Case 8

Case 8

Introduction

The Body Shop International PLC is a British-based manufacturer of skin care, hair care, and cosmetics. In the late 1990s, The Body Shop International PLC was one of the fastest growing manufacturer-retailer in the world. The firm had an annual revenue growth rate of 20% in the early to middle 1990s, but by the late 1990s, the firm’s revenue growth rate slowed to 8%. Combined with its slowing revenue growth rate and intense competition in the industry, the firm was no longer profitable. By 2001, the firm had a revenue growth rate of 13% but a pretax profit decline of 21%. CEO Patrick Gournay informed shareholders that this was unacceptable. Percentage-of-sales forecasting can provide the firm with an idea of future earnings and what needs to be done to improve the financial situation of the firm. However co chairman of the board and founder of the firm Anita Roddick finds financial information boring so the forecast has to be practical and concise in its delivery.

Analysis

The forecast technique used in this case in the Percentage-of-sales approach which uses a forecast of sales and estimates other financial statement accounts based on a relationship between sales and that particular account. The pro forma projection is based from The Body Shop International PLC’s current revenue growth rate of 13%. This rate provides a realistic projection based on the firm’s performance as of 2001. However, it is hard to account for externalities in this rate based on conditions in the consumer market where The Body Shop’s sales may increase, or market conditions that a more favorable for financial growth. In 2001, turnover was at 374.1 million pounds with a cost of sales at 149.0 million pounds, giving the firm a gross profit of 225.1 million pounds. The firm’s operating expenses are at a three year high of 195.7. The firm’s cash level is also at a three year low of 13.7 in 2001. The firm’s long term liabilities are also at a three year...