The Body Shop Analysis
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THE BODY SHOP ANALYSIS
Anitas lack of financial experience took a toll on her business so that led me to change her forecast based on a few assumptions.
The growth of the firm was too rapid and because of that, sales, margin and stock prices began to decline. The decrease in market share led to poor decision making by the owner.
I noticed some trends and that led me to my assumptions for the next three years. I have made pro-forma statements for the fiscal years 2002, 2003 and 2004. These figures are based on the percentage of sales method for pro-forma financial modeling. I used sales figures from the past 3 years and applied a growth rate of 13% increase to sales.
I choose a 13% increase to sales because the company can maintain their COGS. One of the biggest factors that contributed to the firms poor profit margin was the operating expenses. By closing non-profitable stores, they can reduce operating expenses such as additional salaries; rent, electricity, etc. By cutting overhead, profits both before and after interest and taxes will increase. Therefore, the profit margin will show an increase over the next three years and by controlling these expenses, the value of retained earnings will increase and possibly increase the dividends to shareholders.
Although additional outside financing would help, I do not think it is necessary in order to maintain their internal growth rate, but with additional financing, sustainable growth rate increases by 2%.
My recommendations for the Body Shop International would be to maintain the firms health and maximize shareholder wealth. The firms focus should then be on growth and profitability. If they reduce operating expenses, they will increase their profit margins as well as net income and increase the return on assets causing an increase in the internal growth rate and increase in earnings. The shareholders should also look into additional or increased dividends causing the firm to remain profitable and maintain a retention ratio of 70%.