The Body Shop

De La Salle University

Graduate School of Business THE BODY SHOP

ACC511M

Prof. Raymond Queddeng

1st Term, S.Y. 2010-2011

GROUP II

Chungtuyo, Myrna Victoria

Eslabon, Ronaldo

Gonzales, Rosvie

Macapinlac, Ronald

I. STATEMENT OF THE PROBLEM

In the early to middle of 1990’s, The Body Shop surged, posting at least 20% of revenue

growth each. However, because of the rapid expansion which tarnished the image of The Body Shop, coupled by the entry of several competitors, growth slowed down to around 8% in 2000s.

Anita Roddick, the founder of The Body Shop, stepped down as CEO in 1998 and was replaced

by Patrick Gournay who made several organizational changes and re-alignments. While the

revenues grew by 13%, the pre-tax profit declined 21%, which is below management’s

expectations.

Roddick and Gournay requested forecast for the next three years, to be presented sans the

technical terms and should be easily graspable.

Based on the 3-point strategy that will be implemented by CEO Patrick Gournay, we can see that Body Shop will focus on three major avenues, namely: Marketing, Finance, and Social Responsibility.

1. Enhance brand through a focused product strategy and increased investment in stores; - MARKETING

2. Operational efficiencies in our supply chain by reducing product and inventory costs - FINANCIAL

3. Reinforce our stakeholder culture – CSR

As a hypothetical consultant to the Body Shop, the group will endeavour to propose a multi-faceted solution that the company can apply to improve their mid- to long- term growth and profitability. It is a strategy that involves the different areas of operations, with emphasis on the financial concerns, and that will satisfy the social and environmental goals of Anita Roddick.

II. OBJECTIVES

a.To make financial projections given limited information and specified market

condition

b.To use reiteration to solve the circularity of debt and interest expense

c.To make meaningful recommendation with regard to future earnings and financial

requirements based on the financial projections

d.To simplify the financial terms to make them accessible to non-financial peopl

e. III. AREAS OF CONSIDERATION/ASSUMPTIONS

The primary concern will be to improve the after-tax profitability of the company using financial modelling through the optimal mix of cost and sales components. The information stated in the case will be the basis for projections that will be made.

a.Reiteration was used to compute for the debt requirements or excess in cash

b.Sensitivity analysis should be conducted to determine the acceptable interplay of

various cost components and asset requirements.

c.Several meaningful assumptions should be incorporated to support the projections.

Likewise, The Body Shop’s concern for socially responsible operations and products should be addressed. As stated in Gournay’s strategy, all other aspects of operations will be revitalized to bring back the company’s brand image and financial viability.

IV. CASE ANALYSIS PROPER

Before computing for the pro forma financial statements, the following sensitivity analysis were made based on the assumption that the sales level is at $422.733Million to determine the floor and threshold levels of cost components:

The sensitivity analysis permit one to see the impact of any step up or step down with regard to the debt requirements or excess cash of The Body Shop. However, it is wrong to assume that the scenario which yield the highest excess in cash is the best option as maintaining high cash levels may result in lost opportunities. To determine the best combination of projections, the following historical figures are considered:

Based on the following historical figures:

The following assumptions were made:

1.Sales is projected to increase 15% every year mainly because of the focussed product

strategy and re-branding.

2.Cost of sales is expected to increase prudently. But due to current market condition, and

operational efficiency, minimal increase is expected. Projections are .40, .4050, and 0.41 of sales. The Body Shop’s cost of sales cannot be higher than 0.42%, which is the cost of sales in 1999. It is expected that Gornay will be able to bridle the cost through his supply chain management revamping.

3.Operating expenses is expected to increase in 2002 to 0.50 in continuation of Gournay's

realignments and restructuring plans, which is expected to im prove the company's cost structure in the long term; Thereafter, operating expense will plateau at 0.45. Control and monitoring of expenses is expected to be stringent.

4.Interest rate remains at 6%

5.Tax rate remains at 30%

6.Dividends will be retained at $10.900 Million

7.Current assets is expected to increase to 40% of assets in order to support the expansion

and sales growth, with the Inventory as the main driver; An incremental increase of 5% thereafter.

8.Current Liabilities is expected to 30% for the next three years.

9.Fixed Assets will increase to 115M due to purchases of new machines and equipment,

supporting the operational efficiency drive of the company; Thereafter, FA will increase by P5.0M

10.No additional capitalization will be made

Hence, the following projections:

Trial Assets 287,086 327,794 375,911

Trial Liabilities and Equity 269,125 308,532 335,446

Plug 17,961 19,262 40,465

Because of the expansion plans, and several management actions, excess in cash will be wiped out to zero. Debt will decrease from $60.0 Million levels in 2001 to around $18.0 Million in 2002. However, the same will increase to $40.5 Million in 2004 to finance the fixed asserts purchases and other fund requirements. A healthy mix of debt and equity should also be maintained to take advantage of leverage.

The following ratio analyses were also made, with most of the figures having a favourable increasing trend.

The base-case assumption was used to incorporate the historical figures given as the same have an inherent impact on how the company will perform in the succeeding years.

Based on the pro forma projections, The Body Shop will need to beef up its debt to $40.0Million in year 2004 to sustain the long term plans of the company. However, it is expected that by 2002, portion of the outstanding long-term debts will be paid.

The key drivers in the foregoing forecasts are the (a) cost of goods sold, (b) operating expenses, (c) current assets, and (d) fixed assets. As illustrated in the sensitivity analysis presented above, the movement of these key drivers affect the bottom line figure of the company. V. CONCLUSION/RECOMMENDATION