The Body Shop Case

Case Study #9

The Body Shop was once one of the world’s fastest growing manufacturer-retailers in the world. In the early to middle 1990s, the Body shop experienced rapid revenue growth at around 20%. This growth was spectacular and the firm was a leading force in the natural-based skin care product industry. However, by the late 1990s, revenue growth had fallen under 10% and the firm began to struggle as new competitors entered. When a company’s revenue falls and it begins to report losses as the Body Shop did in both 1999 and 2001 it will begin to look for ways to improve financially. This can be done using financial forecasting. Financial forecasting can give a firm an idea of where it will be in the next few years and gives them the ability to form a plan and try to turn their financial woes around.

I prepared my forecasts for the years 2002, 2003, and 2004 using the percentage-of-sales method. I used a growth rate of 13% in this forecasting method and with that rate the projected sales in chronological order went: 422.73, 477.68, and 539.78 in GBP in millions. Profits retained through my forecast increased as follows: 8.2, 11.88, and 15.29 in 2004. For each statement I used a tax expense of 5 million GBP. The firm remained consistent with ordinary dividends of 10.9 million GBP for the years 1999-2001, so I used that same number in each statement from 2002-2004. In forecasting the balance sheet, I used the same percentage-of-sales rate for each category as the Body Shop reported for 2001. The only exception was for Net fixed assets, I decided to use a rate of 30%. As expected, current liabilities increased each year as sales and revenue increased. From 2002-2004 the current liabilities went as follows: 63.47, 84.52, and 106.77 in 2004. This is expected, as more capital is required as growth continues to increase. In short, as the left hand side of the balance sheet increases in terms of inventories, cash, and accounts