In the early to mid 90's, the revenue growth for The Body Shop was at least 20% each year. The Body Shop was able to grow at a fast pace early in the decade because of the lack of competition. Over the course of the decade, competition grew fierce, and, by the end of the decade, revenue growth fell to 8%. Another reason for the slow growth in the late 90's was the over expansion in the previous years. The Body Shop was in almost every mall in America (and on every shopping street in Britain). It is time for The Body Shop to forecast earnings so it will not be blind-sided by another decline in pretax profit.
Because of the lack of revenue growth, Anita Roddick (founder of The Body Shop) was forced to step down from the CEO position. The new management team, assembled by the new CEO Patrick Gournay, was able to increase revenue by 13% in its first year (2001). However, in its attempt to grow the revenue, The Body Shop lost 21% in its pretax profit due to a lack of forecasting through the use of financial modeling.
Financial Forecast for the Years Ended February 28, 2002, 2003, and 2004 (In GBP Millions)
(GBP)(% sales)(GBP)(% sales)(GBP)(% sales)
Cost of sales 167.839.5%190.439.5%216.239.5%
–excluding exceptional costs215.950.8%245.050.8%278.250.8% –exceptional costs0.00.0%0.00.0%0.00.0%
Net interest expense1.40.3%0.30.1%-1.1-0.2%
Profit before tax39.69.3%46.39.6%53.99.9%
Profit (loss) after tax27.76.5%32.46.7%37.76.9%
Profit (loss) retained16.84.0%21.54.5%26.84.9%
Balance Sheet(GBP)(% sales)(GBP)(% sales)(GBP)(% sales)
Other current assets20.04.7%22.74.7%25.74.7%
Net fixed assets110.626.0%110.622.9%110.620.2%
Liabilities and equity
Other current liabilities22.25.2%25.25.2%28.65.2%
Total liabilities and equity262.061.7%289.160.0%322.659.0%
Summary of Significant Forecasting Assumptions
The average historical growth rate of sales over the past three years is 11%. Since, the new strategy is to responsibly grow sales; an additional 2.5% was added to the average historical growth rate of 11% to come to a growth rate of 13.5% Cost of Sales
The average historical cost of sales over the past three years as a percentage of sales is 40.5%. Since the new strategy is to cut product and inventory costs, this 40.5% has been reduced by 1% to calculate the percentage of cost of sales to sales as 39.5%.
The average historical operating expenses, excluding exceptional costs, are 50.8% of sales. Since there is not further detail of how operating costs are comprised, historical percentage of sales was used. Since exceptional operating costs in 2001 were redundancy costs and cost of supply chain development and the 1999 costs were from closing unprofitable shops, $0 was used as exceptional operating costs...