The Body Shop Study Case

Only available on StudyMode
  • Download(s) : 478
  • Published : October 22, 2012
Open Document
Text Preview
Executive Summary
The Body Shop International PLC has been facing a myriad of issues in the late 1990s. At its creation, the body shop has seen tremendous growth and success. The company thrived to bring a new revolutionary business model and was extremely successful. But after those successful years in the early 1990s, the competition became fierce as new entrants came and absorbed parts of the market. This led to declining sales and profits for the company as they were not able to differentiate themselves from the new competition. The founder of The Body Shop PLC, Anita Roddick, who was the previous Chief Executive Officer, decided to step down and handed over the position to Patrick Gournay. The new CEO implemented a new strategy and direction for the Body Shop. The new initiatives were to have a focused product strategy, a more efficient supply chain, and to reinforce stakeholder culture. In order to solve the problems faces by the company, we modeled the company’s financial need by providing a forecast of the company’s income statement and balance sheet for years 2002, 2003 and 2004. In order to forecast the different changes we used the percentage of sales forecasting method. Moreover, to come up with accurate financial forecasting we undertook sensitivity analysis on several key financial variables that we know are of importance in the company’s future financial state. These included cost of goods sold, growth rate, operating expenses, inventories, restructuring costs, and dividends. Based on these forecasts and due to this growth, we then concluded that external financing is needed to implement the strategies of the company. The funds needed over the next three years decreased due to the fact we were able to cut operational expenses by closing non-profitable product lines, which in return reduced overhead costs.

Assumptions are an essential component to effectively forecast the financial statements of The Body Shop International PLC. Our assumptions for years 2002, 2003 and 2004 include using 13% as the growth rate in sales because it would not change much over the next three years and we did not foresee significant fluctuations in the economy that would affect discretionary spending in the cosmetics market. We used 36% of sales as the cost of goods sold because Gournay’s plan was to “achieve operational efficiencies” which would decrease cost of goods sold due to economies of scale .We chose a 1% decrease in operating expenses to align with our conservative projections. We estimated inventory to decrease to 13% of sales. We increased the exceptional costs to 1.5% and restructuring costs to 2.3% since we predicted that The Body Shop would incur exceptional costs related to the changes in operations as well as restructuring costs. Finally, we assumed dividend payments will remain constant due to Gournay’s plan to reinforce stakeholder culture. After analyzing the results of the forecast, we came to the conclusion that considerable sales growth is not the only factor needed to raise profits. The decrease in profits in the previous years was caused by rising restructuring costs and exceptional costs. It appears, after undertaking the sensitivity analysis that the decrease in the cost of sales and operating expenses led to a decline in the amount of external financing needed. Due to all these factors, the forecast demonstrates that The Body Shop International PLC will need external financing in years 2002, 2003 and 2004.

Introduction
The Body Shop International PLC is a manufacturer and retailer of naturally based skin and hair care products. The company enjoyed favorable revenue growth of 20% in the early to middle 1990s, but suffered a sharp decrease of 8% in its revenue growth in the late 1990s as the company moves from the growth to the maturity stage of the product life cycle. The shrinking annual revenue growth was brought about by intense competition from new retailers of naturally based cosmetics in the...
tracking img