Body Shops concern for socially responsible operations and products should be addressed. As stated in Gournays strategy, all other aspects of operations will be revitalized to bring back the companys brand image and financial viability.IV. CASE ANALYSIS PROPERBefore computing for the pro forma financial statements, the following sensitivity analysis were made based on the assumption that the sales level is at $422.733Million to determine the floor and threshold levels of cost components: Sensitivity Analysis of Debt and Excess CashCOGS/Sales Ratio2002COGS/SalesDebtExcess Cash0.35-28,787.000.38-19,520.000.4-13,342.000.42-7,165.000.44-987.000.452,102.00-0.4811,369.00-Sensitivity Analysis of Debt and Excess CashOperating Expense/Sales Ratio2002Operating ExpensesDebtExcess Cash0.30 - 90,564.00 0.35 - 75,120.00 0.40 - 59,675.00 0.45 - 44,231.00 0.50 - 28,787.00 0.55 - 14,162.00 0.60 2,102.00 - 0.65 17,546.00 - 0.70 32,991.00 - Sensitivity Analysisof Debt and Excess CashDividends as percentage of Sales2002DividendsDebtExcess Cash3%-26,927.005%-18,101.007.5%-7,070.0010%3,962.00-12.5%14,994.00-15%26,025.00-17.5%37,057.00-Sensitivity Analysis of Debt and Excess CashCurrent Assets/Sales Ratio2002Current AssetsDebtExcess Cash0.25 - 59,675 0.275 - 48,644.00 0.3 - 37,612.00 0.325 - 26,580.00 0.35 - 15,549.00 0.375 - 4,517.00 0.4 6,515.00 - 0.425 17,546.00 - 0.45 28,578.00 - 0.475 39,610.00 - Sensitivity Analysis of Debt and Excess CashFixed Assets Requirements2002Fixed AssetsDebtExcess Cash100M - 39,851.00 150M 12,341.00 - 200M 64,533.00 - 250M 116,725.00 300M 168,917.00 350M 221,109.00 The sensitivity analysis permit one to see the impact of any step up or step down with regard to the debt requirements or excess cash of The Body Shop. However, it is wrong to assume that the scenario which yield the highest excess in cash is the best option as maintaining high cash levels may result in lost opportunities. To determine the best combination of projections, the following historical figures are considered:Based on the following historical figures:199920002001Income StatementAmount% of salesAmount% of salesAmount % of salesTurnover303.7100330.1100374.1100Cost of sales127.742130.939.714939.8Gross Profit17658199.260.3225.160.2Operating expensesExcluding exceptional costs151.449.9166.250.3195.752.3Exceptional Costs4.51.50011.23Restructuring Costs16.65.52.70.810.3Net interest expense0.101.50.54.41.2Profit before tax3.41.128.88.712.83.4Tax Expense82.610.43.23.50.9Profit (loss)before tax-4.6-1.518.45.69.32.5Ordinary dividends10.93.610.93.310.92.9Profit(loss) retained-15.5-5.17.52.3-1.6-0.4199920002001Balance SheetAmount% of salesAmount% of salesAmount % of salesAssetsCash3411.219.25.813.73.7Accounts Receivables27.89.230.39.230.38.1Inventories38.612.744.713.551.313.7Other current assets12.54.115.64.717.54.7Net Fixed Assets87.828.9104.731.7110.629.6Other Assets0061.86.71.8Total Assets200.766.1220.566.8230.161.5Liabilities and equityAccounts payable134.320.56.210.72.9Taxes payable11.33.711.73.57.11.9Accruals10.83.615.64.711.53.1Overdrafts000.30.10.70.2Other current liabilities21.67.113.3416.94.5Long-term liabilities289.236.711.161.216.4Other liabilities1.70.610.30.40.1Shareholders equity114.337.6121.436.8121.632.5Total liabilities and equity200.766.1220.566.8230.161.5The following assumptions were made: 1. Sales is projected to increase 15% every year mainly because of the focussed product strategy and re-branding.2. Cost of sales is expected to increase prudently. But due to current market condition, and operational efficiency, minimal increase is expected. Projections are .40, .4050, and 0.41 of sales. The Body Shops cost of sales cannot be higher than 0.42%, which is the cost of sales in 1999. It is expected that Gornay will be able to bridle the cost through his supply chain management revamping.3. Operating expenses is expected to increase in 2002 to 0.50 in continuation of Gournays realignments and restructuring plans, which is expected to improve the companys cost structure in the long term; Thereafter, operating expense will plateau at 0.45. Control and monitoring of expenses is expected to be stringent.4. Interest rate remains at 6%5. Tax rate remains at 30%6. Dividends will be retained at $10.900 Million7. Current assets is expected to increase to 40% of assets in order to support the expansion and sales growth, with the Inventory as the main driver; An incremental increase of 5% thereafter.8. Current Liabilities is expected to 30% for the next three years.9. Fixed Assets will increase to 115M due to purchases of new machines and equipment, supporting the operational efficiency drive of the company; Thereafter, FA will increase by P5.0M 10. No additional capitalization will be madeHence, the following projections:Input DataIn (000)200220032004Sales(1) 430,215.00 494,747.25 568,959.34 Cost of Goods Sold (2) 0.40 0.4050 0.41 Operating Expenses/ Sales (3) 0.50 0.45 0.45 Interest Rate (4) 0.06 0.06 0.06 Tax Rate (5) 0.30 0.30 0.30 Dividends (In Thousands) (6) 10,900.00 10,900.00 10,900.00 Current Assets/Sales (7) 0.4000 0.4200 0.4410 Current Liabilities/Sales (8) 0.30 0.30 0.30 Fixed Assets (19) 115,000.00 120,000.00 125,000.00 Starting Equity (10) 121,600.00 121,600.00 121,600.00 Income Statement 2,002 2,003 2,004 Sales 430,215 494,747 568,959 COGS 172,086 200,373 233,273 Operating Expenses 215,108 222,636 256,032 Interest Expenses Income) 1,078 1,156 2,428 Profit Before Tax 41,944 70,583 77,226 Profit after tax 12,583 21,175 23,168 Tax 29,361 49,408 54,058 Dividends 10,900 10,900 10,900 Earnings Retained 18,461 38,508 43,158 Balance Sheet 2,002 2,003 2,004 Excess in Cash - - - Current Assets 172,086 207,794 250,911 Fixed Assets 115,000 120,000 125,000 Total Assets 287,086 327,794 375,911 Current Liabilities 129,065 148,424 170,688 Debt 17,961 19,262 40,465 Equity 140,061 160,108 164,758 Total Liabilities and Net Worth 287,086 327,794 375,911 Trial Assets 287,086 327,794 375,911 Trial Liabilities and Equity 269,125 308,532 335,446 Plug 17,961 19,262 40,465 Because of the expansion plans, and several management actions, excess in cash will be wiped out to zero. Debt will decrease from $60.0 Million levels in 2001 to around $18.0 Million in 2002. However, the same will increase to $40.5 Million in 2004 to finance the fixed asserts purchases and other fund requirements. A healthy mix of debt and equity should also be maintained to take advantage of leverage. The following ratio analyses were also made, with most of the figures having a favourable increasing trend. Ratio Analysis200220032004Net Income/Sales4.29%7.78%7.59%Gross Margin/Sales60.00%59.50%59.00%Operating expenses/sales5