Projections of Body Shop - Essay Example

Projections of Body Shop Executive Summary The Body Shop was founded in 1976 by Anita Roddick.1 (One of the funny side notes is that it’s first shop opened right next to an undertakers office). For the most of it’s early existence it had a local feel to it, A Family owned store In January 1986 The Body Shop company went to the London Stock Exchange Market. From that day on the organization had to act differently. With a capital injection the company could turn from being a niche retailer to an international corporation though it always stood for a strong social values throughout this transition . In 1994 it opened a Direct selling department as well The Body Shop has been listed on the London Stock Exchange for 20 years and finally it was taken over by a cosmetic giant from France, L’Oreal, in March 2006. It is said that, despite this huge change in ownership, “Anita Roddick’s baby” will “retain its existing identity and values and operate independently within the L’Oréal group, led by the current management team.” Time will show the truth. The body shop continuously was on a rapid growth path right from the beginning , it encountered some turbulence during the end of the last decade. This paper will analyse the Historical data of the Body Shop and do a SWOT analysis on it’s strengths and weaknesses review it’s annual accounts over the period of 1999-2006. How it became an outstanding success despite defying the Industry norms. And finally how sustainable that success is. Based on the above a base case for 2007-09 will be prepared Analysis of Historical Data for the Body Shop: Income Statement 1999(GBP) 1999(% sales) 2000(GBP) 2000(% sales) 2001(GBP) 2001(% Sales) Turnover 303.7 100 330.1 100 374.1 100 Cost of Sales 127.7 42 130.9 39.7 149 39.8 Gross Profit 176 58 199.2 60.3 225.1 60.2               Operating Expenses             excluding exceptional costs 151.4 49.9 166.2 50.3 195.7 52.3 exceptional costs 4.5 1.5 0 0 11.2 3 restructuring costs 16.6 5.5 2.7 0.8 1 0.3 Net interest expense 0.1 0 1.5 0.5 4.4 1.2 Profit Before Tax 3.4 1.1 28.8 8.7 12.8 3.4 Tax Expense 8 2.6 10.4 3.2 3.5 0.9 Profit(loss) after tax -4.6 -1.5 18.4 5.6 9.3 2.5 Ordinary dividends 10.9 3.6 10.9 3.3 10.9 2.9 Profit ( loss retained) 15.5 -5.1 7.5 2.3 -1.6 -0.4 Income Statement 2002(GBP) 2002(% sales) 2003(GBP) 2003(% sales) 2004(GBP) 2004(% Sales) Turnover 413.1 100 428.5 100 442.6 100 Cost of Sales 158.3 39 168.1 39.2 182.3 39.2 Gross Profit 254.8 61 260.4 60.3 260.3 58.8               Operating Expenses             excluding exceptional costs 209.3 45.4 228.1 46.1 239.7 42.3 exceptional costs 0 0 0 0 0 0 restructuring costs 0 0 0 0 0 0 Net interest expense 0.9 0 1.8 1.5 2.3 1.9 Profit Before Tax 4.1 5.3 16.44 4.1 15.5 2.9 Tax Expense 10 4.2 7.8 5.7 2.1 0.88 Profit(loss) after tax 2.1 3.8 13.2 7.1 6.1 3.7 Ordinary dividends 14 5 18 4.1 11 4.1 Profit ( loss retained) 19 4.7 8.1 7.4 3.2 4.1 Income Statement 2005(GBP) 2005(% sales) 2006(GBP) 2006(% sales) Turnover 479.2 100 502.8 100 Cost of Sales 208.1 43 238.6 47.45 Gross Profit 271.1 57 264.2 52.65           Operating Expenses         excluding exceptional costs 242.1 47.1 267.2 50.3 exceptional costs 0 0 0 0 restructuring costs 0 0 0 0 Net interest expense 1.1 0 0 1.8 Profit Before Tax 2.9 3.1 7.3 9.2 Tax Expense 2.7 3.1 19.1 10.7 Profit(loss) after tax 5.1 6.2 9.8 7.1 Ordinary dividends 7.3 6.8 9.9 5.1 Profit ( loss retained) 14.1 9.1 6.2 8.2 A brief analysis of the historical data reveals that Financially The Body Shop is on a sound footing financially and was so until the purchase by L’Oreal. There is a healthy growth in the Turnover averaging around 8%. The cost of sales rarely exceed 40% leaving a fairly healthy margin to work with. That margin is again reflected in the fact that the gross profit is consistently around the 60% mark. And except during a couple of years where there were exceptional costs and restructuring costs , there is a healthy profit before tax. Hence the decision to delist body Shop ( an automatic event on acquisition) on absorption by L’oreal made L’oreal financial statement much stronger. Strengths and Weaknesses for the Body Shop Body Shop is a very unique company and has some very unique strengths and some it’s strengths are also it’s weaknesses. Strengths - Lack of Marketing, guerrilla/viral strategy - Connection to political issues - Strong customer community - Strong social mission - Lack of shareholder “consideration” - The first to break the market Weaknesses - Locus of power on Anita and Gordon Roddick - Connection to political issues - Not “purple” in the US Market (they have been copied) Body Shop is in a unique position of not having to market itself in the conventional sense because of it’s strong customer base. It has a strong following of loyal customers , because among others , it’s percieved social values. The political issues which it has attached itself include being 100% vegetarian and not use animal testing. Using Environmentally Friendly products and champion other social causes like AIDS. Even Anita Roddick , on her deathbed ( she died recently of Hepatitis C) was actively campaigning A recent stockholder survey2 revealed what the stock holders think. Some of the responses were “The way that the Body Shop strives to produce open, honest and fair annual report and accounts and interim reports, and manages to send them out to shareholders reasonably promptly.” “Would not like the Body Shop to stop its social audit. In fact would like more info in audit.” “Asking for opinions, such as this.” “The format of the Annual Report.” “Keep the campaigning and values but improve the marketing. No more paperwork than at present.” “Thank you for not producing huge, glossy reports – a waste of paper and always a sign of desperation” In other words the group of people who are Body shop shareholders are from the same set of people who are it’s customers. It has a unique market which is very strong. The weaknesses which maybe exposed now , because of the the purchase of the Company by Loreal is that all key decisions and strategy were centered around Anita and Gordon Roddick. The same political issues which provided Strength to The Body Shop also was their weakness as it clearly alienated a big group of customers who did not share the same social beliefs. This was part of the problem why they could not do good in the U.S. as well. How has the Body Shop become such an outstanding success despite defying industry norms and strategies? Clearly Body Shop was a very unconventional company , but still success is measured by conventional means. So How did Body Shop do it? Slightly unconventionally but successfully.3 Some of the areas of unconventional decision making was in the areas of Pricing , Sales, Franchise development , Marketting and Advertising. Pricing Products were priced more expensively than mass merchandised cosmetics, but well under exclusive department store lines. Sales The Body Shop made no elaborate claims or promotions. And the products still packaged in plain plastic bottles were never “sale” priced.” Franchising Global Franchising By appointing a head franchisee in each major national market, Roddick was able to concentrate on the development of new product lines and the company’s global vision, rather than worry about the complexities of administration or personnel management. Selection of Franchisees The Body openly acknowledged a preference for women as franchisees Calling it “The Body Shop’s secret ingredient” Management of Franchises Roddick kept strict control over the franchising process. Her objective was to ensure that The Body Shop image and the principles it was based on, were not diluted through franchising” Product Development and Production Initially, product development had been derived by samples brought back in Anita’s back pack, and the creativity of the herbalist she had worked with since the startup. Although over 70% of They Body Shop products were supplied by outside contractors, the company hoped to increase its in-house manufacturing from 30% to 50% by the early 1990s. Marketing and Advertising Advertising Noticeably lacking, for a cosmetics retail company, were any photographs of models with beautiful hair and perfect skin. Roddick was fond of saying that her concept of beauty was Mother Theresa not some bimbo Marketing As a cosmetic retailer, The Body Shop defied most accepted marketing practices. In an industry where 30 cents on every dollar of sales was typically devoted to advertising, the company had no marketing or advertising department. How sustainable is the Body Shop’s success? The Body Shop Success is very sustainable. Despite being taken over by L’oreal the values which Body Shop has stood for are being continued. In fact the decision of going 100% vegan was a decision taken post acquisition. This ensures the continuity of it’s customer base. The acquisition also gives it access to a new market without losing it’s identity. Financial model for predicting Body shop base case for 2007-2009 The following excel spreadsheets are prepared from , The Body shop international PLC2001: Introduction to Financial modeling ( University of Virginia , Darden Business Publishing). The methodology and formulae were provided in the case study. The Excel Sheets themselves have to be operated via iterations as they use circular formulae Input Data  2006 2007 2008 2009     SALES 673,429 741,262 793,354 818,418 COGS/SALES 0.38 0.37 0.41 0.39 OPERATING EXPENSES/SALES 0.50 0.51 .48 0.43 INTEREST RATE 0.06 0.06 .06 .06 TAX RATE 0.30 .030 0.30 .30 DIVIDENDS (Thousand pounds) 10,900 13,200 14,600 15,550 CURR. ASSETS/SALES 0.32 .34 .36 .36 CURR. LIABS./SALES 0.28 .28 .27 .28 FIXED ASSETS 110,600 115,400 118,628 119,200 STARTING EQUITY 121,600 132,400 139,200 145,150 INCOME STATEMENT 2006 2007 2008 2009     SALES  673,429 741,262 793,354 818,418 COGS  284,162 312,414 338,552 374,413 OPERATING EXPENSES  332,224 370,521 392,314 391,216 INTEREST EXPENSE (INCOME)  18,414 19,314 20,316 22,118 PROFIT BEFORE TAX  301,622 322,413 338,612 358,618 TAX  90,145 94,226 95,635 108,213 PROFIT AFTER TAX  210,343 235,123 243,023 250,323 DIVIDENDS   EARNINGS RETAINED   BALANCE SHEET 2006 2007 2008 2009     CURRENT ASSETS  108,236 109,613 110,243 113,218 FIXED ASSETS  88,204 99312 94218 93219 TOTAL ASSETS  196440 200912 204461 206437     CURRENT LIABILITIES  68217 69219 71216 73214 DEBT  18219 21214 23432 22445 EQUITY  28413 29345 28333 23456 TOTAL LIAB. & NET WORTH  31412 35313 33219 35642 Formulae & Iterations ( Methodology) The Following Formulae were used in the calculations. Input Data   2007 2008 2009     SALES COGS/SALES OPERATING EXPENSES/SALES INTEREST RATE TAX RATE DIVIDENDS (Thousand pounds) CURR. ASSETS/SALES CURR. LIABS./SALES FIXED ASSETS STARTING EQUITY INCOME STATEMENT 2006     SALES +B3 COGS +B4*B16 OPERATING EXPENSES +B5*B16 INTEREST EXPENSE (INCOME) +B6*B33 PROFIT BEFORE TAX +B16-B17-B18-B19 TAX +B7*B20 PROFIT AFTER TAX +B20-B21 DIVIDENDS +B8 EARNINGS RETAINED +B22-B23 BALANCE SHEET 2006     CURRENT ASSETS +B9*B16 FIXED ASSETS +B11 TOTAL ASSETS +B28+B29     CURRENT LIABILITIES +B10*B16 DEBT +B30-B32-B34 EQUITY +B12+B24 TOTAL LIAB. & NET WORTH +B32+B33+B34 Input Data       SALES 688,437 COGS/SALES 0.33 OPERATING EXPENSES/SALES 0.51 INTEREST RATE 0.06 TAX RATE 0.30 DIVIDENDS (Thousand pounds) 14,200 CURR. ASSETS/SALES 0.32 CURR. LIABS./SALES 0.28 FIXED ASSETS 119,219 STARTING EQUITY 138,430 INCOME STATEMENT 2006     SALES 632445 COGS 280134 OPERATING EXPENSES 246243 INTEREST EXPENSE (INCOME) 2431 PROFIT BEFORE TAX 88213 TAX 19,240 PROFIT AFTER TAX 41,220 DIVIDENDS 11,200 EARNINGS RETAINED 33,118 BALANCE SHEET 2006     EXCESS CASH 28,245 CURRENT ASSETS 114,216 FIXED ASSETS 141189 TOTAL ASSETS 265,395     CURRENT LIABILITIES 129,436 DEBT 0 EQUITY 136,449 TOTAL LIAB. & NET WORTH 265,395     TRIAL ASSETS 245,875 TRIAL LIABILITIES AND EQUITY 265,395 PLUG: DEBT (EXCESS CASH) (19,520) Sensitivity Analysis   Debt and Excess Cash   By COGS/SALES       COGS/SALES DEBT Ex. CASH   +B34 +B28 0.35 0 28,787 0.38 0 19,520 0.40 0 13,342 0.42 0 7,165 0.44 0 987 0.45 2,102 0 0.48 11,369 0 Read More