Body Shop International Plc

EXECUTIVE SUMMARY

The Body Shop International PLC was one of the fastest growing manufacturer-retailers in the world ran aground. The firm had an annual revenue growth rate of 20% in the early to middle 1990s, by the late 1990s, revenue growth slowed to around 8%. New retailer entered to the market, bringing intense competition. After changed management in 2001, revenue grew 13%, but pretax profit declined 21%. The company implemented three strategies 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 cost, and to reinforce our stakeholder culture.

I. Objective

We try to assist the founder and co-chair with financial forecasting with the analysis. Report should be answered the following questions:

1. How did you derive your forecast? Why did you choose the "base case" assumptions that you did?

2. Based on your pro forma projections, how much additional financing will The Body Shop need during this period?

3. What are the three or four most important assumptions or "key drivers' in this forecast? What is the effect on the financing need of varying each of these assumptions up or down from the base case? Intuitively, why are these assumptions so important?

4. Why are you finding relevant to general manager like Roddick? What are the implications of these findings for her? What actions should she take based on your analysis?

II. Analysis

1. We derived the forecast based on their relationship with sales, so every account in pro forma financial based on relationship with sales. We assume that the growth of sales will go constantly at 13%from 2002 to 2004. This is because the company will begin to implement its new strategy to enhance the Body Shop brand that will push the company's sales up,but they will also need to spend some money because Body Shop will increase their investment in stores. For the most accounts, we use the same percentages as the preceding years' experience. We can look at table 2.1 for the full account forecast. The base- case assumption chosen is the average of the three years progress of sales because there is not any significant upward or downward trend in the account.

Table 2.1 Growth table forecast from 2002 to 2004

Parameter 2002 2003 2004

Sales growth 13% 13% 13%

COGS/Sales 38% 38% 38%

Operating Expense/Sales 50% 50% 50%

Interest Rate 6% 6% 6%

Tax Rate 30% 30% 30%

Dividends 10,900 10,900 10,900

Current Assets/Sales 32% 32% 32%

Current Liabilities/Sales 28% 28% 28%

Fixed Assets 110,600 110,600 110,600

Starting Equity 121,600 147,029 178,296

2. Based on the result of our projecting financial from 2002-2004, Body Shop should not get an additional financing because they still have excess cash. We can look at table 2.2 for further information.

Table 2.1 Net Working Capital projection from 2002 to 2004

Parameter 2002 2003 2004

Trial Assets 245,875 263,460 283,332

Trial Liabilities and Equity 265,395 312,049 367,410

Excess Cash 19,520 48,588 84,078

Debt 0 0 0

3. The three key drivers in the forecast are:

1) Cost of Sales is 42% in 1999, 39.6% in 2000, and 39.8%in 2001. In current market that Body Shop face intense competition so we make assumption that Body Shop should maintain their Cost of Sales % Sales not go above 42%. At least maintain it from 40-41%. They also need to maintain the sales growth between 11-15%. At this point we choose a steady sales growth 13% from 2002 to 2004.

2) Net Working Capital should keep increasing over the forecast time period.

3) Increasing fixed assets mean that Body Shop doing Investing activities. Increasing fixed asset could be effect to increasing Depreciation expense and the effect also make decreasing Profit before tax.

4) If the Body Shop changing their dividend policy so fluctuation dividend that will be paid by Body Shop will affected decreasing or increasing Profit retained.

4. Our findings are important for Anita Roddick because she is the decision maker who has a very limited knowledge in finance, and thus our findings from the pro forma report are going to enable her to calculate the financial ratio, which is one of the most important steps in decision making process, easily. Based on our analysis she should tries to decrease Cost of Sales. Decreasing Cost of Sales could be done with create or increasing manufacturing in others country that raw material and cost to produce is less expensive. When The Body Shop could decrease Cost of Sales, they can compete with low price but still maintain