|Body Shop International PLC 2001 Case Study Solution - Introduction to Financial Modeling
The first question that usually proposed for this case study is in
regards to the revenue issue; What was the cause of the lack of
growth in revenue during the late 90's? The 2nd question deals
with the rapid growth in 2001; What was the cause of the rapid
increase in sales in 2001 and what were the negative impacts of
the rapid growth.
Issues surrounding the lack of growth in revenue:
In the early to mid 90's, the revenue growth for Body Shop was at least
20% each year. But by the late 1990's, the revenue growth fell to 8%.
Body Shop was able to grow at a fast pace early in the decade
because of the lack of competition. But by the end of the decade, the
competition grew fierce. Another reason for the slow growth in the
late 90's was the over expansion in the previous years. Almost every
mall in America (and shopping street in Britain) had a Body Shop.
How would the Body Shop forecast earnings so they would not be blind-sided by another decline in OIBT?
This case study is very simple and straight-forward. It usually is one of
the first cases presented in class, as it is the first case in the book
because it is the easiest.
Because of the lack of revenue growth, Anita Roddick (founder of the Body Shop) was forced to step-down from the CEO position. The
fresh management team, assembled by the new CEO Patrick Gournay, was able to increase revenue by 13% in their first year (2001).
However, in their attempt to grow the revenue, they lost 21% in their OIBT. The major reason why this occurred was because of a lack
of forecasting through the use of financial modeling.
Key Aspects of the Body Shop Case Study (based on implied assumptions)
- Because the hybrid method of financial forecasting is used, the cost of goods sold as a percent of sales should be addressed
in your analysis. For example, the COS % of Sales is 42% in 1999, 39.7% in 2000, 39.8% in 2001, and you need to provide a
forecast for 2002 - 2004. The COS % of Sales in the 3 year forecast should never go above 42% because of the current market
conditions, and at best should increase to 41% in 2004. To be conservative, the 2002 and 2003 %s should average 40.25%.
(Another way to handle this is to do a sensitivity analysis; say the % was 35 for all 3 years, then do it again at 37, 40, 42 and 45
and show how this impacts the bottom line. Then choose the best estimate)
- Revenue should grow 10 - 15% in 2002 - 2004.
- Working capital should keep increasing over the forecasted time period.
- At least 1 major competitor will go bankrupt, and another will be acquired by a company that is not the Body Shop.
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