According to the text, revenue growth for Body Shop was 20% each year but dropped to 8% in the late 1990s due to increased competition. The growth drop could also be a result of expansions to every shopping street in Britain and American malls. Anita Roddick (founder of the Body Shop) stepped down from the CEO position because of the lack in revenue growth and a new CEO Patrick Gournay took over. Gournay was able to increase revenue by 13% in 2001 which was the first year he was CEO but pretax profit declined by 21%.
The benefits of these assumptions are that while maintaining the current growth rate of 13%; we can maintain our COGS. One of the major factors contributing to the firm’s poor profit margin is operating expenses. By closing non-profitable stores, we can reduce operating expenses such as additional salaries; rent, electricity; etc. With the COGS/SALES ratio at 38% the company will not need to borrow any money. There is an excess of cash or negative debt calculated in year 2002.
A few assumptions from this forecast is one that operating expenses are high which could be due to the fact that there are a lot of stores still in operation that are not generating high profits. By eliminating overhead expenses by closing down non-profitable stores and maintaining these controllable expenses can greatly increase the value of retained earnings back into the company and possibly increase the dividends to shareholders. When the COGS are increased to 45% the company would need to borrow but if the COGS is decreased to 35% the company will have higher excess of cash. We can also see from the calculations that there is an increase in profit every year from 2002-2004 as well as an increase in shareholder’s equity.
The focus should remain on operations and profitability by monitoring our profit margin and usefulness of our assets. My recommendations for the Body Shop International would be to maintain the firm’s...