The Body Shop Case

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1. Executive Summary
This report presents an analysis of The Body Shop PLC’s pro forma financials from 2002-2004 and insights into financial requirements for the company as it moves forward with their new strategies for achieving operational efficiencies and reclaim its brand image as a top manufacturer-retailer in the beauty and personal care industry.

We have constructed pro forma financial statements based on the sales-driven estimates and interest and tax fixed burdens. The key determining factors to the accuracy of these projections are the assumptions made about revenue growth and the sales-driven accounts like cost of goods sold, current assets (viz., inventory). Also, assumptions about the company’s capital budgeting structure and dividend policy have been made which can have a significant impact on the outcome of the projects and the management actions associated with it.

The company is currently facing a situation where it cannot drive its sales growth without adversely affecting the bottom line. The reduction in bottom line for the year is acceptable if it is a result of investments in fixed assets which support additional capacity or to implement a strategic marketing plan for higher future sales.

Based on the analyses of the pro forma statements and sensitivity analysis of key relationships explored, we have come to a conclusion that the company can sustain operations without any need for external financing if they limit their sales growth and cogs/sales ratio at 15% and 0.35 respectively. That would require the management to further take some cost reduction initiatives necessary to meet that objective. Also discussed in the results section is the effect of the company’s dividend policy and inventory management on their need for external funding.

2. Introduction / Background
The Body Shop International PLC was one of the fastest growing manufacturer-retailers in the world; however in the late 1990s it lost market share. The firm had an annual revenue growth rate of 20% in the early to middle 1990s, but by the end of the decade, revenue growth slowed to around 8%. New retailers of naturally based skin- and hair-care products began to flood the market, which caused prices to decrease along with The Body Shop’s competitive advantage. The Body Shop shifted from its core values as well, becoming more of a mass-market line as it expanded into “almost every mall in America, as well as virtually every corner on Britain’s shopping streets.” This was in contrast to its brand image of being a unique boutique shop for skincare. The founder of The Body Shop, Anita Roddick, stepped down as CEO in 1998 after many failed attempts to renew the company’s image. She was replaced by Patrick Gournay, an executive from the French food giant Danone SA. However, problems continued to plaque the company despite this management change. Revenue grew 13% in 2001; however pretax profit declined 21%. Even though pretax profit declined, Gournay was convinced that implementing a new strategy would produce successful results. Gournay’s strategy consisted of three primary objectives: “To enhance The Body Shop Brand through a focused product strategy and increased investment in store; to achieve operational efficiencies in our supply chain by reducing product and inventory costs; and to reinforce our stakeholder culture.” The purpose of this case is to estimate The Body Shops future earnings and financial needs. Anita Roddick and Patrick Gournay would like projections of the next three years of financial statements to determine what type of financing will be required to attain success.

3. Methodology / Description of Model

We began this case by creating a pro forma, which is a projected income statement and balance sheet, for The Body Shop. For this particular case, a percentage-of-sales forecasting method was assumed when determining our most of our projected figures. Therefore, it was required that we...
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