Finc 3015 - Case Study 1 - the Body Shop

FINC3015 Case Study 1 - The Body Shop

The Body Shop's newly implemented strategy aims to realize three key objectives: "to enhance The Body Shop brand through a focused product strategy and increased investment in stores; to achieve operational efficiencies in our supply chain by reducing product and inventory costs; and to reinforce our stakeholder culture." In forecasting the Body Shop's future earnings and financial needs these goals will be continually referred to so as to ensure that the pro-forma projections are consistent with Patrick Gournay's plan.

1. Base-case assumptions:

The forecast has been derived using the 'percent of sales' forecasting method whereby future sales are first estimated and then used to calculate the remaining Income Statement and Balance Sheet items based on their relationship to sales. Estimations are made on the basis of financial statements of the Body Shop for the period 1999-2001. Whilst this sales driven approach is founded on the presumption of a direct link to sales, this is not the case for every item. As such, the base-case assumptions applied to the forecasts for 2002-2004 are explained below:

Sales:

Being a 'mature' firm in an increasingly competitive market, it is unlikely that the Body Shop will ever regain its high sales growth rates of the 1990's. As such, sales is assumed to grow at the historical average of 11% per year.

Cost of Sales:

- will increase slightly from 2001, at historical average 41% of sales

- doesn't show an upward/downward trend, but varies around this figure

- won't be decreasing since our plan is to focus on quality of products and maintain core products to improve brand image ("focused product strategy")

Operating Expenses:

- excluding exceptional costs:

o supply chain development in 2001 should decrease operating expenses

o allowing for adjustment time we assume they continue at 52% of sales in 2002 and until the effects of the strategy are fully realised

o from 2003 onwards the historical average of 51% of sales is adopted

- exceptional costs:

o exceptional costs over the past 3 years were related to closing unprofitable shops in (1999), redundancy costs, costs of supply chain development, and impairment of fixed assets and goodwill (2001)

o still need to implement "increased investment in stores"

o exceptional