Body Shop Case

The Body Shop used to be one of the fastest growing manufacturer-retailers in the world. However due to the mainstreaming of their product into the mass-market instead of maintaining its brand name and image, the company has fallen off and seen its revenue grow, but the actual profit greatly drop. These issues cause a problem not only for upper management and employees, but also for the true owners of the firm, the stockholders. From a stockholder’s perspective, the firm is doing well; The Body Shop is making revenues in excess of their expenses; however after taxes and dividends, the firm generates little to negative profit. On top of this decline the firm’s debt continues rise every year to possibly cover the losses. These results are derived from analyzing the income statements and balance sheets from the past three years (1999-2001).

To figure out the route that The Body Shop needs to take in order to become a successful firm once again as it was in the early to middle 1990s, a financial forecast needs to be derived. By analyzing the last three years, The Body Shop’s turnover is increasing every year (8.6% in 2000 and 13.5% in 2001). The issue here however is that after expenses have been accounted for, taxes taken out (30% tax rate), and the ordinary dividends are distributed, The Body Shop retains a loss overall.

Due to the previous financial statements, the need for a financial forecast over the next three years (2002-2004) is necessary to determine the course of action The Body Shop needs to take. To do this, the best forecast is the percentage of sales forecast using the data from the most current year, 2002. By assuming that sales will increase 15% in 2002, 18% in 2003, and 21% in 2004 (assumed because of the increase over the past three years), the operating, restructuring, interest, and tax expenses can be forecasted. The amount of dividends distributed over the past three years has not changed; therefore the amount stays constant in the...