Case 8

Case 8

The Body Shop International PLC 2001:

An Introduction to Financial Modeling

Summary

The Body Shop has experience a recent decline in growth rate from 20% down to 8%. This report will bring to light the areas of the business that may need optimization. In the following pages, we will detail a simple forecast based on reasonably average assumptions, followed by a forecast using more precisely interpolated assumptions. We have also included a sensitivity analysis which will allow us to view the relationships between variables. From our observations, we will describe the best course of action for The Body Shop, from a financial perspective.

Simple Forecasting and Assumptions

In order to analyze large sets of data, initial assumptions must be established. These assumptions regarding The Body Shop’s financial statements are listed below.

Assumptions

Sales: GBP 422.733 million (13% increase over 2001)

Cost of goods sold (COGS): 38% of sales

Operating expenses: 50% of sales

Interest expense: 6% of debt

Tax: 30% of profit before tax

Dividends: 10.9 million

Current assets: 32% of sales

Fixed assets: GBP 110.6 million

Current liabilities: 28% of sales

Common equity: GBP 121.6 million + Retained earnings

Using these assumptions we were able to interpolate the future financial statements seen in Appendix A.

Trend Analysis and Forecasting

In the previous section we created a forecast based on reasonable assumptions. These assumptions however are not an accurate reflection of the past performance of The Body Shop over a period of longer than one year. In order to find more meaningful and specific data, we performed a trend analysis over three years (1999, 2000, 2001). This analysis is portrayed in Appendix B.

The most influential data in Appendix B is the Sales trend. This is due to the fact that many other accounts can be calculated as a percent of sales. With a precise representation of sales growth, we are able...